Failure to file FBAR was willful despite application for voluntary disclosure program

Bohanec, (DC CA 12/8/2016) 118 AFTR 2d ¶ 2016-5537

A district court has found that the taxpayers’ failure to timely file a Foreign Bank and Financial Accounts Report (FBAR) was willful where, among other things, they stopped employing a bookkeeper or keeping any books after opening a foreign bank account and made several misrepresentations under penalty of perjury when they applied to participate in IRS’s Offshore Voluntary Disclosure Program (OVDP).

Background—FBAR. Under the Bank Secrecy Act, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority. Except in the case of willful failures, the amount of any civil penalty imposed for violating this rule will not exceed $10,000. However, those who willfully fail to file their FBARs on a timely basis, i.e., on or before June 30 of the following year, can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation (31 CFR § 1010.821)) or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. IRS has discretion as to the amount of the penalty, subject to these limits. (31 USC 5321(a)(5)(C))

Part III to Schedule B of the ’98 Form 1040 concerned foreign accounts and trusts. Question 7a in Part III to Form 1040, Schedule B asked: “At any time during ’98, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1.”

Page B-2 of the instructions for Schedule B for ’98 stated: “See [FBAR] Form TD F 90-22.1 to find out if you are considered to have an interest in or signature or other authority over a financial account in a foreign country (such as a bank account, securities account, or other financial account).” Page B-2 of the instructions for Schedule B for ’98 also stated: “If you checked the Yes box on line 7a, file [FBAR] Form TD F 90-22.1 by June 30, ’99, with the Department of the Treasury at the address shown on that form.”

Background—OVDP. On Mar. 26, 2009, IRS announced its first OVDP, a form of a tax amnesty program. It permitted U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to IRS. IRS has since established additional OVDPs.

Facts. The taxpayers were Mr. and Mrs. Bohanec.

Mr. Bohanec owned a camera shop in California. He had two camera-related patents that he obtained without any assistance from an attorney. For many years in a row, the Bohanecs had an accountant prepare their tax returns.

The Bohanecs arranged with Leica, a German camera manufacturer, to become an exclusive Leica dealer. The camera shop was the only exclusive Leica dealer in the world. After other retailers complained about the deals the camera shop received, Leica ended the exclusivity deal and restricted the camera shop’s Leica purchases.

Leica had a subsidiary in Canada called Leitz Canada, which was headed by Walter Kluck. Sometime in the late ’70s, the shop started purchasing Leica cameras from Leitz Canada and thus avoided the supply constraints imposed by Leica.

The camera shop shipped to customers around the world. During the ’80s, the Bohanecs brokered transactions between Leitz Canada and various camera retailers around the world. Kluck contacted the Bohanecs requesting their assistance in finding international buyers, for which the Bohanecs would earn a commission.

Commissions for international sales were deposited into an account at UBS AG in Switzerland in the Bohanecs’ name. UBS AG is a Swiss financial-services company. Kluck opened the Swiss account on the Bohanecs’ behalf. The Bohanecs did not provide UBS AG with their home address. The Bohanecs did not tell anyone in the U.S., other than their two children, of the existence of the Swiss account. By the time the Bohanecs had the Swiss account, they no longer used a bookkeeper or kept any books. The Bohanecs never discussed the Swiss account with an accountant, lawyer, or banker.

In addition to the Leitz Canada commission deposits, the Bohanecs directed their international customers, on at least a few occasions, to deposit money directly into the Swiss UBS account. The UBS account was managed by Kluck while he was alive and, thereafter, by UBS.

The Bohanecs opened other foreign bank accounts in Austria and Mexico. They made several transfers from the UBS account to these other accounts. As of June, 2008, they had a balance of almost $650,000 in the UBS account. Between the filing of their ’98 federal income tax return and May 19, 2011, the Bohanecs did not file any federal income tax returns. Between the opening of the UBS account and May 19, 2011, the Bohanecs did not file any FBARs.

