Sixth Cir. Affirms Reckless FBAR Conduct as Willfulness Violation

Sixth Cir. Affirms Reckless FBAR Conduct as Willfulness Violation

6th Circuit Rules that Willful FBAR Includes ‘Reckless Conduct’

Several courts across the country have ruled on the issue of FBAR penalties and whether reckless disregard qualifies as willfulness. Some of the recent cases include:

This time, it was the Sixth Circuit Court of Appeals who upheld a District court’s ruling finding that a reckless FBAR violation still qualifies as a willful violation — and thus results in significantly higher penalties than would be assessed under the non-willful standard. This is an important case, because not only does it detail willfulness and reckless disregard involving FBAR but it also highlights how an incomplete OVDP (Offshore Voluntary Disclosure Program) can impact the court’s finding (which was also detailed in the prior case of United States v. Collins). Let’s take a look at why the court held defendants should be assessed willfulness FBAR penalties by reviewing excerpts from the Court of Appeals.

This is an update to our prior article on this same case, United States v. Kelly.

Swiss Bank Accounts

      • “Kelly is a U.S. citizen. In 2008, Kelly closed his domestic bank accounts and opened an interest-bearing account at Finter Bank in Zurich, Switzerland. He designated the Finter account as “numbered” so that his name would not appear on the statements. R. 48-4, PageID 466. He also requested that Finter retain, rather than mail him, any account-related correspondence. Kelly completed a “Tax Form U.S. Withholding/Individual” when he opened this account, which informed him that “persons liable to U.S. taxation can only continue to invest in U.S. securities if they disclose their identity to the IRS by filing a form W-9.” R. 48-8, PageID 518. Instead of providing an IRS Form W-9 and disclosing the account to the IRS, Kelly chose to divest from U.S. securities.

      • Kelly’s actions, or lack thereof, after he opened the account are important. He never sought professional or legal advice about “federal reporting obligations or requirements in regard to the Finter account” or “potential tax implications,” and he never confirmed with Finter whether it was reporting his account to the federal government. R. 48-4, PageID 476–77. He did, though, ask the bank whether it would respond to IRS requests, and Finter told Kelly that the “IRS [would] have to go via Swiss Authorities.” R. 48-9, PageID 520. Between 2013 and 2015, Kelly maintained a balance of around $1.5 million in the Finter account.”

Incomplete OVDP

      • “In April 2014, a few months after receiving the December 2013 letter from Finter, Kelly requested to participate in the OVDP for the years 2008 through 2013. Kelly admitted that he was aware of his FBAR reporting obligations at that time.

      • The OVDP aims “to bring taxpayers that have used undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax and related laws.” R. 48-33, PageID 646. In becoming compliant, these taxpayers can avoid civil and criminal penalties.

      • The Treasury Department “preliminarily accepted” Kelly’s voluntary disclosure as timely. R. 48-13, PageID 533–34. But it informed Kelly that acceptance of his disclosure depended on him making truthful disclosures, cooperating with the IRS, and trying, in good faith, to satisfy his tax obligations. Around this same time, Kelly closed his Finter account. With the help of a Swiss advisor, Kelly opened a new account with Bank Alpinum in Liechtenstein and transferred all of the Finter funds there.

      • In December 2016, more than two years after he became aware of his FBAR obligations, Kelly filed delinquent FBARs for the years 2008 through 2013. He did not file any FBARs, though, for 2014 or 2015.”

Government FBAR Investigation

      • “In 2018, Kelly submitted a Form 433-A, Collection Information Statement1 to the IRS under penalty of perjury. The form asked him to list his personal bank accounts; he did not include his account with Bank Alpinum. Later that year, the IRS removed Kelly from the OVDP, in part because he failed to provide information about his foreign assets.

      • The IRS then began investigating Kelly’s compliance with FBAR requirements. It determined that he failed to meet the requirements of 31 U.S.C. §5314 by willfully failing to timely file FBARs from 2013 through 2015, and proposed penalties for those years totaling $769,126.

