IRS victory in rare FBAR case gives big boost to agency’s offshore tax evasion crackdown

J. Bryan Williams is a name that US persons who stash their money in offshore accounts to evade their US taxes may come to dread. Williams is the subject of a rare case that has just been decided by the US 4th Circuit Court of Appeals in Richmond.

The ruling by the US appellate court, which is one of 11 in the United States and ranks right below the US Supreme Court, gives a major boost to the current intensive pursuit of overseas tax evasion by the IRS.

A US citizen, Williams deposited $7 million in Swiss bank accounts from 1993 to 2000 without declaring the money to the Internal Revenue Service. In 2009, Williams became the target of a rare civil suit by the IRS, which sought to impose a $200,000 penalty for willful failure to file a Report of Foreign Bank and Financial Accounts (Treasury Department Form 90-22.1), on his two Swiss accounts. The form is commonly known as the FBAR.

Trial court had ruled against IRS

US District Judge Liam O’Grady, in the Eastern District of Virginia, had ruled in favor of Williams in 2010, saying the IRS lacked evidence to prove Williams’ willful violation of the FBAR filing requirement. On July 20, the 4th Circuit reversed the ruling, thus facilitating penalties by the IRS on US tax evaders by potentially lowering the burden of proof needed to show that failure to file the FBAR was intentional.

“Before this ruling, the IRS took the stance that proving intent [for willful failure to file an FBAR] was no different than in tax fraud cases. The standard was thought to be the same,” says Jeffrey Neiman, of Neiman Law, in Ft. Lauderdale, and a former federal prosecutor who led the Justice Department’s tax evasion prosecution of UBS for harboring US tax evaders.

Expert says IRS now has more clout in FBAR cases

Neiman notes that the 4th Circuit case gives the IRS more latitude in proving willful failure to file FBARs and in collecting the hefty penalties that come with it. The civil penalty for willful failure to file may reach $100,000, or 50% of the value of the offshore account, whichever is greater. He says the ruling indicates that US persons with offshore accounts could be considered cognizant of the FBAR requirement simply by signing their US tax returns.

Instead of having to prove a specific intent to “violate a known legal duty,” which other tax cases have upheld as the standard of willfulness, the opinion suggests that a taxpayer’s assumed understanding of the FBAR requirement may be enough to make them liable for penalties for willful violations.

“The IRS would be crazy not to use this ruling to its advantage,” Neiman says, “there’s just too much money at stake.”

IRS now wielding FBAR as weapon against tax evaders

The case also spotlights the evolving role of the FBAR. A once-obscure Bank Secrecy Act form, which is not technically a form required by the tax code, it was first instituted as a reporting requirement for US persons with overseas accounts. Now, the IRS has given the FBAR a potent new life as tax enforcement and revenue-raising tool. The IRS has administered and enforced the FBAR since 2003.

Any US person, including individuals, corporations and trusts, who holds more than $10,000 in a foreign account at any point during the calendar year must file annually an FBAR with the US Treasury Department’s Financial Crimes Enforcement Network.

An FBAR must be filed for a range of accounts, including savings and checking accounts, brokerage and securities accounts, certain types of insurance policies and non-cash assets like gold.

“This case shows that the IRS is willing to seek the maximum FBAR penalties, which we weren’t sure they would do,” says Charles Rubin, tax attorney at the Boca Raton firm, Gutter Chaves Josepher Rubin Forman Fleisher.

IRS believes 80% of offshore accounts are unreported on FBARs

Despite the large penalties and the threat of criminal prosecution for avoiding the FBAR requirement, the 42-year-old reporting form has historically been largely unknown or unheeded by US persons who are required to file it. The IRS has consistently said it believes that less than 20% of offshore accountholders subject to FBAR reporting actually submit the form in any given year.

The UBS case, which in 2009 and revealed that the largest Swiss bank had been luring US persons to establish accounts in Switzerland to evade their US taxes, prompted many US persons to file FBARs before their accounts were discovered by US prosecutors and IRS Special Agents who were working the case against UBS.

FinCEN data shows that 276,386 FBARs were filed in 2009, but more than double that number, or 594,488 FBARs were filed in 2010.

