U.S. citizens with overseas assets or offshore bank or financial accounts are required to report these holdings to the IRS each year on a “Report of Foreign Bank and Financial Accounts,” or “FBAR.” Failure to do so can result in fines that will be enhanced if your actions are deemed to have been willful. Aside from this, taxpayers who fail to file FBAR can also be subject to the “fraudulent failure to file” penalty relating to your overall return, but only if their actions were sufficiently deliberate. Since the standards for both of these actions seem essentially the same- the deliberate attempt to avoid tax liability by failing to file documents- you might think that if a court were to sustain the application of one of these penalties, they would sustain the other. However, in a recent district court case, the court sustained the FBAR willful penalty while overturning the fraudulent failure to file penalty. Our skilled tax lawyers have been looking closely at this case to understand how and why this happened.
The Case- United States v. DeMauro
In United States v. DeMauro, the case at issue, a woman named Annete DeMauro challenged the IRS’s assessment against her of enhanced civil fines due to willful failure to file FBAR as well as the fine for fraudulently failing to file under § 6663 of the tax code. She conceded that she had failed to file her FBAR reports as ``required but claimed that she had not done so willfully or with a fraudulent purpose. Willful failure to file FBAR can occur through either specific knowing failure to file or willful blindness or reckless disregard of the obligation to report. Civil fraud under §6663 requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing.”
The government pointed to evidence that DeMauro has not sought a tax professional's advice regarding the FBAR filings as she had in the past for similar situations and the fact that she took steps to conceal her foreign bank accounts and money transfers. DeMauro countered that she had taken such steps not to avoid taxes, but in order to conceal assets from her abusive ex-husband, an explanation found credible by the IRS agent on the case.
The District Court ultimately ruled that the government had proved its case that the willful failure to file FBAR penalties were appropriate, but that the fraudulent failure to file fines were not proper in this instance. As noted in a recent tax blog, the answer to the seeming conundrum of why one of these fines and not the other was upheld lies in the standard of persuasion required for the government to prove its case in each instance. The government must prove application of the FBAR willful penalty by a preponderance of the evidence, while it must prove application of the fraudulent failure to file penalty by clear and convincing evidence.
It is not exactly clear even to the most studied scholars of the law what the precise difference is between a “preponderance of the evidence” and “clear and convincing evidence,” except that clear and convincing evidence is more than a preponderance of the evidence (but less than the “beyond a reasonable doubt” standard needed for a criminal conviction.) In this matter, the court believed that, particularly due to the mitigating factors that DeMauro introduced regarding why she moved around assets and concealed accounts, the court did not meet its burden of proving by clear and convincing evidence DeMauro’s failure to file was fraudulent. On the other hand, they felt that the government had met the lesser burden of proving by a “preponderance of the evidence” that she had willfully failed to file FBAR forms. Thus, she was validly subject to that penalty, but not the other.
Anytime you deliberately fail to file your tax returns or required supporting documents like FBAR, you are opening yourself up to multiple potential civil surcharges as well as the possibility of criminal charges in some instances. However, because of the use of different burdens of persuasion by the court to decide whether each fine or enhancement is legally valid, the fact that you have been assessed an FBAR willful penalty does not necessarily mean that you are also guilty of a fraudulent failure to file. Anytime you find yourself facing potentially severe civil fines for these types of behaviors, you should contact a skilled tax attorney like those at the Tax Law Offices of David W. Klasing right away so we can assess the particulars of your situation and do everything in our power to mitigate the damage and get your penalties reduced to the most minimal amount possible. To set up a consultation, contact us today at (661) 432-1480.
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