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Third Circuit Sustains FBAR Willful Penalty

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Third Circuit Sustains FBAR Willful Penalty

 

Making sure that our clients receive the best possible advice means staying on top of all developments in tax law. Recently, the Third Circuit was in the headlines for their decision in an appeal of IRS willful foreign account disclosure penalties.

In these types of cases, penalties increase substantially if the IRS can demonstrate that the taxpayer violated the tax code intentionally. This case was significant because the Third Circuit demonstrated that certain types of recklessness may be grounds to find willfulness, even if the government cannot show that the defendant definitively attempted to avoid their FBAR disclosure obligations.

If you have questions about international tax disclosure laws or believe you may have fallen out of compliance, now is the time to get help. Reach out to the dedicated International Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing by calling us today at (800) 681-1295 or schedule online here.

Court Finds that Defendant’s Conscious Avoidance of Foreign Reporting Obligations Constituted Willfulness

Recently, an appeal of a district court decision to the third circuit ended in affirmation of a substantial penalty for a failure to report overseas accounts. Richard Collins, the defendant, was determined to have consciously avoided disclosing his accounts for an extended period of time.

Background

Richard Collins appealed a district court’s decision affirming IRS penalties for his allegedly willful failures to file a Report of Foreign Bank and Financial Accounts (FBAR) for two consecutive years.

Collins controlled assets in five separate accounts located in foreign countries, including three with HSBC in Canada, one with Le Credit Lyonnais in France, and one with UBS in Switzerland. According to Collins’ own admissions, the collective Canadian accounts reached the reporting threshold of $10,000 at their maximum value during 2007, as did the French and Swiss accounts.

Civil Penalty Assessments

In 2013, Collins submitted an amended FBAR for 2007 to the IRS as part of his participation in the Overseas Voluntary Disclosure Program (OVDP). According to court documents, Collins’ participation in the OVDP would later dissolve for reasons that are not clear.

In June of 2015, the IRS sent a letter to Collins informing him that they had determined to impose civil willful FBAR penalties against him for the years of 2007 and 2008. The penalties were based on the maximum account balances for all of his various foreign accounts for the two years in question. The total penalty worked out to more than $150,000 for each year, reaching a grand total of over $300,000 in penalties.

According to the District Court for the Western District of Pennsylvania, where the case originated, the IRS had the ability under their internal mitigation guidance to assess penalties totaling over $600,000 for the offenses, but that the IRS reduced these penalties after considering the facts and circumstances of Collins’ case.

Appeal Process

Within a month of receiving notice of the IRS’ decision to assess willful FBAR penalties, Collins filed a protest and requested an appeal with the IRS. In the filing, Collins did not contest the IRS’ penalty calculations, but rather argued that the IRS had erred in finding that his failure to disclose was willful. The IRS Appeals Office denied his appeal of the penalties assessed, and Collins then brought his case to court.

Collins used a number of reasons to justify his argument that his failure was an honest mistake. Collins claimed that he believed that his filing of an IRS Form W-9 with UBS satisfied his foreign account reporting requirements. He also claimed that he relied on advise he received from the U.S. Embassy in Paris in the 1970’s stating that he had no obligations to the IRS for his foreign accounts.

The District Court was not moved by these or any other arguments made by Collins and affirmed the IRS’ penalty assessment. Collins then appealed the District Court’s decision to the Third Circuit.

Third Circuit Decision

On appeal, the Third Circuit confirmed the trial court’s earlier decision that the IRS’ penalty calculations were within the statutory limits and were rational, and not arbitrary and capricious. However, this was not the critical area of the appeal. Rather, their decision was more concerned with whether the evidence presented was enough for the IRS to determine that Collins violated his foreign account disclosure obligations willfully.

The Court determined that Collins’ failure to disclosure his foreign accounts was willful, as it was not just reckless, but showed an “actual intent to deceive.” To get to this result, the Court applied the civil standard of willfulness, which encompasses recklessness.

To find that a defendant’s recklessness constitutes willfulness in a tax law context, the critical question is whether the defendant knew or clearly ought to have known that there was a substantial risk that they were not compliant with a reporting requirement. This standard also requires that the defendant be in a position to get clarity on the issue very easily.

Collins’ Significance: Low Bar for IRS to Assess Willful Penalties

Decisions in appeals like Collins show that the IRS can claim your foreign account disclosure errors were willful even when they do not have direct evidence of your explicit knowledge. This opens the door for willful FBAR penalties, which are substantially higher than penalties for non-willful violations.

If you think that you might have fallen out of compliance in your disclosure requirements of overseas accounts but decide not to act, you likely will not be able to use your lack of knowledge as a defense against severe IRS penalty action. Your best possible step in these cases is to contact an experienced International Tax Lawyer and CPA.

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Call the Tax Law Offices of David W. Klasing Today

If you have questions about your past, present, or future overseas asset reporting requirements, do not wait for the problem to get worse. Reach out to the capable International Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing today by calling us at (800) 681-1295.

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!

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