DISTRICT COURT CONTINUE TO REQUIRE ONLY A PREPONDERANCE OF THE EVIDENCE TO SUPPORT A FINDING OF WILLFULNESS IN FBAR PENALTY ENFORCEMENT CASES.

The U.S. District Court for the Central District of California in U.S. v. August Bohanec and Maria Bohanec Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16) https://www.pacermonitor.com/public/case/8438973/United_States_of_America_v_August_Bohanec_et_al handed the IRS victories on two important issues:

1. Held that the standard of proof in civil FBAR cases is the lesser burden of “preponderance of the evidence,” and not the higher standard of “clear and convincing evidence,” and,
2. Held that the willful FBAR penalty may be assessed when the taxpayer’s conduct is reckless but not intentional.

Standard of Proof Issue

When the IRS assesses a willful FBAR penalty, it cannot collect the FBAR penalty assessed under the collection procedures employed to collect income taxes. Thus, IRS cannot levy on bank account, record liens or employ the usual summary collection procedures permitted under the Internal Revenue Code for collecting income tax assessments. Rather, generally within two years from the date of assessment, IRS must commence a suit in U.S. District Court to obtain a judgment for the amount of the FBAR penalty assessed. Once a judgment is obtained, IRS may collect the debt over the life of the judgment (generally 20 years with a renewal period of an additional twenty years).

Taxpayers have argued that the burden of proof required of IRS in proving willfulness should be the higher “clear and convincing evidence” standard. They argue that the Internal Revenue Manual (IRM) states that the standard should be the same as is applied for the civil fraud penalty, that is, “clear and convincing evidence.” This is a higher standard than the general burden of proof standard applied in civil tax matters, which is “by a preponderance of the evidence (POE).” Under the POE standard the fact at issue must be established by the weight of the evidence, that is, by more than 50% of the evidence admitted at trial.

This standard of proof required is a big deal because the government has the burden of proving willfulness in seeking to obtain a judgment for a civil willful FBAR penalty assessment. There is a lot at stake in these cases because the civil willful FBAR penalty is the greater of $100,000 or 50% of the value of the unreported foreign financial accounts on the due date of the FBAR in question.

The Court in Bohanec applied the lesser POE standard of proof as had the U.S. District Courts in the much commented on Williams and McBride cases.
In so holding the court noted that the IRM does not have the force of law and is not relevant to the case at hand.

The Bohanec Court cited the Supreme Court decision in Herman & MacLean v. Huddleston, 459 US. 375, 389 (1983) which held that the “clear and convincing” burden of proof applies in civil matters only, where particularly important individual interests or rights are at stake.” Such rights include parental rights, involuntary commitment and deportation. The lower more generally applicable preponderance of the evidence standard applies, however, where “even severe civil sanctions that do not implicate such interest are contemplated.”

The court held that “the monetary sanctions at issue here do not rise to the level of particularly important individual interests or rights.” Thus, the court applied the POE burden of proof in deciding the case.

Scope of “Willful” issue

The taxpayer had also argued in Bohanec.that IRS Chief Counsel Advice, CCA 200603026, establishes that “willful” for purposes of the civil FBAR penalty under 31 USC Sec. 5321 is the same as the criminal standard for “willful,” that is, an intentional violation of a known legal duty; and, that willful conduct therefore does not encompass conduct that is reckless but not intentional.

The Court held that the CCA may not be cited as precedent and that no court has adopted the view stated in the CCA or espoused by the taxpayer.

The Court cited Safeco Ins. Co. of America v. Burr, in which the Supreme Court explained that “willfully is a word of many meanings whose construction is often dependent of the context in which it appears.” 551 U.S. 47, 57 (2007).

The Court stated that “where willfulness is an element of civil liability, the Supreme Court generally understand the term as covering ‘not only knowing violations of a standard, but reckless ones as well.” Safeco 551 U&.S. at 57.   Further citing Safeco at page 68, “Recklessness is an objective standard that looks to whether conducti entails and unjustifiably high risk of harm that is either known or so obvious that it should be known.”

