Second Federal Court Holds that Recklessness is Willfulness for FBAR Penalty
Following the Fourth Circuit’s lead in the recent and controversial Williams case, the District of Utah recently held that a taxpayer who signs a tax return and fails to file an FBAR stands in reckless disregard of the risk that he or she is violating the FBAR requirement and is therefore willful in his or her failure to file an FBAR. The full citation is United States v. McBride, Case No. 2:09-cv-378 (D. Utah). The court reasoned that “because the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious. The risk of failing to disclose a financial interest in a foreign account is an obvious risk, given that the question on line 7a of Schedule B is available to anyone who looks at a blank Form 1040 individual income tax return.”
What of the taxpayer who trusts his or her return preparer and does not bother to examine the tax return? The court fell back on the Fourth Circuit’s statement that “[a] taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”
“This case, like Williams, appears to eschew the strict criminal standard of willfulness that the IRS has for years applied to the civil FBAR penalty,” said Jim Mastracchio, Co-Chair of the firm’s Tax Controversy Practice. “I am not entirely convinced, however, that Williams and now McBride portend a broad application of the new recklessness standard to ordinary failures to file FBARs.” Mastracchio explained, “The taxpayers in these two cases were both engaged in aggressive tax avoidance: Williams had pleaded guilty to tax evasion, and McBride was involved in an apparently fraudulent tax shelter. I believe that the jury is still out on whether the courts will apply this new standard of willfulness to taxpayers who merely signed their tax returns without noticing the language regarding the FBAR filing requirement.”
Jay Nanavati, who recently joined the firm after having spent years involved in the government’s offshore tax enforcement efforts, added “This case, if followed to its logical conclusion, stands for the proposition that a taxpayer who does not carefully analyze his or her tax return, even when a tax professional prepares the return, can be penalized for having willfully violated the law. I do not believe that this is the result that the courts or the IRS hope to reach in the long run.” The civil penalty for willful failure to file an FBAR is 50% of the highest aggregate account balance multiplied by the number of years for which the taxpayer failed to file an FBAR.
For more information on the government’s offshore enforcement efforts, FBAR penalties, and the IRS’s Offshore Voluntary Disclosure Program (OVDP), please contact Jim Mastracchio at (202) 861-1650 (Jmastracchio@bakerlaw.com) or Jay Nanavati, (202) 861-1747 (firstname.lastname@example.org), Baker Hostetler LLP, 1050 Connecticut Ave., Washington, DC 20036 (www.bakerlaw.com).