An IRS Program Manager Technical Advice (PMTA 2018-013) the Chief Counsel’s office outlined its position on what constitutes willfulness for purposes of imposing the maximum penalty for FBAR reporting violations, as well as the standard of proof that must be established for the IRS to carry the issue of applying the penalty.
Under 31 USC §5321(a)(5)(B) the maximum penalty for an FBAR violation is $10,000 unless the violation is willful. In that case, 31 USC §5321(a)(5)(C) increases the maximum penalty to the greater of $100,000 or 50% of the balance in the account.
But what is a willful violation? Knowingly violating the provisions would be clearly willful, but the memorandum holds that since this a civil penalty, the standard for willfulness has been held to be lower by the Courts. The PMTA notes:
Where “willfulness” is a statutory condition of civil liability, the Supreme Court has generally interpreted “willfulness” to not only include knowing violations of a standard, but reckless ones as well. Safeco, supra, at 59. Willful blindness to the obvious or known consequences of one’s action also generally satisfies a “willfulness” requirement in the civil context. Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011).
The memorandum goes on to apply this to the FBAR violation issue:
Consistent with the Supreme Court’s interpretation of the word “willful” in the civil context, courts have held that the standard for “willfulness” for civil FBAR violations includes recklessness and willful blindness. The Fourth Circuit in United States v. Williams, 489 F. App’x 655, 660 (4th Cir. 2012), reversed for clear error the district court’s finding that willfulness had not been established, because the taxpayer’s “undisputed actions establish reckless conduct.” The district court in Bedrosian rejected the argument that in order for the government to sustain a civil willful FBAR penalty, it must meet the standard used in the criminal context and show “that the actions amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991).” Bedrosian v. United States, No. CV 15-5853, 2017 WL 4946433, at *3 (E.D. Pa. Sept. 20, 2017) (on appeal to the 3d. Cir. on other grounds). Id. The court in United States v. McBride, 908 F. Supp. 2d 1186, 1210 (D. Utah 2012), held that willfulness for civil FBAR violations includes both recklessness and willful blindness, as did the court in United States v. Bohanec, 263 F. Supp. 3d 881, 889 (C.D. Cal. 2016). As the court in Bedrosian noted, every federal court to have considered the willfulness standard for civil FBAR violations has concluded that the civil standard applies, and the standard includes “willful blindness” and “recklessness”. No. CV 15-5853, 2017 WL 4946433, at *3. The court in Garrity similarly noted that numerous courts have found that “willfulness” in the civil FBAR context includes reckless conduct. United States v. Garrity, 2018 WL 1611387, at *6 (D. Conn. Apr. 3, 2018) (citing cases holding that “willfulness” for civil FBAR violations includes recklessness, and noting that “defendants cite no case in which a court has held to the contrary.”)
In footnotes to the memorandum, the author discusses examples of each type of conduct. With regard to willful blindness the memorandum notes:
“Willful blindness” is established when an individual “takes deliberate actions to avoid confirming a high probability of wrongdoing and [when he] can almost be said to have actually known the critical facts.” Global-Tech Appliances, Inc., supra, 131 S. Ct. at 2070-71. In the tax reporting context, the government can show willful blindness by evidence that the taxpayer made “a conscious effort to avoid learning about reporting requirements.” Williams, supra, 489 F.App'x at 659-60. Additionally, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. See IRM 220.127.116.11.5.1.
Recklessness is similarly discussed in a footnote:
The recklessness standard is met “if the taxpayer (1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.” United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989)
As well, the memorandum concludes that while the government bears the burden of proof, that burden is met via a mere preponderance of the evidence rather than higher standard:
As is the case with the standard for willfulness, the courts are uniform with regard to the burden of proof for civil FBAR penalties; the government bears the burden of proving liability for the civil FBAR penalty by a preponderance of the evidence. As the court in Bohanec, 263 F. Supp. 3d at 889, noted, the Supreme Court has held that a heightened, clear and convincing burden of proof applies in civil matters “where particularly important individual interests or rights are at stake.” Herman & MacLean v. Huddleston, 459 U.S. 375, 389 (1983). Important individual interests or rights include parental rights, involuntary commitment, and deportation. Huddleston, 459 U.S. at 389. However, the preponderance of the evidence standard applies where “even severe civil sanctions that do not implicate such interests” are contemplated. Id. at 390. The court in Bohanec3 held that civil FBAR penalties do not rise to the level of “particularly important individual interests or rights,” and accordingly, the preponderance of the evidence standard applies. Bohanec, 263 F. Supp. 3d at 889. This was also the holding of the court in United States v. Williams, No. 1:09–cv–437, 2010 WL 3473311 (E.D.Va. Sep. 1, 2010), rev'd on other grounds, United States v. Williams, 489 Fed.Appx. 655 (4th Cir.2012), the court in McBride, 908 F. Supp. 2d at 1201, and the court in Bedrosian, 2017 WL 4946433, at *3. As the court in Garrity recently noted, every court that has answered the question [of the burden of proof] has held that the preponderance of the evidence standard governs suits by the government to recover civil FBAR penalties. 2018 WL 1611387, at *3 (D. Conn. Apr. 3, 2018).
Another footnote concedes an earlier IRS memorandum suggested a higher standard applies, but concludes that memorandum is in error:
In CCA 200603026, the office suggested that the clear and convincing standard should apply, but subsequent cases have not sustained this position.