So much of the discussion around the IRS amnesty initiatives lies in the concept of "Willfulness". While nothing here should be construed as legal advice, here are some key points to consider -
- 31 U.S.C. § 5321 (a)(5)(C)imposes upon any person who "willfully violat[es]" or "willfully caus[es] any violation of ... section 5314," a penalty equal to the greater of $100,000 or 50% of the balance in the account(s) at the time of the violation. 31 U.S.C. §§ 5321 (a)(5)(C) and (D).
- Willfulness is “a voluntary, intentional violation of a known legal duty.” United States v. Sturman,951 F.2d 1466 (6th Cir. 1991), quoting Cheek v. United States, 111 S. Ct. 604, 610 (1991); IRM 4.26. 188.8.131.52(1)
- A finding of willfulness under the Bank Secrecy Act must be supported by evidence of willfulness. IRM 184.108.40.206.5.3(2)
- Willfulness is shown by the person's knowledge of the reporting requirements and the person's conscious choice not to comply with the requirements. In the FBAR situation, the only thing that a person need know is that she has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR. IRM 220.127.116.11.5.3(5).
- An example of a situation in which willfulness may be present is where: A person admits knowledge of and fails to answer, a question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file the FBAR. A determination that the violation was willful likely would be appropriate in such a case. IRM 18.104.22.168.5.3(8.A.)
- Under the theory of “willful blindness,” willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting requirements.
- “Willful blindness” requires proof that:
- a person subjectively believed that there was a high probability that a fact exists and
- he took deliberate actions to avoid learning of that fact. Global-Tech Appliances v. SEB, SA, 131 S. Ct. 2060, 2070-71 (2011).
- “Willful blindness” is more than recklessness or negligence. A willfully blind person is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts. A defendant must subjectively believe that there is a high probability that a fact exists and the defendant must take deliberate actions to avoid learning of that fact." Global Tech id at 2070.
- Cf. McBride, (Willful blindness found based on the failure to review Schedule B of the tax return) but see, 22.214.171.124.5.3(6) ("The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness").
- United States v. Williams, 489 Fed. Appx. 655, 2012 U.S. App. LEX IS 15017 (4111 Cir. July 20, 20 12)(unpublished), reversing 2010 U.S. Dist. LEX IS 90794, No. I :09-cv-437 (E. D. Va. Sept. I, 2010).
o Split panel
- Criminal Conviction -- Mr. J. Bryan Williams pled guilty to a two-count superseding criminal information, charging him with conspiracy to defraud the IRS, in violation of 18 U .S.C. § 3 71, and criminal tax evasion, in violation of 26 U.S.C. § 7201.
o Unreported Income of $800,000 on $7,000,000 in deposits
o Lied to the accountant on the organizer
o Checked the “No” box
- “I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon, until I filed my 2001 tax return”
- “Unfortunate” aspects of Williams
o Court focused on willful blindness despite ample evidence of willfulness
o The Court stated that the fact that Williams admitted he never read, the FBAR form or line 7a of the tax return, and "never paid any attention to any of the written words on his federal tax return," constituted a "conscious effort to avoid learning about reporting requirements."
o The Court equated “reckless conduct” with willful blindness– an approach rejected by the Supreme Court
- United States v. McBride, 2012 U.S. Dist. LEXIS 16 1206, Case No. 2:09-cv-378 ON (D. Utah Nov. 8, 2012)
o Preponderance of Evidence standard
o Adopted Williams willful blindness standard repeating the assertion that recklessness equates to willful blindness
o McBride adopted the determination in Williams that Schedule B, line 7a's direction to "[s]ee instructions for exceptions and filing requirements for Form TDF 90-22. 1" placed the taxpayer "on inquiry notice of the FBAR requirement."
- Evidence of willfulness should have been sufficient without relying on willful blindness
o McBride lied about key details to the IRS during the course of an audit, withheld information, and made contradictory statements
o McBride read some of the marketing materials which informed him of the duty to report foreign accounts
o McBride used nominee entities to move U.S. revenue offshore
o His stated purpose of entering the financial plan was to make it appear that he did not have a financial interest in foreign accounts that he had established by creating nominee corporations to hold the accounts.
o His initial reaction to the promoter when told about the details was “This is tax evasion.”
o McBride’s partner’s accountant expressed concerns about the plan, but McBride did not discuss the plan with his own accountant
Willfulness-Standard of Proof
- The burden of establishing willfulness is on the Internal Revenue Service. IRM 126.96.36.199.5.3(3).
- The IRS has concluded it must prove willfulness by "clear and convincing" evidence, and the general presumption of correctness afforded to tax assessments is inapplicable. See IRS CCA 200603026, 2005 IRS CCA LEXIS 83 **5-7 (Sept. 1, 2005); but see Williams (IRS must prove willfulness by a preponderance of the evidence).
- Willfulness can rarely be proven by direct evidence, since it is a state of mind It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness in the failure to file the FBAR on inferences from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks. IRM 188.8.131.52.5.3(7).
Non-Willfulness: Will You Know It When you See It?
- Presumably non-willful means the absence of willfulness, actual or constructive, but…
- “Non-willful conduct” for the Streamlined Program 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.”
Willfulness Factors / Questions
- Who Prepared the return?
o Tax Preparer
- Did the tax preparer use an organizer?
o Was it filled out, and sent back?
- Were you asked about the existence of any offshore accounts or assets or about any foreign source income by the tax preparer?
o If yes, what did you say?
- Was the preparer informed about foreign assets/income?
o Why not?
- When did you first become aware of the foreign source income, foreign accounts or foreign assets?
- Level and type of education?
- Work experience?
- Was the account opened with a U.S. passport? If not, why not?
- What were/are the sources of the funds in the accounts?
- Were the accounts held in an offshore structure?
- What is the source of the funds?
o Legal vs. illegal
o Taxed vs. untaxed
- How were funds withdrawn?
- Were the funds moved from one offshore bank to another?
- What did the client do when he was asked by a foreign bank to close his account?