What is the burden of proof for civil willful FBAR penalties? Government says – mere “preponderance of the evidence”?

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A prior post took part of the government’s brief in the Zwerner case.  See, FBAR Penalties for USCs and LPRs Residing Overseas – Can the Taxpayer have no knowledge of the law and still be liable for the willfulness penalty? See government memorandum.

A portion of the post and brief is set out below:

. . .  another perplexing aspect of this case is that the government continues to persist in its argument that a mere preponderance of the evidence is the proof standard required.  That will be left for another post and another discussion.P4 of Govt Motion for Summary Judgment in Zwerner - Knowledge

Here is that other post.

The reason this issue is so important for U.S. citizens and lawful permanent residents (LPRs) residing outside the U.S., is that few have historically filed FBARs.  Few may have had little knowledge or understanding of what is an FBAR in years past.   For more background on FBARs and how the government has assessed penalties as of late, see, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part II)

Also, see a prior post entitled – Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S

Back to the point at hand: can the government truly take the position that “. . . But to establish a taxpayer’s liability under 31 U.S.C. Section 5321 for willfully failing to file an FBAR, the United States need not prove that the taxpayer actually knew of the FBAR requirements he violated. . . “?

This is a truly low bar and a low level of proof the government has, IF this is the law, particularly when the amounts of the penalties can exceed the value of the individual’s accounts in their country of residency.  To date, no appeals court has ruled on the question.

The current state of the law, leaves taxpayers at a terrible disadvantage when the IRS assesses FBAR penalties which seem to have little correlation with their failure to file the form.

The position taken by the Tax Division, Department of Justice in the Zwerner case is also seems contrary to the Internal Revenue Service’s own Internal Revenue Manual, which provides as follows (with highlights in bold):

  1. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
  2. A finding of willfulness under the BSA must be supported by evidence of willfulness.
  3. The burden of establishing willfulness is on the Service.
  4. If it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
  5. Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the only thing that a person need know is that he has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
  6. Under the concept of “willful blindness” , willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow-up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person. For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.

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