      • The government initiated an action against Kelly after he failed to pay the FBAR penalties assessed against him. The parties filed cross-motions for summary judgment. The district court granted the government’s motion and denied Kelly’s. Kelly timely appealed.”

Does Willfulness Include Recklessness?

      • “We must first determine what it means to “willfully” violate the FBAR requirements. As mentioned above, a willful violation can lead to criminal and civil penalties. The type of penalty sought dictates how we interpret “willfully.” See Bryan v. United States, 524 U.S. 184, 191 (1998) (“The word ‘willfully’ is sometimes said to be ‘a word of many meanings’ whose construction is often dependent on the context in which it appears.” (quoting Spies v. United States, 317 U.S. 492, 497 (1943))).

      • Based on the above authorities, we hold that, for purposes of an FBAR civil penalty, a willful violation of the FBAR reporting requirements includes both knowing and reckless violations. In so holding, we join every other circuit to have addressed this issue. See United States v. Rum, 995 F.3d 882, 889 (11th Cir. 2021) (per curiam); Kimble v. United States, 991 F.3d 1237, 1242 (Fed. Cir. 2021); United States v. Horowitz, 978 F.3d 80, 88 (4th Cir. 2020); Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018).”

Court Rules Defendant Was Reckless

      • “Having determined that civil liability for willful violations of the Bank Secrecy Act’s FBAR requirements encompasses both knowing and reckless conduct, we next consider if a genuine dispute of fact exists as to whether Kelly, at a minimum, acted recklessly in failing to adhere to his FBAR obligations. A reasonable factfinder could reach only one conclusion — Kelly’s conduct in failing to comply with his FBAR obligations was reckless, if not knowing.

      • Kelly does not dispute that he failed to timely file FBARs for 2013, 2014, and 2015. He argues, however, that he did not act knowingly or recklessly. To support his argument, he relies primarily on his participation in the OVDP prior to the due date for the 2013 FBAR and his conduct after being terminated from the program, including ordering annual reports from Bank Alpinum — which he believed were sent to the government — and hiring a Swiss account manager.

      • But the record contains ample undisputed evidence that shows Kelly willfully failed to timely file FBARs for 2013 through 2015. For one, he took steps to intentionally evade his legal duties. Cf. Sturman, 951 F.2d at 1476. Kelly designated his Finter account as “numbered” so that his name would not appear on the statements, and he requested that the bank retain any account-related correspondence. These efforts, which allowed him to shield his considerable assets from U.S. authorities, “evince[ ] more than mere negligence.” Horowitz, 978 F.3d at 90. Kelly also shielded his account from U.S. authorities by opting out of investing in U.S. securities, which would have required him to file a Form W-9 with the IRS. Only after Finter told Kelly that it would disclose his account to U.S. authorities did Kelly take steps to comply with his reporting obligations by requesting to participate in the OVDP. Yet, even after that point, he did not meet the 2013 FBAR filing deadline. And his subsequent statements to the IRS about his foreign assets were found to be false and incomplete.

      • At any rate, Kelly’s conduct was objectively reckless. He opened a Swiss bank account, into which he immediately deposited over $1.8 million. He did not, however, seek professional advice about his reporting obligations or the potential tax implications of those assets. Kelly also did not confirm with Finter whether it would report his assets to U.S. authorities. Finter closed his account, warned Kelly that it was required to report to U.S. authorities, and urged him to seek professional tax advice. After all of this, Kelly applied to participate in the OVDP and, by his own admission, became aware of his reporting requirements. Kelly knew he had failed to report in the past and that this was an ongoing obligation. But he still failed to inquire whether his FBARs were being prepared and filed — and indeed, he never submitted the 2014 and 2015 FBARs. And he never consulted a tax advisor or an attorney. Given that he ought to have known about the risk of noncompliance, and could have found out by simply asking, his failure to disclose was, at the very least, reckless.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.