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How Does “Credibility” Work in Civil Willfulness FBAR Penalties?

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How Does “Credibility” Work in Civil Willfulness FBAR Penalties?

 

You may think that tax penalties, particularly with regard to willful FBAR violations, are determined in a black-and-white fashion. In the tax world, it is typical for decisions to be made according to a formulaic approach. However, subjective perception is critical when fraud is concerned. Retaining your credibility can be the difference between financial security and draconian IRS penalties, criminal tax, and fraudulent foreign information reporting prosecution.

Courts will look for evidence of factors that indicate fraud and consider any that are present together in order to determine whether the defendant committed tax fraud. These factors, called “badges of fraud,” are broad and purposefully general. Their existence will be determined at the discretion of the court. A good example of how credibility affects the badges of fraud is the case of Harrington v. Commissioner, which is featured below.

Retaining credibility is critical for avoiding the harshest of willful FBAR penalties that may be assessed to those who fall from compliance. The dual licensed International Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing are here to help. Call us at (800) 681-1295 with any questions about how credibility may factor into your tax situation.

Lack of Credibility as a Badge of Fraud for Imposing the Civil Fraud Penalty

When assessing the existence of tax fraud, the IRS will introduce into court any evidence that may exhibit a “badge of fraud.” Badges of fraud can be expressly proven or implied based on actions or inactions of the taxpayer. Credibility plays a critical role in several of the badges of fraud that a court will consider when evaluating a tax fraud or fraudulent foreign information reporting case.

Here are several of the badges of fraud where credibility may come into play, particularly in the Harrington case featured below:

  • Failure to cooperate with tax authorities
  • Asserting frivolous arguments
  • Lack of credibility of the taxpayer’s testimony
  • Implausible or inconsistent explanations of behavior
  • Attempting to conceal illegal activities
  • Filing false documents
  • Dealing in cash
  • Establishing multiple entities with no business purpose
  • Understating income
  • Concealing income or assets
  • Engaging in a pattern of behavior with an intent to deceive

According to caselaw, none of the badges of fraud on their own is enough to conclusively find fraud, but the existence of several factors is “persuasive circumstantial evidence of fraud.”

Harrington: Court Did Not Find Account Owner Credible

The credibility of the defendant in a willful FBAR penalty assessment came into play on July 26 of this year. In Harrington v. Commissioner, Harrington, the defendant taxpayer, was called to testify on his past tax and information filings. The content of the defendant’s testimony was viewed by the court as simply incredible, and likely contributed to the assessment of the size of the FBAR penalties against him. Judge Albert G. Lauber of the U.S. Tax Court remarked several times in his opinion that the Court simply “did not find [Harrington’s] testimony credible.”

Badges of Fraud in Harrington

At one point, Harrington was asked to articulate on the nature of his connection to a UBS account under the name Reed International, Ltd. (the “Reed Account”). The company was incorporated in 1987 in the Cayman Islands and was originally meant to hold assets for a lumber company in which Harrington was invested.

Harrington testified that he had no “access or control” of the funds held in the Reed Account, and therefore could not withdraw any funds from the account. Yet, according to the decision, the court had already obtained documents that showed Harrington as a “beneficial owner” of the foreign account. Further, a document in evidence showed that Harrington had been given power of attorney to manage the company’s assets, including the Reed Account. In terms of badges of fraud, this testimony certainly serves as an example of implausible and inconsistent explanations of behavior.

The opinion stated that Harrington was “often evasive or dismissive of questions that respondent’s counsel and the Court asked of him.” This quality may indicate satisfaction of some badges of fraud in addition to lack of credibility in testimony, such as failure to cooperate with tax authorities and engaging in a pattern of behavior with an intent to deceive.

Harrington attempted to address the acknowledged inconsistencies in his testimony by factoring in his age (he was 88 at the time of the trial).

But Judge Lauber didn’t buy it. According to the opinion, “Petitioner testified intelligently at trial; he did not simply misremember a few trivial facts, but mischaracterized facts and events of critical importance. He may have conceivably forgotten that he signed a particular document in 2003, but he cannot have ‘forgotten’ than he had control over offshore investments worth $3 million.”

The Court also noted the significance of Harrington’s false filings. Harrington admitted that his returns filed between 2005-2009 omitted roughly $800,000 of income, which was substantial in comparison to the $170,000 that they did report. The court found that the omitted income supplied “further evidence of fraudulent intent.”

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How Does the Harrington Decision Affects You?

Harrington is a cautionary tale to anyone who may face civil willful FBAR penalties presently or in the future. Firstly, the government can imply fraud from circumstantial evidence. Thus, it is critical that, when it comes to your finances, you behave in a manner that removes any shadow of a doubt about your dealings. Secondly, if you must testify, you need proper preparation in order to avoid the pitfalls that Harrington stepped into. Namely, you will need coaching on strategies to convey all relevant information and cooperate with prosecutors while retaining some level of discretion on your private financial matters.

We Can Help You Establish the Credibility Necessary for Potentially Avoiding Willful FBAR Penalties

The Tax Law Offices of David W. Klasing are well-equipped to provide you the defense you need against the federal government. Our experienced dual licensed International Tax Lawyers and CPAs have been dealing with the IRS for decades, and we can help protect you against heavy fines and criminal tax and foreign information reporting fraud prosecution. Call us to schedule a reduced rate initial consultation at (800) 681-1295 or schedule online here.