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In light of the McBride decision, in what ways has the ability of the U.S. government to impose civil willful penalties on taxpayers who do not properly report foreign income and file FBARs been solid

Table of Contents

    Date: 01/04/13

    Topic: Foreign Accounts

    The McBride Decision: U.S. District Court Upholds Willfulness Penalty

    Taxpayers not electing to enter the Offshore Voluntary Disclosure Program because they do not like the application of the penalties are faced with difficult odds. In most cases, taxpayers must weigh the likelihood of potentially successfully contesting willfulness penalties. Speaking at the International Tax Enforcement ABA National Institute on November 9, 2012, a representativie of Rosenberg Martin Greenberg LLP said that taxpayers who have opted out of the IRS’s voluntary disclosure programs have obtained favorable results “because they truly have reasonable cause arguments.” However, no reasonable cause was found when District Court Judge David Nuffer ruled in favor of the U.S. government that it could collect a civil penalty assessed to Jon McBride for willful failure to report his interest in four foreign accounts.


    McBride was a 50% partner and handled financial operations for The Clip Company, which sold belt clip accessories for cellular telephones. In that capacity he enlisted Merrill Scott and Associates, a financial management firm that used “strategies to permit its clients to avoid or defer the recognition of income for tax purposes and to shield their assets from the reach of creditors by using, amongst other financial strategies and instruments, foreign variable annuities and foreign financial accounts.” Essentially, nominees holding legal title through shell corporations and foreign bank accounts held clients’ assets.

    McBride decided to retain Merrill Scott’s services without a full understanding of the process by which they proposed to somehow legally move Clip Company’s U.S. revenue offshore. At no time during the course of the relationship did McBride obtain an outside legal advice concerning Merrill Scott’s services although he was provided a legal opinion through Merrill Scott prepared by the Estate Planning Institute, P.C. Consequently, for tax years 2000 and 2001, McBride failed to file FBAR reports and when the IRS began investigating he was uncooperative and denied using Merrill’s services. As a result the IRS assessed a penalty of $100,000 ($25,000 per account) for willful failure to report interest in the foreign accounts.


    In upholding the government’s ability to assess and collect $100,000 in penalties, Judge Nuffer did not find credible McBride’s claim of ignorance to reporting requirements. In the Judge’s finding of facts and conclusions of law he articulates that “willfulness includes conduct marked by careless disregard whether or not one has the right to so act…therefore willfulness may be satisfied by establishing the individual’s reckless disregard of a statutory duty, as opposed to acts that are known to violate the statutory duty at issue.” Further, he goes on to acknowledge that willfulness may also be proven through reasonable inference from conduct meant to conceal or mislead sources of income if willful intent can be proved by circumstantial evidence.

    Support for the decision came from among other cases, the recently decided United States v. WilliamsWilliams provided the proposition that a taxpayer who signs a tax return is charged with constructive knowledge of its contents. Thus, according the Judge Nuffer, “a taxpayer’s signature on a return is sufficient proof of a taxpayer’s knowledge of the instructions contained in the tax return form and in other contexts.” McBride’s signature combined with the fact that he was already suspicious of the legality of Merrill Scotts financial plan signifies a willful ignorance at a minimum.

    Espousing on the civil willfulness standard, Judge Nuffer declared that a responsible person is reckless if he knew or should have known of a risk that the taxes were not being paid, had a reasonable opportunity to discover and remedy the problem but did not do so.


    The facts of McBride and the earlier decision in Williams are prime examples of what has the IRS fired up. The IRS approach to unreported foreign accounts presents the opportunity for taxpayers to come into compliance without feeling the full wrath of a criminal prosecution. Taxpayers who choose to gamble by not entering the Offshore Voluntary Disclosure Program will increasingly find it difficult to avoid harsh civil penalties as evidenced by these decisions and most certainly their progeny.

    The increased sophistication of taxpayers has led the courts to proclaim only but absolute ignorance will absolve a noncompliant taxpayer of being charged with willful conduct. This is almost a near impossible standard and puts the onus on individuals to understand their obligations and recognize incongruity by taking measures to remedy potential problems. If you find yourself in a similar situation or have an unreported interest in foreign accounts and or unreported offshore income, it is vital to seek the consultation of a knowledgeable and experienced tax attorney.


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