As stated in a previous post, FBAR and the future of FBAR Penalty litigation, many unanswered questions regarding foreign tax compliance would only become known through litigation. On September 1, 2010, in Virginia Eastern District Court, in a case of first impression, in U.S., v. J. Bryan Williams (Civil Action No. 1:09-cv-437) the law came down against the IRS.
These were the undisputed facts:
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In 1993, Defendant Williams, then a Mobil Oil Corporation executive, opened two foreign bank accounts at Credit Agricole Indosuez, SA
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Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period , and never once reporting the income nor the existence of the accont to the IRS during this time.
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In early 2000, the Swiss Authorities froze Williams' Credit Agricole account and notified the IRS.
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Williams later plead guilty to tax evasion for this in 2003.
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On Williams' 2000 1040, signed on October 15th 2001, the return asked Williams to indicate whether he had an interest in financial accounts in a foreign country by checking "Yes" or "No" in the appropriate box and directed him to Form TDF 90-22.1 ("Form TDF 90-22.1 form" is used interchangeably with "FBAR") .
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On Williams 2000 tax return the box was checked "No."
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The deadline for filing a TDF 90-22.1 form for the tax year 2000 was June 30, 2001.
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Williams did not file an FBAR by June 30, 2000
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The IRS brought this action to impose stiff Civil Penalties against Williams for wilfully failing to file an FBAR, which Williams objected to and is the subject of this lawsuit.
This, on the surface, seems like a bad fact pattern for Williams. I have to imagine that the IRS was looking for a slam dunk to prosecute — to send a message to taxpayers with FBAR obligations — and get some imposing FBAR case law on the books.
Let's think about these facts. Williams had a $7 million foreign account, earned $800,000 a year from it, and when asked about it directly on his return, he checks a box that says "no" he doesn't have any foreign bank accounts. We are left to wonder how one innocently forgets about a $7 million offshore account that he has been deposit money in for the last 8 years? It has to be a willful avoidance, doesn't it?
So why did judgment rule against the IRS? Here are additional facts and conclusions:
First, it was material that Williams' tax professionals did not advise him to the requirement to file an FBAR. He said he didn't know he had to, and no one made it clear to him that he needed to. Unlike a strict liability offense where state of mind in irrelevant, in order to be liable for willful failure to file penalties, ones must possess a willful state of mind. Ignorance is at best, negligent.
Second, and here's what I think it most important — is that for tax year 2000, the due date to report the TDF 90-22.1 form was on June 30, 2001. But the thing is that the IRS already knew about the account — since November 2000 when the account was originally frozen!
So when Williams was required to disclose the accounts existence to the IRS on June 30, 2001, Williams already knew the IRS knew about the Credit Agricole. There is no possible way Williams failure to file the FBAR could have possibly helped him and he must have known that. The court reasoned that the failure to check the box and failure to file a TDF 90-22.1 form by the June 30th deadline could have only been an innocent mistake. There actually was no strategic reason for Williams to file an FBAR — thus, the court infered that the failure to file was not willful.
So what does this case mean for taxpayers with FBAR filing requirments? Can they expect leniency? Does this case give license to to disregard FBAR requirements and a yellow light to tax evasion?
I think not. Let's consider the big picture of this case. First of all, Williams didn't get away with much — he already, in a separate criminal case, plead guilty to tax evasion in 2003 and was sentenced to 46 months. All he got away with in this case, if anything, is that he did not have to pay a punitive fine for failing to disclose something to the IRS that the IRS already knew about. Not much a victory, really.
There is just one more fact that doesn't show up in the opinion that could have impacted the decision. This case was heard by Judge Liam O'Grady, who at 60, may have had some sympathy for Williams, who is now approaching 70.
Again, it doesn't seem as much as a victory for Williams — who still had to go through the expense and emotional turmoil of a trial, albeit only a civil action. But rather, at least on the surface (and yes, usually there is something more below the surface) this seems more of a case that the IRS should not have prosecuted in the first place. And luckily, one judge refused to penalize an old man who already paid his debt to society for failing to disclose a foreign account the IRS already knew about.
UPDATE: After much discussion around our firm, the title of this entry was changed from "First FBAR Penalty Case ends poorly…for IRS" to "Did IRS really lose 1st FBAR decision? " because, in further retrospect, the IRS got most what it wanted. A bold prosecution — that really didn't have all that much merit, in my eyes — that sent a message of fear and intimidation to taxpayers who have failed to disclose foreign accounts.
If you have undisclosed accounts and are unsure what disclosure program is best for you, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
