Willful failure to file FBAR subject to civil penalty; court backs IRS assessment

Doeren Mayhew

The latest "FBAR" case before the Fourth Circuit Court of Appeals indicates the extent to which the IRS is now enforcing mandatory disclosure of foreign bank accounts. The case also reflects how the IRS plans to approach the willfulness standard in the future when considering penalties for violation of reporting requirements for the TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The forecast is not good for those who miss FBAR reporting in the future. In Williams, the Fourth Circuit found that the taxpayer was liable for IRS civil penalties because of his "willful blindness" in failing to read the instructions on his tax return. These instructions included a check-in-the-box that would have alerted him of the possibility that he was subject FBAR filing requirements. This decision may impact taxpayers with foreign assets in the future. It should also encourage taxpayers to be more vigilant in the future about the existence of FBAR reporting requirements. FBAR reporting and penalties Taxpayers are required under federal law to report to the Department of Treasury any foreign financial interests they have in banks, securities, or other financial accounts. The report is submitted using the FBAR form, which must be filed on or before June 30 of each calendar year with respect to assets held during the previous calendar year. The Treasury may impose civil penalties on a person who fails to timely file the report. For a person who "willfully" fails to timely file the FBAR, the Treasury may impose a larger penalty, whose imposition and collection the IRS enforces. Court's analysis Two judges on the three-judge panel found that willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information. Willfulness also can be inferred from a conscious effort to avoid learning about reporting requirements. Additionally, willful blindness may be inferred where a taxpayer was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts about the liability. The taxpayer reported on his 2000 return that he had no foreign accounts, despite long-standing knowledge of two foreign accounts, the court found. The taxpayer testified that he "never paid any attention to any of the written words" on his return. The court concluded that the taxpayer had made a conscious effort to avoid learning about FBAR reporting requirements. A taxpayer who signs a tax return cannot claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of the return's contents. In the case of FBAR reporting, it turns out that ignorance is far from bliss, with hefty penalties a likely consequence.