It is nearly impossible to prove willfulness. The IRS, though, has a trick. It only need to prove willful blindness. The "willful blindness" state of mind argued by the IRS is so broad it could be applied to anyone who has not filed an FBAR. Taxpayers who make innocent or negligent mistakes on their tax returns should not be hit with Willful FBAR penalties. But currently, the IRS has an different idea.
The Bank Secrecy Act was not passed into law to create penalty scheme for those who make a technical mistake, it was passed into law because Congress felt law enforcement needed strong tools to take down the worse of the worse. Human and drug traffickers, international criminal syndicates and terrorist cells.
This article discusses how the IRS muddles standards that are difficult to prove. And it all starts with the Bank Secrecy Act of 1970 — found in Title 31 of the US tax code.
Title 31: The Bank Secrecy Act
Title 31 consists of the Bank Secrecy Act of 1970 (BSA) as amended. The BSA give the power to the Treasury Department to impose FBAR filing requirements and FBAR filing penalties, but there are also other BSA provisions. Maybe you have heard of some; anti-money laundering (AML) statutes, for instance. IRS Form 8300 is required to be filed with cash deposits of $10,000 of more. A willful failure to file Form 8300 carries a willful penalty. Form 8300 is a Title 31 form and carries a Title 31 penalty.
Title 31 Willfulness
As I will demonstrate, the Supreme Court has ruled that Title 31 Willfulness is the same standard regardless of what Title 31 provision is violated. That is, there isn't a special FBAR willfulness standard that is lower than a Willful Failure to File Form 8300 or any other Title 31 Form.
The government attempts to convince taxpayers and practioners that the law supports their interperation of FBAR willfulness as being a rather easy threshold to meet. Perhaps some day it will be. But as it is now, such a claim is a bit premature, as there is controlling Supreme Court precedent that we'll discuss.
The government's claimed willfulness standard
The two cases you will hear a lot about from the government are Williams and McBride. Yet, Williams is an unpublished 4th Circuit case, thus not binding for precendent.
In Williams, the defendant pled guilty to conspiracy to defraud the IRS and criminal tax evasion. Mr. Williams admitted in his plea that he knew he had to report his foreign accounts on FBARs but chose not to because he intended to hide his foreign income. In Mr. Williams’s FBAR case, the 4th Circuit held that a person’s conduct meant to conceal or mislead can show willfulness, but that willful blindness required both being subjectively aware of the existence of a tax liability and the purposeful act of avoiding learning the facts to point to such a liability.
McBride is a District court case. In that case, Mr. McBride contacted a financial management firm to help reduce tax liabilities in what appeared to be an elaborate transfer pricing scheme. After the IRS contacted Mr. McBride, the record shows that he did not cooperate with their information requests. The District Court held that McBride committed a willful violation because he actually knew of the FBAR requirement and did not file.
Yet the case not mentioned so much by the government is Ratzlaf v. US, 510 U.S. 135. In Ratzlaf the defendant, accused of structuring in violation of 31 USC 5313, was convicted of willfully violating Title 31 (again, Title 31 is where we find the BSA that created FBAR penalties). The defendant appealed the conviction, saying that the government had not proven that he knew the structuring he did was unlawful. The Supreme Court held that the willfulness provision of Title 31 required that the government prove that the defendant acted with knowledge that his conduct was unlawful.
The Court went on to say, [W]e count it significant that the sec. 5322(a)’s omnibus “willfulness” requirement, when applied to other provisions of the same chapter, consistently has been read by the Courts of Appeals to require both “knowledge of the reporting requirement” and a “specific intent to commit the crime. . . . The Court goes on to say, Notable in this regard [is] 31 U.S.C. 5314, concerning records and reports on monetary transactions with foreign financial agencies. . . . Decisions involving these provisions describe a “willful actor as one who violates a “known legal duty.” [Citation omitted]
When considering the issue of the definition of the same term (in this context, willfulness) in different places in the same statute, the Court says,aA term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 470 (1992).
To put it another way, as I initially claimed, willfulness can't be two different standards depending on the Title 31 violation.
Ratzlaf was decided in 1994 by the Supreme Court and is controlling for all willful Title 31 penalties. Williams and McBride were decided later, and it is important to note that the Williams court failed to review or mention Ratzlaf. This is fatal to the logic of Williams, if we were at all concerned about its precendential value.
As far as the McBride decision is concerned, McBride relied on the flawed Williams case, not the controlling Supreme Court decision in Ratzlaf.