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A panel of the Court of Appeals for the Fourth Circuit has found that a taxpayer’s failure to file Form TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR), was willful. The taxpayer’s conduct, the court held, was evidence of his willful blindness to the FBAR filing requirement.

Court Upholds Penalties for Failure to File FBAR

  • 8/15/2012

Court Upholds Penalties for Failure to File FBAR

Reversing the trial court, a panel of the Court of Appeals for the Fourth Circuit has found that a taxpayer’s failure to file Form TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR), was willful. The taxpayer’s conduct, the court held, was evidence of his willful blindness to the FBAR filing requirement.

Comment: In 2006, the IRS Chief Counsel indicated that "willfulness" had the same definition under the civil FBAR penalty as under the criminal penalty. The Chief Counsel explained that statutory construction rules would suggest that the same word used in related sections should be consistently interpreted. The Fourth Circuit did not take this approach.

Background

The taxpayer deposited more than $7 million into two bank accounts outside the U.S. between 1993 and 2000. However, the taxpayer did not disclose the accounts, nor did he report the income earned on those accounts. The taxpayer did not file an FBAR for 2000 by the deadline.

On his 2001 return, the taxpayer acknowledged his foreign accounts. Two years later, he asked to participate in the IRS offshore voluntary disclosure initiative, but the IRS rejected his request. Eventually, the taxpayer was charged with conspiracy to defraud the IRS and criminal tax evasion, to which he pled guilty. In 2007, the taxpayer filed FBARs for 1993 through 2000.

The IRS assessed two $100,000 civil penalties for failing to file an FBAR for 2000. The taxpayer did not pay the penalties and the IRS filed suit. The trial court found that the IRS failed to show that the taxpayer had willfully failed to file an FBAR in a timely manner for 2000.

Comment: The IRS imposed two $100,000 penalties because the taxpayer had two accounts.

Court’s analysis

Two judges on the three-judge panel found that willfulness may be proven by 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. In addition, 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 the 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.

Comment: When the taxpayer entered his guilty plea, he said that his failure to report the foreign accounts was part of a larger scheme of tax evasion. The court decided his guilty plea confirmed that his failure to file an FBAR was willful.

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