Tax Law Center Blog

There is a debate as to the “burden of proof” that must be met by the Internal Revenue Service (IRS) in asserting that an FBAR violation was “willful”.  This is significant because those who willfully fail to file the required FBAR on a timely basis, can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation) or 50% of the balance in the unreported financial account. A recent court case impacts the FBAR Burden of Proof.

What is the FBAR Burden of Proof?

When we speak of the “burden of proof” this refers to which party is responsible for putting forth evidence and, very significantly, the level of evidence they must provide in order to win the case. Generally, the party bringing the claim has the burden of proof (in an FBAR penalty case this party will be the US government, the IRS). The burden of persuasion determines the amount of evidence the IRS must provide in presenting evidence to the judge or jury so that they can reach a decision. In most civil cases, the applicable burden of persuasion is called “a preponderance of the evidence.” This means generally that, in order for the IRS to win, at least 51% of the evidence must favor the IRS.

Many tax professionals believed that the burden of proof required for sustaining a “willful” FBAR penalty was the high “clear and convincing evidence” standard. However, the court cases have shown this is not so.

Burden of Proof is Lower Standard

The most recent case (April 3 2018) permitting the IRS the lower “preponderance of the evidence” standard for determining a “willful” FBAR violation is United States v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018), which was decided earlier this month.

The District Court for the District of Connecticut held in U.S. v. Garrity that the IRS may prove that the taxpayer failed to timely file a FBAR by a preponderance of the evidence instead of by a higher, clear and convincing evidence standard.

Garrity continues a trend making it easier and easier for the government to establish a willful FBAR failure, and thus to assert the higher penalties up to half of the balance of unreported accounts at the time of the violation.  The Garrity court is certainly not alone in this view.  Unfortunately, the Garrity court appears to blindly be following earlier precedent that lacked any substantial basis for determining that this lower standard should apply in FBAR cases. See, United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sept. 1, 2010), rev’d, United States v. Williams, 489 F. App’x 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012);  United States v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (D. Cal. 2016). Bedrosian v. United States (E.D. Pa. Sept. 5 2017).  With a significant line of cases now holding that the lower “preponderance of the evidence” standard applies for determining a “willful” FBAR violation, it’s doubtful that courts considering FBAR cases in the future will buck the trend and require the higher “clear and convincing evidence” standard.

“Recklessness” Means “Willfulness”

In addition to applying the lower “preponderance of the evidence” standard for determining a “willful” FBAR violation, the Garrity court also determined that the IRS could show willfulness on the taxpayer’s part by proof of reckless conduct and did not need to show an intentional violation of a known legal duty.  Garrity merely continues a trend of cases that have effectively expanded the definition of “willful” conduct when it comes to FBAR penalties.

OVDP Closing

The recent Court decisions make it difficult, if not impossible, for a Taxpayer to overcome the Assessment of the Willful FBAR penalty since these decisions have emboldened the IRS. With the recent decision by the IRS to end the Offshore Voluntary Disclosure Program on September 28, 2018. Taxpayers who wish to join the OVDP need to make complete offshore voluntary disclosures received or postmarked by September 28, 2018. The submissions may not be partial, incomplete, or “placeholder submissions”. The OVDP, designed for taxpayers whose failure to comply with US tax laws was “willful”, has been in effect in various iterations since 2009.

The OVDP end could suggest that Streamline Filing Compliance Procedures may also come to an end. With the closure of OVDP and the courts making it easier and easier for the IRS to succeed on a “willful” argument, taxpayers who have remained tax noncompliant need to take the appropriate action.  What such action may be for different taxpayers that will depend entirely on the specific fact pattern, which can be determined by an experienced tax attorney.