Taxpayer Liable for Willful Violation of FBAR Requirements

Procedure & Administration

The Fourth Circuit reversed a district court and held that a taxpayer had willfully violated the foreign bank account reporting requirements for two foreign bank accounts.

Background

In 1993, J. Bryan Williams opened two Swiss bank accounts in the name of ALQI Holdings Ltd., a British corporation (the ALQI accounts). From 1993 through 2000, Williams deposited more than $7 million into the ALQI accounts, earning more than $800,000 in income on the deposits. However, for each of the tax years during that period, Williams did not report to the IRS the income from the ALQI accounts or his interest in the accounts, as he was required to do under 31 U.S.C. Section 5314 (Section 5314).

By the fall of 2000, Swiss and U.S. authorities had become aware of the assets in the ALQI accounts. Williams retained counsel, and on Nov. 13, 2000, he met with Swiss authorities to discuss the accounts. The following day, at the request of U.S. authorities, Swiss authorities froze the ALQI accounts.

When having his 2000 federal tax return prepared in January 2001, Williams completed a “tax organizer” that his accountant had provided to him. In response to the question in the tax organizer regarding whether Williams had “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country,” Williams answered “No.” In the return Williams filed for 2000, he answered “No” on line 7a of Part III of Schedule B, indicating that he did not have an interest in or signature authority over a financial account in a foreign country. Williams also did not file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), by the June 30, 2001, deadline.

Subsequently, upon the advice of his attorneys and accountants, Williams fully disclosed the ALQI accounts to an IRS agent in January 2002. In October 2002, he filed his 2001 federal tax return on which he acknowledged his interest in the ALQI accounts. Williams also disclosed the accounts to the IRS in February 2003 as part of his application to participate in the Offshore Voluntary Compliance Initiative. At that time, he also filed amended returns for 1999 and 2000, which disclosed details about his ALQI accounts.

In June 2003, Williams pleaded guilty to conspiracy to defraud the IRS and criminal tax evasion in connection with the funds held in the ALQI accounts from 1993 through 2000. As part of the plea, Williams agreed to admit in writing to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the ALQI accounts, in exchange for a sentence reduction.

In January 2007, Williams finally filed an FBAR for each tax year from 1993 through 2000. Thereafter, the IRS assessed two $100,000 civil penalties against him, pursuant to 31 U.S.C. Section 5321(a)(5), for his failure to file an FBAR for tax year 2000. Williams failed to pay these penalties, and the IRS filed suit to collect the penalties in district court.

The District Court’s Decision

Following a bench trial, the district court entered judgment in favor of Williams, finding that the IRS had failed to establish that Williams willfully violated the FBAR requirements. The parties agreed that Williams had violated the requirements by failing to timely file an FBAR for tax year 2000. The only question was whether the violation was willful.

The district court found that (1) Williams “lacked any motivation to willfully conceal the accounts from authorities” because they were already aware of the accounts and (2) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.” Therefore, the district court found that Williams’s violation of Section 5314 was not willful. The IRS timely appealed the decision to the Fourth Circuit.

The Fourth Circuit’s Opinion

The Fourth Circuit, reversing the district court, held that Williams had willfully violated the Section 5314 FBAR requirements. The court stated that after reviewing the evidence from trial, it was left with a definite and firm conviction that the district court had clearly erred in finding that Williams did not willfully violate Section 5314. According to the court, at a minimum, “Williams’s undisputed actions establish reckless conduct, which satisfies the proof requirement under §5314.”

The court first pointed to the fact that Williams had signed his tax return. The court stated that his signature was prima facie evidence that he knew the contents of the return. Thus, the Schedule B, line 7a directions to “[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1” put Williams on inquiry notice of the FBAR requirement.

The court next noted that, at trial, Williams testified that he had not read the line 7a directions or paid attention to any of the other written words on the face of his return. The court interpreted this as a conscious effort to avoid learning about reporting requirements. It also found that his answers to the foreign account questions on his tax organizer and his federal return were evidence of conduct meant to conceal sources of income or other financial information. The court found that these actions put together constituted “willful blindness” to the FBAR requirement on Williams’s part.

Finally, the court found that Williams’s written admission in his criminal case was further proof that his violation of Section 5314 was willful. The court explained that by admitting in the statement that he willfully failed to report the existence of the ALQI accounts as part of his larger scheme of tax evasion, Williams had also admitted violating Section 5314. The court stated, “In light of his allocution, Williams cannot now claim that he was unaware of, inadvertently ignored, or otherwise lacked the motivation to willfully disregard the FBAR reporting requirement.”

Reflections

A dissenting opinion in the case, while agreeing that the majority had correctly used the clear error standard in reviewing the district court’s decision, argued that the majority had applied the standard incorrectly by merely substituting their judgment for the judgment of the district court, which in this case was the trier of fact. While the dissent admitted there was evidence that Williams had acted willfully, it argued that there was also plausible evidence, relied on by the district court, that Williams had not acted willfully, thus making a finding of clear error inappropriate.

Williams, No. 10-2230 (4th Cir. 7/20/12)