U.S. v. Bohanec, a case decided in the U.S. District Court for the Central District of California, involved a married couple both of whom immigrated to the United States. They owned a camera shop that grew to a successful international business using Ebay as their sales platform. They started depositing income earned outside the United States in a bank account with UBS in Switzerland. The Bohanecs failed to report and pay tax on income earned outside the U.S. They also failed to report their foreign bank accounts.
The U.S. taxes its citizens on worldwide income. The U.S. also requires reporting of any foreign financial account via the FBAR when the aggregate balance of foreign financial accounts exceeds $10,000 for a given year. The penalties for failing to file an FBAR can be draconian. A non-willful penalty is $10,000 and can apply for each open year there is a violation. The willful FBAR penalty is significantly higher increasing to $100,000 or 50% of the account balance at the time of the violation, whichever is higher. Again, the willful FBAR penalty can apply to each open year there is a violation.
The Bohanecs had a sizable Swiss bank account that grew to exceed 1 million U.S. dollars. They did not report the account, the interest it earned, nor their income earned outside the U.S. They also had a few other reporting omissions.
The Bohanecs opened an account in Mexico with funds transferred from the UBS account. Mr. Bohanec had one additional account in Austria where Mr. Bohanec received disability payments. He had been receiving disability payments from an injury more than 40 years ago, prior to his arrival in the U.S. The entire time he was depositing the disability payments to the Austrian account, which grew to over $500,000.00.
They neglected to notify their CPA, stopped using a bookkeeper, and stopped maintaining books. They ignored Schedule B instructions, an attachment to the tax return inquiring about foreign accounts. Finally, realizing they had a serious reporting problem, they entered the IRS’s Offshore Voluntary Disclosure Program (OVDP). The OVDP is a special program that lets taxpayers who failed to report foreign accounts to come forward voluntarily to report all previously unreported foreign financial accounts and unreported income. In exchange for the taxpayer coming forward, the IRS offers lower penalties than those that might apply if the taxpayer had not come forward.
The Bohanecs made the right decision to participate in the OVDP, yet still failed to make a full and proper disclosure. Despite going forward voluntarily, they did not report all accounts and still omitted income. As a result, they were rejected from the OVDP. The IRS then asserted a tax deficiency with interest and a fraud penalty. On top of that, the IRS assessed a willful FBAR penalty against Mr. Bohanec and another will FBAR penalty against Mrs. Bohanec.
The Bohanecs did not pay the FBAR penalty so the United States sued them to reduce the FBAR penalty to a judgment. The only issue before the Court was whether or not the failure to file a timely FBAR was “willful” for the year 2007. The Court determined it was in fact a willful failure to file and entered judgment against the Bohanecs in the amount of $160,915.75 each.
The Bohanecs argued that they had no knowledge of the FBAR reporting requirement. The IRS argued that actual knowledge is not necessary for a willful finding, only that the conduct is reckless.
There are not a lot of Court decisions on the issue of the willful FBAR penalty, but there are few now. The Court cites both Unites States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) and United States v. McBride, 908 F. Supp.2d 1186 (D. Utah 2012). The Court falls in line with both the Williams and McBride cases further solidifying the low standard to establish the willful FBAR penalty.
First, actual knowledge is not required. “Where willfulness is an element of civil liability, the Supreme Court generally understands the term as not covering only knowing violations, but reckless ones as well. “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.”
Second, proof of willfulness only requires a showing by the government of a preponderance of the evidence, not the higher and more stringent standard of clear and convincing evidence. “The monetary sanctions at issue here do not rise to the level of particularly important individual interests or rights. Accordingly, the preponderance of the evidence standard applies.”
All of the decided cases decided on the willful FBAR penalty involve some fairly egregious behavior. It’s not hard to see how the courts have been able to find willfulness when it includes “recklessness” and only a preponderance of the evidence is required. What remains to be seen is the case where the facts do no support a finding of recklessness in this developing area of the law.