On Jan. 6, 2010, the Bohanecs executed an application to participate in the OVDP. 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 camera business.” On May 19, 2011, the Bohanecs executed and filed FBARs and federal income tax returns for 2003, 2004, 2005, 2006, 2007, and 2008.

While those FBARs included the UBS account, they did not include the Austrian or Mexican accounts. The Bohanecs were ultimately rejected by IRS for the OVDP.

The Bohanecs did not report the commission income they received from Leitz Canada on their federal income tax returns. They also sold cameras on Ebay and didn’t report that income on their returns.

The only issue in this case was whether the Bohanecs’ failure to file a 2007 FBAR was willful.

Court defines “willful.” The court, rejecting the Bohanecs’ argument, concluded that the term “willful” included “reckless” for purposes of FBAR.

The court first noted that 31 USC 5321(a)(5) does not define willfulness. The Bohanecs asserted that “willfulness” encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties. But the court said that no court has adopted that principle in a civil tax matter. The only cases the Bohanecs cited to support their argument that “willful” means that a defendant must have knowledge and specific intent — Ratzlaf v. United States, (S Ct 1994) 510 U.S. 135 (structuring) and United States v. Eisenstein, (CA 11 1984) 731 F.2d 1540 (felonious failure to file currency transaction reports)—were criminal cases. The Bohanecs noted that IRS Chief Counsel, in Chief Counsel Advice 200603026, has opined that the willfulness standard for purposes of 31 USC 5321 is the same as the criminal standard. But, the court said, IRS Chief Counsel Advice may not be cited as precedent.

The court said that, 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 Ins. Co. of America v. Burr, (S Ct 2007) 551 U.S. 47 ) “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 ) Several other courts, citing Safeco, have held that “willfulness” under 31 USC 5321 includes reckless disregard of a statutory duty. See Williams, (CA 4 2012) 110 AFTR 2d 2012-5298110 AFTR 2d 2012-5298 and Bussell, (DC CA 2015) 117 AFTR 2d 2016-439117 AFTR 2d 2016-439.

Court finds taxpayer’s actions were willful. The court then concluded that the Bohanecs’ failure to timely file an FBAR for 2007 was willful.

The court first considered the issue of standard of proof. It said that 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, (S Ct 1983) 459 U.S. 375 ) Such interests include parental rights, involuntary commitment, and deportation. The lower, more generally applicable preponderance of the evidence standard applies, however, where “even severe civil sanctions that do not implicate such interests” are contemplated. ( Herman ) The court here said that the monetary sanctions at issue here did not rise to the level of “particularly important individual interests or rights.” Accordingly, the court said, the preponderance of the evidence standard applied.

It then concluded that IRS proved by a preponderance of the evidence that the Bohanecs were at least recklessly indifferent to a statutory duty, for the following reasons:

…The Bohanecs were reasonably sophisticated businesspeople. For a time, the Bohanecs’ camera shop was the only exclusive Leica dealer in the world. The deals the Bohanecs negotiated with Leica’s U.S. distributor were so favorable as to motivate other Leica retailers to protest. The Bohanecs were able to circumvent Leica’s supply restrictions by entering into an international agreement with Leitz Canada. The Bohanecs had a worldwide reputation and sold and shipped to customers around the world.

…The Bohanecs 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. The Bohanecs 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 the Bohanecs hired to help them file tax returns. The Bohanecs 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 Bohanecs’ representations that they were unaware of or did not understand their obligations, and deferred entirely to Kluck, were not credible. Part III of Schedule B of the Bohanecs’ ’98 tax return put them on notice that they needed to file an FBAR. The Bohanecs 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 accounts.

…The Bohanecs’ credibility was further undermined by their conduct with respect to their application to participate in the OVDP. The Bohanecs made several misrepresentations under penalty of perjury. They misrepresented, for example, that all of the funds in the UBS account were after-tax proceeds from the Bohanecs’ 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 the Bohanecs’ Austrian and Mexican bank accounts.

References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶  S-3650; United States Tax Reporter ¶  60,114.06; TG ¶  60611.