Applying the law as stated, the Court found that the government had proved by a POE that August and Maria Bohanec were at least recklessly indifferent to ta statutory duty to file an FBAR for the following reasons:
• They were reasonably sophisticated people who ran a highly successful camera shop that for a time was the only exclusive Leica dealer in the world. They negotiated very lucrative deals with Leica.
• When other dealers protested that circumvented Leica’s supply restrictions through a negotiated agreement with Walter Kluck president of Leitz Canada, Leica’s subsidiary there. They had a worldwide reputation and sold and shipped to customers around the world.’
• August Bohanec was sophisticated enough to obtain two patents without the assistance of an attorney.
• They also managed the construction of a home along the coast of Mexico including the hiring of a contractor and the opening of Mexican bank accounts.
• They knew they had to pay taxes and had to file returns and yet did not file returns after 1998 until they attempted to enter the OVDP in January of 2010.
• In connection with the sales of Leica cameras Walter Kluck of Lietz opened a UBS Swiss bank account for them into which was deposited commissions or finders fees for steering international buyers to Kluck.
• They did not report the commissions on federal income tax returns.
• On at least two occasions they directed their international customers to directly deposit money into their UBS account.
• After closing the camera shop they sold used Leicas on EBay without reporting the income.
• The Bohanec’ did not provide UBS with their home address.
• The Bohanec told only their children about the Swiss account and no one else.
• They did not tell their return preparer for the camera shop returns about the account.
• They did not seek professional advice about reporting requirements.
• They never used a bookkeeper to keep books once the account was opened.
• Part II of Schedule B of their 1998 return put them on notice that they needed to file an n FBAR.
• Defendant’s credibility was damaged by their false statements and omissions in their submission to the OVDP which ultimately cause their application to be rejected, namely
o That all of the funds in the UBS account were after tax proceeds from their camera business.
o Omitted from their FBARS other foreign accounts in Mexico and Austria.
o Returns filed with OVDP omitted all income from E-bay sales

Although not specifically cited as a reason for the court’s finding of recklessness, the decision may also have been influenced by other findings of fact, namely:
•The UBS account was managed by Walter Kluck while he was alive and thereafter by UBS.
• They made occasional withdrawals from the account, for example, for their daughter, to transfer fronds to an account in Austria owned by August and to an account they had both opened in Mexico.
• The UBS account had a high value in 12/31/99 of $1,096,500 and a value on 6/30/2008 when the failure to file being alleged occurred of $643,662.
• They moved the entire account to Austria in 2009 when the balance was $523,677 and later repatriated the funds to their U.S. account  Although not commented on by the court, this was following the UBS criminal investigation becoming public.
• Schedule B was included in their 1998 return (last return filed before the OVDP submission) included the following question: At any time during 1998 did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account:? See page B-2 for exceptions an filing requirements for Form TD F 90-22.1.(Now FinCEN Form 114)
o  Page B-2 of the instructions for Schedule B for 1998 states: See (FBAR) Form TD F 90-22.1 to find out if you are considered to have an interest in or signature or other authority over a financial account in a foreign country (such as a bank account, securities account or other financial account)”
o  Page B-2 of the instructions for Schedule B of 1998 also states: “if you checked the Yes box on line 7a file Form TD F 90-22.1 by June 30, 1999, with the Department of the Treasury at the address shown on that form.”
• The IRS assessed additional tax for 2003, 2005-2010 in the amount of $172,291 and penalties including a civil fraud penalty. The taxpayers had not disputed the deficiency in Tax Court and owed IRS a total of $492,163 at the time of trial on the FBAR penalty assessment.

RSS Comments:
Regarding recklessness – We cannot look into someone’s mind to see what is going on his or her brain with regard to FBAR reporting obligations. Thus, evidence of knowledge or wanton disregard of warning signs will be deduced from circumstantial evidence. Thus, it appears to me that if facts would put a reasonably prudent person with the same education, background, experience and sophistication on notice that there is a danger of non-compliance with the tax law and the person proceeds in wanton disregard of the risk, the conduct is reckless. It is not difficult perhaps to distinguish reckless conduct from ordinary negligence or ignorance of the law. It may be more difficult to distinguish reckless conduct which makes one ineligible for a streamlined filing from gross negligence which IRS has stated does not disqualify one from the streamlined procedures..
Regarding Schedule B – The court spells out the language on the 1998 Schedule B which was the last personal return filed by the Bohanec before the OVDP filing. This return was filed 8 years before the 2007 FBAR on which the penalty is assessed was not filed.
Question: Was it reasonable to presume that the taxpayer’s recalled the 1998 return language and instructions in 2007, the year for which they are being assessed the FBAR penalty or on June 30, 2008 the FBAR due date

The IRS states in its Streamlined FAQ 6 for persons residing outside of the U.S., that:
We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation

I suggest perspective Streamlined filers read the entire case which has lengthy findings of fact that are instructive with regard to preparing streamlined non-willful certifications. The case may be found at https://www.pacermonitor.com/public/case/8438973/United_States_of_America_v_August_Bohanec_et_al
© 2016 by Robert S. Steinberg, Esquire
http://www.Steinbergtaxlaw.com

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