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Texas Court Holds Taxpayer Liable for Willful FBAR Penalty

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    In June, the Federal Tax Crimes Blog highlighted an interesting case involving the Foreign Bank Account Report (FBAR), United States of America v. Edward S. Flume (2019), in which the IRS attempted to “recover civil penalties assessed against Defendant Edward Flume for willful failure to report his interest in a foreign bank account during tax years 2007 and 2008.” This refers to federal tax rules requiring U.S. citizens and resident aliens with offshore accounts that meet certain criteria to disclose such accounts by filing FinCEN Form 114 online through the BSA E-Filing System. When a taxpayer fails to do so, he or she may, like Flume, receive FBAR penalties, which can cost up to $10,000 per violation – or, if the violation was willful, up to $100,000 per violation (or up to 50% of the unreported account balance). What is interesting about Flume is the Court’s finding that, even if Flume did not explicitly act with the intent of breaking the law, he acted with such recklessness that he should nonetheless be held liable for the willful penalty.

    See our 2011 OVDI Q and A Library

    See our FBAR Compliance and Disclosure Q and A Library

    See our Foreign Audit Q and A Library

    Failure to File FBARs: Reckless, Willful, or Both?

    The United States District Court for the Southern District of Texas, Laredo Division, began in its findings of fact (linked above) by providing some background information on the defendant and underlying case. The Court noted, for instance, Flume’s status since 1990 as a “U.S. citizen who has lived and worked in Mexico” (which, our readers should note, is precisely the type of taxpayer likely to be affected by FBAR filing requirements; that is, a U.S. taxpayer who lives or works abroad).

    According to the Court’s records, the IRS sued Flume in April 2016 in an attempt “to collect penalties originally assessed against Defendant Flume by the IRS in 2014.” Penalties were originally assessed because, during 2007 and 2008, “Flume failed to report his financial interest in… a Swiss UBS account to the IRS, despite having a legal obligation to do so under the Bank Secrecy Act, where the FBAR requirement originates. “In 2007,” the Court wrote, “the average monthly balance of the UBS account was $899,342.02,” well above the $10,000 FBAR threshold (or, for that matter, the related $50,000 FATCA threshold); and “in 2008, its average monthly balance was $718,811.24” – still far above the reporting limit. However, rather than reporting the funds, Flume instead “began transferring all his assets out of the UBS account.”

    Despite Flume’s efforts, the IRS discovered his UBS accounts in or around 2010, when the IRS “began an examination of his tax filings” (or in other words, subjected Flume to a tax audit). Through the IRS tax audit process, the Internal Revenue Service determined that Flume “had failed to file timely FBARs for his Swiss bank account in 2007 and 2008.” Determining his conduct to be willful, the IRS assessed penalties of nearly half a million dollars, which Flume failed to pay. In an effort to defend his stance, Flume argued that, because he did not become aware of the FBAR requirement until 2010 (the year Flume “attended a financial seminar for American expatriates”), his failures to file FBARs were not willful but rather, “inadvertent.”

    In examining the issue of whether willfulness actually existed, the Court pointed out that a taxpayer “willfully violates the reporting requirement ‘when he either knowingly or recklessly fails to file’ an FBAR,” citing Bedrosian v. United States (2018). To act “knowingly” is clear enough; but what about the meaning of “recklessness” as it pertains to FBAR tax compliance? In this instance, the Court defined recklessness to mean any activity carrying “‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Critically, as the Court also noted, “Willful blindness — as where a defendant consciously chooses to avoid learning about reporting requirements — is also a form of recklessness.” Pointing to “numerous contradictions” in Flume’s testimony, the defendant’s background as a tax-savvy business owner, and the fact that Flume reported some foreign accounts (such as his Mexican accounts) but not others (such as his Swiss accounts), the Court found that Flume “acted with extreme recklessness by failing to review his tax returns before signing them,” thus finding the defendant to have acted willfully.

    “The IRS’s assessment of $456,509.00 in penalties,” the Court ruled, “is therefore proper.”


    Criminal Tax Defense Attorneys Handling FBAR Tax Evasion Cases

    Even if you do not think you have acted willfully, the IRS may disagree – and ultimately, it is up to the courts. That is why it is so critical to be represented by a skilled and experienced attorney, like award-winning attorney-CPA David W. Klasing. To arrange a reduced-rate tax consultation, call today at (800) 681-1295, or contact the Tax Law Office of David W. Klasing online.

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