On this blog, we have frequently discussed the willfulness standard as it relates to one’s duty to satisfy offshore account and asset disclosure obligations set forth by the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank Accounts (FBAR). Often, we discuss willfulness not only because of the criminal penalties that alleged voluntary or intentional behavior can carry but also because willful violations of one’s tax obligations can foreclose the possibility of utilizing the Streamlined Disclosure program to correct the error. If the taxpayer attempts to utilize the Streamlined Disclosure Program when it is inappropriate to do so, because his or her actions were deemed willful, he or she may have handed the government evidence that could be used in subsequent criminal tax enforcement proceedings.
On this blog, we frequently discuss that the willfulness standard is rather amorphous. Whether a taxpayer’s conduct can be considered willful is a subjective determination based on the intent of the taxpayer. Since it is impossible to actually get into a taxpayer’s head and know what he or she was thinking at the time, prosecutors look for outward signs of intent. These signs of intent are part of the overall factors and circumstances surrounding the alleged failure to disclose accounts.
In 2015, we wrote about the IRS’s refusal to further define the term willful beyond the one line definition, “For purposes of the streamlined procedures, non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” There is a significant lack of clarity regarding this definition since it fails to further define the terms it utilizes and does not provide clear examples or factors to guide the determination.
To this end it is hard to imagine anyone that has been using reputable tax preparers, especially CPAs or Tax Attorneys, to prepare their tax and foreign information returns that could possibly claim to be unaware of the FBAR and other offshore asset, business and income producing asset, tax reporting and information reporting requirements under the Streamlined Voluntary Disclosure program without risking incarceration. Over the past four years’ tax professional have been threatened with losing their right to practice in front of the IRS if they are not asking clients if they have offshore accounts and offshore income generating assets. If you choose to attempt a streamlined voluntary disclosure in the current political environment and you used a sophisticated tax preparer you risk the IRS approaching the preparer after receiving your streamlined disclosure and inquiring if you were made aware of your offshore tax and information responsibilities. Your preparer is not likely to put their licensing at risk to back up your non-willful assertion that is required for the streamlined program.
Recently, we wrote about an IRS official’s decision to finally provide additional information regarding the willfulness standard. In November 2016, IRS Small Business/Self-Employed Division special trial attorney and division counsel, John McDougal, indicated that most taxpayers should be able to qualify for the Streamlined Disclosure Program. He said that, “As long as you weren’t fraudulent or willful in the FBAR sense . . . even gross negligence is an appropriate basis for filing streamlined.” While this announcement seemed like good news for taxpayers with potential compliance issues, subsequent events seem to suggest a lowered standard for civil willfulness findings.
In a recent California tax case, United States v. Bohanec, No. 2:15-cv-4347 (C.D. Cal. Dec. 8, 2016) there was an issue of what constitutes willfulness within the context of an FBAR duty. In Bohanec, the taxpayers were business owners who ran a camera store in California. The taxpayers apparently had several lucrative contracts with foreign camera companies and parts suppliers. From these contracts, the taxpayers deposited income into Swiss Bank accounts. They did not report these account nor did they tell anyone about the accounts except for their children.
In 2010, they attempted to use the OVDP program to come clean regarding the unreported accounts. However, even when making this disclosure, the taxpayers failed to include certain offshore accounts. Thus, the taxpayers were rejected from OVDP. In a court proceeding, the judge found that, as sophisticated business people, the taxpayers had engaged in reckless disregard of their tax and information reporting obligations.
The interesting takeaway from this case is that the defendants had argued that that “willfulness” included only intentional, meaning with knowledge, violations of known legal duties. Therefore, under the approach urged by the Bonehacs, a willfulness finding would have required not only knowledge of the obligation but also the specific intent to avoid it. However, the court found that within a civil context, willfulness does not require any knowledge on the behalf of the taxpayer. Rather, the court found that no knowledge or intent is necessary for willfulness. The fact that a taxpayer acted recklessly without knowledge in the context of his or her characteristics and circumstances is enough to support a finding of willfulness.
The IRS has come a long way since 2015 when they refused to expound on what constituted willfulness for offshore disclosure purposes. However, it is not necessarily good news for taxpayers.
Following the comments made by Mr. McDougal and the court decision in Bonehac, we can now better define what it means to be willful. From the comments made by Mr. McDougal we can say that willfulness does not reach gross negligence. Therefore, taxpayers who were grossly negligent can theoretically qualify for Streamlined Offshore Disclosure. However, Bonehac stands for the fact that even behavior that does not intend to violate the law can, in the context of the existing circumstances, be characterized as a reckless disregard which does constitute willfulness. It is important to note that the taxpayers in Bonehacs were viewed as sophisticated business people by the court. If they were found to be less sophisticated, it is highly likely the result would have differed.
Thus, willfulness continues to be subjective with its starting point falling somewhere on the continuum between gross negligence and reckless disregard. Since intent and specific knowledge are not necessarily required for a willfulness finding, any evidence of the foregoing will almost certainly result in a finding of willfulness. However, in the absence of intent, what makes up reckless disregard can only be assessed after considering the totality of the circumstances. These circumstances can include the party’s level of sophistication, whether they took steps to conceal the behavior, whether they hired an accountant, and whether events that would ordinarily lead to the taxpayer being aware of the obligation. As for the last point, consider the already changing circumstances regarding general public awareness of FBAR and FATCA obligations. Whereas these obligations were little known even five years ago, today the IRS seems to believe that most taxpayers know or should know about this obligation. Even where they don’t their tax preparers are now seen as annually raising the issue of offshore income and information reporting religiously with every taxpayer in order to protect their right to practice and even to avoid malpractice suits by their own clients and preparer penalties.
Thus, while these recent developments provide some illustrations of what constitutes willful conduct, numerous open questions remain. However, as with any intent-based statute, one’s state of mind remains a difficult concept to define and prove. The tax lawyers at the Tax Law Offices of David W. Klasing have deep experience in representing taxpayers in voluntary disclosures (Streamlined and OVDP) to fix offshore tax and foreign information reporting issues. They work diligently and strategically to help you choose the proper offshore voluntary disclosure program to utilize to protect your liberty and net worth, and where appropriate, to show that your actions were not willful and that you did not intend to violate the tax and foreign information reporting laws. To schedule a reduced-rate consultation at our Los Angeles County, Westwood or Orange Country, Irvine law offices, call 800-681-1295 today.