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Couple's Attempt at Only Partial Disclosure in IRS Voluntary Disclosure Program Did Not Save Them From Being Found to Have Willfully Not Filed FBAR Reports

The taxpayer in the case of United States v. August Bohanec et ux, USDC CD Ca., No. 2:15-cv-04347 was found to have willfully failed to file FBAR forms.  The taxpayer was hit with the enhanced penalty of $100,000 or 50% of the balance in the accounts for being found willfully in violation.

This was true despite the fact that the taxpayer in question had attempted to enter the IRS’s Voluntary Disclosure Program for Offshore Accounts.  But the IRS rejected their application to enter the program and the Court found they had “made several misrepresentations under penalty of perjury” in their application to enter the program.

The taxpayers in this case had three different offshore accounts for the year in question, one with UBS in Switzerland, along with another in Austria and one additional account in Mexico.  They had been depositing money in the UBS account from various business activities, including a significant commission arrangement they had with a Canadian entity and sales they had made on eBay.

The Court noted the following with regard to their attempt to enter the voluntary program:

The Bohanecs' application, submitted under penalty of perjury, represented that the "original balance and all funds deposited into the [Swiss UBS] account were after-tax earnings from our used camera business."

…While the FBARs filed by the Bohanecs in May 2011 for 2003, 2004, 2005, 2006, 2007, and 2008 included the UBS account, they did not include the Austrian account, which was in existence during 2003 through 2008.

…The FBARs for 2006, 2007, and 2008 filed by the Bohanecs in May 2011 did not include the Mexican account, which was in existence during 2006 through 2008.

… While the federal income-tax returns for 2003, 2004, 2005, 2006, 2007, and 2008 included the interest earned on the UBS accounts, they did not include the income earned by the Bohanecs from their EBay sales.

The Court found that this weighed heavily against the credibility of the taxpayer’s assertion that their conduct had not been willful, noting:

Defendants' credibility is further undermined by their conduct with respect to their application to participate in the IRS' Voluntary Disclosure Program for Offshore Accounts. Defendants made several misrepresentations under penalty of perjury. Defendants misrepresented, for example, that all of the funds in the UBS account were after-tax proceeds from Defendants' used camera business, when in fact the account included Leitz Canada commissions that had never been reported on income tax returns. The application also failed to disclose Defendants' Austrian bank account. Furthermore, Defendants then proceeded to file false tax returns for 2003-2008 that did not include any of Defendants' income from internet sales. Defendants' FBARs for 2003-2008 did not disclose the Austrian account and the FBARs for 2006-2008 did not disclose the Mexican account.

The Court also rejected the theory that actual knowledge of the filing obligation as required for the taxpayers’ conduct to be willful, finding that if a taxpayer acts with gross negligence with regard to his/her filing obligations that sustains a finding of willfulness in a civil action, such as this one. 

As the opinion notes:

80. Although Defendants assert that "willfulness" encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties, no court has adopted that principle in a civil tax matter. The only cases Defendants cite to support their argument that "willful" means that a defendant must have knowledge and specific intent are criminal cases. See Ratzlaf v. United States, 510 U.S. 135 (1994) (structuring); United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1984) (felonious failure to file currency transaction reports).

81. Where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering "not only knowing violations of a standard, but reckless ones as well." Safeco, 551 U.S. at 57.

82. "Recklessness" is an objective standard that looks to whether conduct entails "an unjustifiably high risk of harm that is either known or so obvious that it should be known." Safeco, 551 U.S. at 68 (internal quotation marks and citation omitted).

83. Several other courts, citing Safeco, have held that "willfulness" under 31 U.S.C. § 5321 includes reckless disregard of a statutory duty. See United States v Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012); United States v. Bussell, No. CV15-02034 SJO(VBKx), 2015 WL 9957826 at *5 (C.D. Cal. Dec. 8, 2015); see also United States v. McBride, 908 F.Supp. 2d 1186, 1204, 1209 (D. Utah 2012).

As has been true in other cases (see the Williams case cited above by the Court), the fact that the taxpayers had completed Schedule B of Form 1040 was also held to show they were “on notice” about the matter.

The Court found in this case the taxpayers had reason to know that reporting obligations existed but did not take action to determine what they were.  First, the Court noted the taxpayers were relatively sophisticated about business and tax matters, noting:

Defendants were reasonably sophisticated business people. For a time, Defendants' camera shop was the only exclusive Leica dealer in the world. The deals Defendants negotiated with Leica's U.S. distributor were so favorable as to motivate other Leica retailers to protest. Defendants were able to circumvent Leica's supply restrictions by entering into an international agreement with Leitz Canada. Defendants had a worldwide reputation and sold and shipped to customers around the world. Defendants knew that they had to pay taxes if they earned money, and that they had to file tax returns. Defendants always used a tax preparer to prepare the camera shop's tax returns. Defendant August Bohanec was sufficiently sophisticated to obtain two patents without assistance. Defendants also managed the construction of a home along the coast of Mexico, including the hiring of a contractor and the opening of a Mexican bank account.

Their conduct with regard to their Swiss account also was deemed troublesome by the Court, finding they had kept the existence of that account a secret and never inquired of any adviser about that account:

Defendants were at least reckless, if not willfully blind, in their conduct with respect to their Swiss UBS account and their reporting obligations regarding the account.2 Defendants never provided UBS with their home address, and never told anyone other than their children of the existence of the UBS account, including the tax preparers Defendants hired to help them file tax returns. Defendants never asked a lawyer, accountant, or banker about requirements regarding the UBS account, and never used a bookkeeper or kept any books once the UBS account was opened.

The Court also had problems with a number of other assertions of the taxpayers, noting:

Defendants' representations that they were unaware of or did not understand their obligations, and deferred entirely to Kluck, are not credible. Part III of Schedule B of Defendants' 1998 tax return put them on notice that they needed to file an FBAR. Defendants not only deposited commissions from their Leitz Canada deals into the UBS account, but also directed customers to deposit payment into the account and made several transfers and withdrawals from the UBS account to other foreign and domestic accounts. Self-serving testimony that Defendants believed that there were no requirements regarding the account because they were intended to use the funds in the account "for retirement" is sufficiently incredible, particularly in light of Defendants' level of sophistication, to call into question the veracity of the remainder of their testimony. (RT 14:7-23.)

The case illustrates just how things can “go wrong” when a taxpayer attempts to enter a ‘come clean” program but decides to withhold information.  While it seems likely the taxpayers would have come to the IRS’s attention due to disclosures that were eventually made by UBS about its accounts, the taxpayer’s apparent attempts to “limit the damage” by only disclosing the UBS accounts and, even then, giving misleading information about the source of the funds, only served to make them appear more culpable when the IRS discovered they had given an “edited” version of what had happened.

While we don’t have information in this case about any advisers that the taxpayers may have consulted, this case showcases why it’s important for the taxpayers to have advisers experienced in the program and to be totally honest with those advisers.  For the latter point, it’s also important that at least that initial “come clean” conversation be with an attorney that has privilege, since the case could very well end up with a criminal referral. 

That is important because should the taxpayers decide not to take the advice to come totally clean (and these taxpayers might not have done so), an attorney could simply resign at that point with no real damage to the taxpayers.  A non-attorney adviser would not be in the same position—and, in fact, the IRS might become very interested in the details of what the taxpayers had been told in order to bolster a case not just for civil, but potential criminal, willfulness in failing to report.