FBAR UPDATE: The Sixth Circuit Rules Willfulness Includes Recklessness - March 2024
Background
Under the Bank Secrecy Act, individuals with foreign bank accounts containing an aggregate of $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (“FBAR”) with the U.S. Department of the Treasury. An individual who fails to file an FBAR by the deadline risks civil penalties.
If the failure to file an FBAR is not willful, the penalty shall not exceed $10,000. However, for any person willfully violating the FBAR requirement, the maximum penalty increases to the greater of $100,000 or 50% of the balance in the account at the time of the violation. A person willfully violating the FBAR requirements could also subject himself to criminal penalties.
Unfortunately, there is no “clear-cut” test to determine whether an act is “willful” and several federal courts tasked with assigning it a legal interpretation have expanded its meaning. While it inherently involves the obvious meaning that a person is willful if they are aware of the FBAR reporting requirement and intentionally choose not to file, these courts have broadened the definition to encompass objectively reckless conduct related to the FBAR reporting obligation. According to this expanded definition, a taxpayer is deemed to engage in objectively reckless conduct if they clearly should have been aware of an FBAR reporting requirement, and discovering this obligation would have been relatively straightforward for them.
In the recent Sixth Circuit Court of Appeals case, United States v. Kelly (2024), the court further expanded the definition of willfulness to include “objectively reckless conduct.”
Summary of United States v. Kelly
In United States v. Kelly (2024), Kelly (the “taxpayer”), a U.S. citizen, opened an interest-bearing account at a bank in Switzerland in 2008, keeping it "numbered" to hide his identity and avoiding disclosure to the IRS. Despite warnings from Swiss bank about U.S. tax compliance, the taxpayer did not seek professional advice and maintained around $1.5 million in the account. In 2012, the Swiss bank closed his account due to non-compliance, later reopening it as "Mandatory High Risk." The bank urged the taxpayer to comply with U.S. tax laws or face disclosure to U.S. authorities.
In 2013, the Swiss bank requested proof of compliance with U.S. tax laws, and the taxpayer, fearing disclosure, applied for the IRS Offshore Voluntary Disclosure Program (“OVDP”) in 2014. His voluntary disclosure was preliminarily accepted, contingent on truthful cooperation. Meanwhile, he closed the Swiss bank account, transferring funds to another bank in Liechtenstein.
In 2016, over two years later, the taxpayer filed delinquent FBARs for 2008-2013, omitting 2014 and 2015. In 2018, the IRS removed him from the OVDP for failing to provide foreign asset information. The IRS then investigated, finding the taxpayer willfully failed to file FBARs for 2013-2015 and proposed penalties totaling approximately $770,000. The taxpayer's non-payment led to a government action, resulting in cross-motions for summary judgment. The district court favored the government, prompting the taxpayer's appeal. The Sixth Circuit affirmed the district court’s decision because it found that the taxpayer's failure to file was a willful violation of the Bank Secrecy Act.
Citing various U.S. Supreme Court cases, the Sixth Circuit explained that term "willfulness" in the context of violating FBAR requirements carries different meanings depending on whether it pertains to criminal or civil penalties. In criminal cases, it refers to a "voluntary, intentional violation of a known legal duty," and such violation can be inferred from conduct meant to conceal or mislead financial information. For civil penalties, including those under FBAR, the Sixth Circuit held that “willfulness” encompasses both knowing and reckless violations. This interpretation aligns with the Supreme Court's ruling in Safeco Insurance Company of America v. Burr, which clarified that civil liability under the Fair Credit Reporting Act for willful violations includes reckless disregard of statutory duty. The court's decision is consistent with every other circuit court, which include the Eleventh Circuit, Fourth Circuit, Third Circuit, and Federal Circuit, that has addressed this issue.
In Kelly, the taxpayer did not dispute his failure to file FBARs for the relevant tax years but argued he did not act knowingly or recklessly. The record, however, revealed evidence of willful and reckless non-compliance. The Sixth Circuit found that the taxpayer intentionally evaded legal obligations by concealing his assets, shielding his Swiss bank account from U.S. authorities, and opting out of U.S. securities to avoid disclosure. