ABOUT THE AUTHOR: Daniel W Hudson is a Senior
Associate at Baker & McKenzie
The use of foreign bank accounts by US taxpayers to hide
undeclared funds and assets has been a highly publicised topic
since the US government’s attack on UBS tested the fortification of
Swiss bank secrecy in early 2009. Once vaguely known to most
laymen, the foreign bank account reporting (FBAR) requirement has
come to be common knowledge in the international community. Given
that a single wilful violation of the FBAR requirement can carry a
penalty of the greater of USD100,000 or 50 per cent of the account
balance, the FBAR requirement has also become the ‘stick’ used by
the US government to encourage US taxpayers with undeclared
offshore funds to voluntarily come clean and disclose their
undeclared assets via the Internal Revenue Service’s (IRS’s)
Offshore Voluntary Disclosure Initiative (OVDI).
Politically speaking, in light of the growing US deficit and
need for additional revenues, the push for international financial
transparency and recoupment of income tax revenues from undeclared
offshore assets is one of the few issues these days that receives
bipartisan support. Legislatively, this is enforced by the 2010
enactment of the Foreign Account Tax Compliance Act
(FATCA) within the Hiring Incentives to Restore Employment
Act, and the intergovernmental agreements stemming from the
legislature. Even during the recent US presidential elections, the
issue of undisclosed offshore assets provided ammunition for one of
the presidential candidates (and, of course, political
pundits).
In addition to the attention that undisclosed offshore assets
have received by the legislative and executive branches of the US
government, the politicisation of this issue may be trickling down
to the judiciary. Specifically, two recent cases relating to the
assessment of civil penalties for the wilful violation of the FBAR
requirement have applied a standard of wilfulness contrary to
previous judicial interpretations, and even the government’s own
interpretation, under Title 31. In United States v
Williams, No 10-2230, 2012 US App LEXIS 15017, at *1 (4th
Cir 20 July 2012), the Fourth Circuit Court of Appeals, in an
unpublished decision, reversed the district court’s denial of civil
penalties for the alleged wilful violation of failing to file an
FBAR under Title 31.
United States v
Williams
In 2010, the US District Court for the Eastern District of
Virginia, in a detailed opinion that fully explained the evidence
supporting its findings, held that the government failed to meet
its burden to establish by a preponderance of the evidence that J
Bryan Williams wilfully violated his obligation to file his 2000
FBAR form, therein denying the federal government’s attempt to
recover civil FBAR penalties from Williams.
Admittedly, the facts did not weigh heavily in the taxpayer’s
favour. In 2000, there was no dispute that Williams had an interest
in two Swiss bank accounts that were held through a foreign entity,
and failed to report the income earned from those accounts on his
2000 federal tax return. More specifically, he checked the ‘No’ box
in response to the question of whether he had an interest in any
foreign financial accounts on Schedule B of that tax return, and
failed to file the required FBAR, reporting his interest in the
accounts, on time. In 2002, Williams disclosed the two accounts to
the IRS, and in 2003, pleaded guilty to conspiracy to defraud the
IRS and criminal tax evasion. As part of his guilty plea, Williams
allocuted to all of the essential elements of the charged crimes,
including that he unlawfully, wilfully and knowingly evaded taxes
by filing false and fraudulent tax returns on which he failed to
disclose his interest in two accounts.
The government argued that the ‘No’ box checked in his tax
return, combined with the failure to file the FBAR, was sufficient
to establish a wilful violation of the FBAR requirement under Title
31. In response to Williams’ testimony that he was ignorant of the
question and directions in Schedule B, the government asserted that
his signature on his 2000 federal tax return was prima facie
evidence that he knew the contents of his tax return.
On examination of the surrounding facts and circumstances
presented at trial, the district court was ‘not persuaded that
Williams was lying about his ignorance to the contents’ of his 2000
tax return because the court concluded that Williams’ testimony
that he was ignorant of the written contents of his return, and
otherwise relied on his accountants to fill in the remainder of the
return, was credible and should be given more weight than the mere
fact that Williams checked the ‘No’ box. More specifically, the
district court found that there was evidence that ‘strongly
indicated’ to the court that Williams lacked the motivation to
wilfully conceal the accounts, and concluded that Williams’ failure
was ‘not an act undertaken intentionally or in deliberate disregard
for the law,’ but rather an understandable omission given the
circumstances.
Despite the district court’s detailed explanation of the
evidence and reasoning supporting its findings, the Fourth Circuit
Court of Appeals, in an unpublished, split-decision opinion, found
that the district court was erroneous in finding that wilfulness
had not been established. The majority focused on Williams’ signed
2000 federal tax return as prima facie evidence that he knew the
contents of his return and that, at a minimum, the question
contained in Schedule B and its directions ‘put Williams on inquiry
notice of the FBAR filing requirement’. The majority took Williams’
testimony that he did not read such a question or pay attention to
the written words on his return as evidence that Williams made a
‘conscious effort to avoid learning about reporting requirements’.
Moreover, his false answers on his year 2000 tax organiser,
provided by his accountant, and return, evidenced conduct ‘meant to
conceal or mislead sources of income or other financial
information’, which the majority concluded constitutes ‘wilful
blindness to the FBAR requirement’.
While the majority could have rested here and concluded that the
record established wilful blindness and reversed the district
court’s holding on that basis, they decided to go one step further
and concluded that they ‘are convinced that, at a minimum,
Williams’s undisputed actions establish reckless conduct,
which satisfied the proof requirement under [the FBAR Penalty
Provision]’ (emphasis added). In support of their conclusion, they
said that ‘in cases where wilfulness is a statutory condition of
civil liability, [courts] have generally taken [wilfulness] to
cover not only knowing violations of a standard, but reckless ones
as well’.
