Recently, Chief Magistrate Judge Joseph C. Spero of the District Court for the Northern District of California confirmed the IRS’ assessment of willful FBAR penalties assessed against a California business owner for two of four years, while confirming an earlier decision that found the government did not meet their burden of proof for the other two years.
The significance in this decision comes in two parts. One area of interest is in how the government failed to meet their high burden of proof, while the other concerns how the penalties must be reassessed in light of the separation of the time period in question. One thing is for certain: the saga of this case has not concluded with this decision.
If recent news stories about crippling FBAR violation penalties, have you concerned, the best place to go is the Tax Law Offices of David W. Klasing. Call our Dual Licensed International Tax Attorneys and CPAs today at (800) 681-1295 to schedule a reduced-rate consultation today or schedule online here.
Court Determines that Government Did Not Satisfy “Willful” Burden of Proof for Two of Four Years
In the case, the defendant, Timberly E. Hughes, was liable for the FBAR willful penalty for 2 of the 4 years for which the Government sought judgment. For the two years that the Court did not sustain the willful FBAR penalty, the Court did not find Hughes’ violations to be nonwillful.
Rather, the Court determined that the Government had not met its burden of proof. As the Court worded it, if the Court could have found her nonwillful, it would have done so, but instead found that the Government had not met its burden of proof.
Hughes owned and operated a Schedule C bookkeeping service business that generated substantial U.S.-source service income. Hughes also owned two foreign corporations which she improperly reported as Schedule C U.S. operations. One of those businesses generated major net losses, raising the hobby loss issue permitting deductions only against income.
Hughes reported her bookkeeping service income as income of the businesses which she improperly reported on Schedule C, thus claiming deductions to which she was not entitled. The erroneous deductions were from $331,145 to $1,306,505 for the years in question. Hughes allegedly also gave a false U.S. business address for the foreign entity. Per the government’s allegations, this suggested that she was trying to hide the foreign nature of the entity. As a result of this reporting, Hughes underreported her income tax liability by over $600,000 in the years involved.
Takeaways from the Court’s Decision in Hughes
As with any high-profile decision by a tax court in the U.S., it is imperative to pay special attention to how specific issues are viewed by the ultimate deciders of tax litigation. In Hughes, there are a few areas of focus that caught the attention of our Dual Licensed International Tax Attorneys and CPAs.
Willful FBAR Penalty Dispute
The formula for calculating the penalty for a willful FBAR violation uses a maximum aggregate FBAR penalty of 50% of the aggregate high balance year and then spread that penalty among the years to which the willful otherwise penalty applied. Thus, for example, assume a single foreign account static high balance in each year was $2 million. Setting aside possible mitigation, the FBAR willful penalty would be $1 million allocated among 4 willful penalty years at $250,000 each year.
The IRS policy for evaluating penalties is to apply the 50% to the high amount for all willful years, not all years in general. This makes the Court’s decision that two of the years were nonwillful very significant. In the example above, the willful penalty would be the same $1 million value, but applied to each of the four years. But, after losing two years, does $500,000 allocated to the now nonwillful years drop off? Or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained?
The short answer is that this has yet to be decided. The ramifications of this determination will be significant for those who may face future penalties for FBAR noncompliance, which is why our Dual Licensed Tax Attorneys and CPAs will stay on top of all developments in this case and others.
TurboTax Defense
It is also important to note here that the Court did not put much consideration into Hughes’ defense that her use of the popular tax accounting software TurboTax did not alert her to the possibility that she may have been obligated to file an FBAR. By making this argument, Hughes was attempting to defeat the “willful” element of the charges against her, substantially reducing the penalty levied against her.
The Court disagreed that her using of TurboTax indicated a lack of willfulness. In the context of FBAR violations, courts have used a number of criteria to impute willfulness on taxpayer violations. While the law is not settled, many cases have used the rationale of “willful blindness” to reach a finding of willfulness. Willful blindness is how the law refers to a taxpayer’s practice of actively avoiding a discovery of their tax obligations so that, while they have a reasonable suspicion that they likely owe the government a disclosure, they can technically claim that they did not know. In the eyes of the Court in Hughes, this defense was not satisfactory.
The takeaway from this is simple: the judicial system can find that you acted willfully in violating any FBAR requirements that apply to you, even if you did not have actual knowledge of them. Therefore, if you have reason to believe that you may have noncompliance in your foreign income reporting history, it is imperative that you bring this to the attention of a dedicated Dual Licensed International Tax Attorney and CPA that can sort out your issues and provide you with options, as opposed to just waiting for the long arm of the law to come knocking at your door.
The Tax Law Offices of David W. Klasing Can Help You Avoid FBAR Penalties
For all your foreign income and asset tax concerns, call our Dual Licensed International Tax Attorneys and CPAs today at (800) 681-1295 to schedule a reduced-rate consultation today or schedule online here.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
Contact Our California FBAR Fraud and Civil Penalty Defense Attorneys for Help
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
If you failed to provide accurate information to the IRS, you may be facing tax fraud charges if you do not come into compliance through a domestic or offshore voluntary disclosure. Our experienced dual licensed California Tax Fraud Defense Lawyers and CPAs are here to help. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 to arrange a consultation with our team or schedule a reduced rate initial consultation directly HERE.
Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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