District court ruling had given hope to FBAR non-filers

The District Court ruling in the Williams case had been widely considered to be the standard to show willfulness. There, Judge O’Grady rejected the prosecutor’s arguments that Williams could be held liable for FBAR penalties because he did not list income from his Swiss accounts on his 2000 tax return and had checked “No” in Schedule B, which asks if the filer had financial accounts in another country.

Williams “lacked any motivation to willfully conceal the accounts from authorities” because they already knew of the accounts, said O’Grady in 2010. Williams had pleaded guilty to tax evasion in 2003, and in 2007 filed FBARs for all the years he had held Swiss accounts.  His failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred,” the Judge said.

Circuit court rejects district court opinion, lowers standard for proving willfulness

The 4th Circuit ruled that William’s signature on his tax return was “prima facie evidence that he knew the contents of the return.” It found that the instructions in Schedule B, which refers to the FBAR, put US taxpayers on “inquiry notice” of the filing requirement. Williams had admitted he never read his tax return or looked at the FBAR form.

4th Circuit majority said this was enough to demonstrate a “conscious effort to avoiding learning about reporting requirements… meant to conceal or mislead sources of income or other financial information… that constitutes willful blindness to the FBAR requirements.”

Despite hurdles, ruling may open floodgates to FBAR civil suits by IRS

Some tax practitioners caution against reading too much into the Circuit Court’s ruling, saying that the case was a gross example of offshore tax evasion. Rubin notes that not only did Williams fail to disclose his Swiss accounts on his tax returns, but also denied having overseas assets to his accountant and attorney. He also notes that the Court’s majority opinion is unpublished, meaning it is not binding legal precedent.

Neiman says, “We can expect more and more cases like this” because of the sheer sums the IRS stands to collect by ramping up civil FBAR enforcement.

One other recent case has been settled. On July 30, two former UBS clients were ordered to pay $2.5 million in civil penalties for willful failure to file FBARs on millions of dollars they held in accounts in secrecy havens, such as Switzerland and the Isle of Man, which is off the coast of England.

“The 4th Circuit case will likely be the start of a wave of FBAR audits by the IRS,” Neiman says. “In a few years, FBAR litigation will be a staple for tax practitioners.”

IRS tempers tough enforcement with lure to evaders to come clean

Another element of IRS FBAR enforcement, is an open-ended Offshore Voluntary Disclosure Initiative, which allows overseas accountholders to come forward, disclose their assets and pay the taxes that are due, in exchange for set penalties the agency has published.

Taxpayers that enter the Initiative are typically spared the civil penalties for willful failure to file FBARs and, instead, pay the lesser $10,000 penalty for non-willful FBAR violations. The Offshore program has already netted the IRS $4.4 billion in back taxes and penalties in 2009 and 2011, the last two years it was offered, with more to come in 2012.

Balancing the carrot of Voluntary Disclosure with the stick of willful non-filing FBAR penalties and criminal prosecution requires the IRS to walk a fine line, says Rubin. “They’ve got a lot of policy issues to work through – the more they enforce FBARs, the more they risk driving people away, as opposed to enticing people into the system.”

Hunting undisclosed offshore accounts remains and IRS priority, a fact supported by its staffing trends. In 2001, the IRS had 13 of Special Agents in its international operations unit, and none in what it calls the “global high wealth” unit. By 2011, there were 71 revenue agents assigned to global high wealth and 856 to international operations. In 2010, there were 259 revenue agents.

Whatever approach the IRS chooses in its overseas tax evasion battles, it now has a stronger legal weapon to do it.

 View the 4th Circuit’s unpublished majority opinion in US v. Williams here

 (The ACFCS Financial Crime Conference, on Sept. 13-15, in New York will provide critical training on offshore tax enforcement and FBAR issues in the panel Prosecution Risks Institutions Now Face From the International Tax Evasion Crackdown and Growing Activism of Non-Governmental Organizations. Among the 37 speakers Jeffrey Neiman, along with other leading experts like Elise Bean, Staff Director and Chief Counsel of the Senate Permanent Subcommittee on Investigations; Michael Benardo, Director, FDIC Financial Crime Unit; and Les Joseph, past Deputy Chief of the US Department of Justice Money Laundering Section. Full program and registration at FinancialCrimeConference.com)