Another FBAR Willfulness Decision Favors the Government-So What Are the Courts Missing? by Robert S. Horwitz
It seems like discussions of burden of proof and the definition of “willful” in FBAR cases are getting to be as routine as discussions of what it means to be a “responsible person” and to act “willfully” for the trust fund recovery penalty under Internal Revenue Code sec. 6672. And the courts have so far fallen in with the line espoused by the Department of Justice.
The latest case in point is United States v. Garrity, No. 3:15-cv-00243 (D. Conn. April 3, 2018), a suit brought to reduce to judgment a penalty assessed under 31 USC sec. 5321(a)(5) for willful failure to file an FBAR, in violation of 31 USC sec. 5314. The Court had ordered the parties to file pre-trial briefs on the burden of proof and what must be proven to establish “willful.”
The Government argued that its burden of proof is by a preponderance of the evidence rather than by clear and convincing evidence as defendants claimed. The Court sided with the Government based on Supreme Court cases holding that this is the normal burden of proof in civil cases, including those involving monetary penalties, at least where the interests at stake are only financial and not “important individual rights and interests” that would warrant a higher standard. The Court rejected defendants’ analogizing the FBAR penalty to a civil fraud penalty, where the Government must prove fraud by clear and convincing evidence. It also rejected defendants’ assertion that since willful involves a question of intent the burden of proof should be greater.
Every published case involving a willful FBAR penalty has held that the government’s burden of proof is by a preponderance. This includes the Bedrosian case, which held that the plaintiff did not act willfully. Practitioners should take comfort that the courts have not held that the assessment of the FBAR penalty is entitled to a presumption of correctness and placed the burden of proof on the person against whom the penalty was assessed. In a trust fund recovery penalty case, the taxpayer has the burden of proving two negatives: 1) that he was not a responsible person and 2) that he did not act willfully.
The Garrity Court also held that the Government can prove that the defendant committed a willful violation by showing he acted recklessly, rejecting the defendants’ argument that the Government must prove that the failure to file an FBAR penalty was a voluntary and intentional violation of a known legal duty.
The Court stated that defendants’ arguments “do not account for the well-established distinction between civil and criminal formulations of willfulness.” The Court relied upon the Supreme Court’s holding in Safeco Insurance Co. v. Burr, 551 US 47 (2007), which held that proof of reckless conduct was sufficient to establish a willful violation of the notice provisions of the Fair Credit Reporting Act. Since numerous cases have held that reckless conduct is sufficient to establish a willful violation of the FBAR reporting provisions, and the defendants could only point to criminal cases defining willful as a “voluntary and intentional violation of a known legal duty,” the Court found no reason to deviate from the cases holding that reckless conduct equals willful conduct.
The courts in FBAR cases have so far ignored the fact that in civil trust fund recovery penalty cases the courts apply a similar definition of “willful” as is applied in criminal cases: a voluntary, conscious and intentional violation of the known legal duty to pay withholding taxes. Phillips v. United States, 73 F. 3rd 939 (9th Cir. 1996). The Ninth Circuit in United States v Easterday, 594 F. 3rd 1004 (2009) and United States v. Gilbert, 266 F. 3rd 1180 (2001), both defined willful for purposes of the criminal trust fund recovery penalty under Internal Revenue Code sec. 7202 in a virtually identical way as it defines willful for purposes of the civil trust fund recovery penalty. And inSlodov v. United States, 436 US 238 (1978), the Court stated that the same conduct subjecting a taxpayer to liability for the civil trust fund recovery penalty subjects him to liability for the criminal penalty:
Also, §7202 of the Code, which tracks the wording of §6672, makes a violation punishable as a felony subject to fine of $10,000, and imprisonment for 5 years. Thus, an employer-official or other employee responsible for collecting and paying taxes who willfully fails to do so is subject to both a civil penalty equivalent to 100% of the taxes not collected or paid, and to a felony conviction.
436 US at 245. This would support an argument that willful should be construed in the same way for civil penalties for violating the Bank Secrecy Act provisions as it is for criminal penalties.
The Government has convinced the courts that willful for purposes of the civil FBAR penalty includes both reckless disregard and willful blindness. Under both Williams, 489 Fed. Appx. 655 (4th Cir. 2012) and McBride, 908 F.Supp. 2nd 186 (Utah 2012), a taxpayer’s failure to review a tax return is sufficient to establish a conscious attempt to avoid learning of the FBAR reporting requirements. Under this reasoning, every person with an offshore account who signs a tax return with a Schedule B and fails to file an FBAR would be liable for the willful penalty.
This interpretation appears to ignore what the Supreme Court held was required to show reckless disregard or willful blindness. In Safeco Insurance Co., the Court stated:
While “the term recklessness is not self-defining,” the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Farmer v. Brennan, 511 U. S. 825, 836 (1994); see Prosser and Keeton §34, at 213–214. The Restatement, for example, defines reckless disregard of a person’s physical safety this way:
“The actor’s conduct is in reckless disregard of the safety of another if he does an act or intentionally fails to do an act which it is his duty to the other to do, knowing or having reason to know of facts which would lead a reasonable man to realize, not only that his conduct creates an unreasonable risk of physical harm to another, but also that such risk is substantially greater than that which is necessary to make his conduct negligent.” Restatement (Second) of Torts §500, p. 587 (1963–1964).
It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law. See Prosser and Keeton §34, at 213 (recklessness requires “a known or obvious risk that was so great as to make it highly probable that harm would follow”).
In Global-Tech Appliances, Inc. v. SEB SA, 563 U.S. 754 (2011), the Court held that in a civil case alleging inducement to violate a patent the defendant’s knowledge can be established by showing willful blindness, which requires more than negligence or recklessness. Relying on criminal cases, the Court stated:
While the Courts of Appeals articulate the doctrine of willful blindness in slightly different ways, all appear to agree on two basic requirements: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact
According to the Court these “requirements give willful blindness an appropriately limited scope that surpasses recklessness and negligence. Under this formulation, a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” Deliberate indifference is insufficient to establish that the person acted knowingly or willfully.
This doesn’t square with the willfulness standard adopted in the reported FBAR cases, where several courts have deemed that a taxpayer has constructive knowledge of the contents of his tax return, which contains on Schedule B, Part III, a statement that if you have a foreign financial account you may have to file FinCen Form 114 and directs the taxpayer to the form and its instructions. Are the Courts saying that a taxpayer who fails to read every line on his return is willfully blind or acting with reckless disregard? If so, I think the courts are jettisoning the mens rea requirement of sec. 5321(a)(5).
Perhaps the courts are turning around. In Norman v United States, No. 15-872 (Court of Fed. Claims), the government moved for summary judgment on the ground that the fact that Ms. Norman signed a return that checked the No box to the question of whether she has a foreign return is enough to prove willfulness because a taxpayer has constructive knowledge of the contents of the return, and thus is deemed to know of the requirement for filing an FBAR and she thus willfully failed to do so. Convoluted, but it is a logical reading of Williams and McBride. The court in an order denied the motion on the ground that there were material facts in dispute requiring trial.
The Court in Garrity did not say would establish recklessness. I hope, after trial, the courts in Garrity and Norman will hold that willfulness requires at a minimum knowledge that the law requires a person knew he may have to report offshore accounts to the Government.
Robert S. Horwitz – For more information please contact Robert S. Horwitz – email@example.com or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.