For the first time, in the case of James Moore, Plaintiff v. United States of…
The Strange Case of U.S. v. Hughes: Willful and Non-Willful (at the Same Time?)
A recent decision from the District Court of Northern California has created more questions in the tax community about FBAR penalties. Usually, in challenging FBAR penalties, courts conclude that the US taxpayer will pay willful FBAR penalties, non-willful FBAR penalties, or no FBAR penalties.
U.S. v. Hughes is a strange case however because the court held that the taxpayer was willful in certain years and non-willful in other years due to the difference in knowledge of Schedule B. In the case, the taxpayer had FBAR penalties for many years and each FBAR penalty is evaluated using a totality of the circumstances analysis which looks at all the relevant facts related to the specific violation in its analysis.
The court found that the taxpayer was non-willful between 2010-2011 because there was no clear evidence that the taxpayer had looked over any Schedule B when submitting the tax return. This means that when a taxpayer has not reviewed a Schedule B there wouldn’t be any presumption that the taxpayer knowingly or recklessly missed the reporting requirement of Schedule B. However in the years 2012-2013, the court held the taxpayer was willful. The court reasoned that there was evidence the taxpayer was aware of the Schedule B questions regarding the filing of the FBAR and there was no excuse as to why the Schedule B form was not filed.
Relevant Facts of the Case
Hughes in 2001 formed an entity, Akaroa Convention Centre (later changed to Takamatua Valley Vineyards Limited) in New Zealand where she was the sole owner and director. Later in 2013, she formed another entity in New Zealand, Cuba Uncorked Limited which was solely owned by Hughes. Ms. Hughes had a financial interest in, and signature authority over the two entities’ bank accounts for the following years. Hughes had to timely file an FBAR for the years at issue and also had to report the interest income from the accounts In 2010 and 2011 Hughes did not attach a Schedule B to her tax returns failing to report the interest income from the accounts. For 2012 and 2013, Hughes reported the interest income on her Schedule B, indicating she had a foreign account. Additionally, Hughes also indicated in the affirmative on Schedule B that she was required to file an FBAR. Despite this, Hughes did not timely file an FBAR for 2012 and 2013.
For 2010 and 2011 the Court found there was no evidence that Hughes had ever reviewed Schedule B before she filed her 2010 and 2011 tax returns and thus saw or knew about the questions related to foreign bank accounts and FBAR obligations. The court found that there was no evidence Hughes knew of the FBAR filing requirements before filing her 2010 and 2011 tax return as there was no Schedule B included with her 2010 and 2011 returns. Thus the court held for 2010 and 2011 Hughes was non-willful and would be subject to non-willful FBAR penalties.
It was a different story for 2012 and 2013 however. The Court held that not only intentionally violating a legal duty would constitute willfulness but the court also held a lower recklessness standard would also apply to a finding of willfulness. Applying this standard the court held Hughes’s failure to file FBARS in 2012 and 2013 was at a minimum, reckless disregard constituting willful violations and thus Hughes had to pay willful FBAR penalties for those years. In making this conclusion the court reasoned there was evidence Hughes was reckless because she checked off the boxes on Schedule B that discussed the obligation to file FBARs. Further, Hughes testified that if she had read the instructions on Schedule B she “would have filed the FBARs.”
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