United States v
McBride
In the Tenth Circuit, the US District Court for the District of
Utah, Central Division, applied a similar standard in United
States v McBride, Case No 2:09-cv-378 DN, 2012 US
Dist LEXIS 161206, at *1 (D Utah, C Div, 8 November 2012), and
found that Jon McBride’s failure to satisfy his FBAR requirement to
report his interest in certain foreign accounts was wilful. Like
the court in Williams, the district court stated that:
‘Where wilfulness is a statutory condition of civil liability, it
covers not only knowing violations of a standard, but reckless ones
as well. Therefore, “wilfulness” may be satisfied by establishing
the individual’s reckless disregard of a statutory duty, as opposed
to acts that are known to violate the statutory duty at issue. An
improper motive or bad purpose is not necessary to establish
wilfulness in the civil context.’
Interpreting ‘wilfulness’
The courts in Williams and McBride both
applied a standard of wilfulness contrary to the government’s own
interpretation, and judicial precedence, under Title 31. In IRS CCA
200603026, the IRS stated that the FBAR provisions providing for
civil penalties and criminal penalties contain a similar
‘wilfulness’ requirement, and concluded that the phrase ‘wilful
violation (or wilfully causes any violation)’ has the same
definition and interpretation. The IRS cited the Supreme Court in
Ratzlaf v United States, 510 US 135 (1994),
addressing the standard for wilfulness in the context of a criminal
violation of a structuring provision of the Bank Secrecy
Act (Title 31), which found ‘wilfulness’ to be ‘a voluntary,
intentional violation of a known legal duty’. In other words, the
government had to prove that the defendant had acted with knowledge
that his conduct was unlawful in order to establish that he had
wilfully violated the anti-structuring law in Title 31.
The IRS clarified that ‘in the case of the FBAR penalty, in
order for there to be a voluntary intentional violation of a known
legal duty, the accountholder would just have to have knowledge
that he had a duty to file an FBAR, since knowledge of the duty to
file an FBAR would entail knowledge that it is illegal to not file
the FBAR’. The corollary of this principle being that ‘there is no
wilfulness if the accountholder has no knowledge of the duty to
file the FBAR’. The IRS concluded that wilfulness can be inferred
where an entire course of conduct establishes the necessary
intent.
If read literally, the Williams and McBride
cases appear to eviscerate the non-wilful and reasonable cause
provisions of Title 31, and the Williams case appears to
come close to establishing a ‘strict liability standard’ for
incorrectly answering the question in Schedule B of an individual’s
US federal tax return, because the majority in Williams
found that Williams signing his tax return in which the Schedule B
question regarding foreign bank accounts was checked ‘No’
constitutes ‘prima facie evidence that he knew the contents of the
return’, and therefore knowledge of the FBAR filing requirement.
Either way, both cases might ultimately prove the age-old dictum
that ‘bad facts make bad law’.
Required Records Doctrine
While debate continues over whether the standard of wilfulness
is edging lower, in three circuits there seems to be little debate
that foreign bank account records may be subject to the ‘Required
Records Doctrine’ and thus discoverable in a criminal proceeding.
Most recently, in the case of In re Grand Jury Subpoena,
696 F3d 428 (5th Cir 2012), the Fifth Circuit Court of Appeals
ordered the production of foreign bank account records that are
required to be under Treasury Department regulations by a witness
who was a target of a grand jury investigation of allegations that
he was using Swiss bank accounts to avoid US income tax. The
witness refused to produce the records, relying on his Fifth
Amendment privilege against self-incrimination. The Fifth Circuit,
in reversing the district court, found that the privilege did not
apply because the record-keeping requirement under the Bank
Secrecy Act (Title 31) falls within the Required Records
Doctrine, which applies when three premises are met:
1the purposes of the record-keeping requirement must
be ‘essentially regulatory’ and serve purposes other than criminal
law enforcement2the records sought must be of a kind ‘customarily
kept’ by the regulated party; and3the records must have
‘public aspects’ to them, which would render them analogous to
public documents.
The court concluded that all three premises had been met. It
found that the requirement to maintain and produce foreign bank
account records is ‘essentially regulatory’ in nature because there
is nothing inherently illegal about having a foreign bank account
(as opposed to a completely illegal activity such as narcotics or
human trafficking ). It was uncontested that the bank records
sought are of a kind that are ‘customarily kept’ by a reasonable
accountholder. Finally, although the court acknowledged that bank
account records are usually viewed as private, it nevertheless
found that there were sufficient ‘public aspects’ to satisfy the
Required Records Doctrine. In so finding, the court focused on the
fact that the Treasury Department shares the information it
collects pursuant to the Bank Secrecy Act’s record-keeping
and reporting requirements with various other agencies, and such
data-sharing is designed to serve an important public purpose (e.g.
federal economic and financial analysis and planning), which is
‘sufficient to imbue otherwise private foreign bank account
records’ with ‘public aspects’ sufficient to satisfy the third
prong of the Required Records Doctrine.
The Seventh Circuit, in In re Special February 2011-1 Grand
Jury Subpoena Dated 12 September 2011, 691 F3d 903 (7th Cir
2012), and the Ninth Circuit, in In re Grand Jury Investigation
MH, 648 F3d 1067 (9th Cir 2011), have reached the same results
in those jurisdictions.
In conclusion
Irrespective of the bad facts in each of the cases above, these
cases may illustrate that the politicisation of undeclared offshore
assets has trickled down to the judiciary, and maybe even created a
slight bias in favour of the US government. In any event, at the
least, the aforementioned cases should be considered when giving
advice on undeclared offshore assets.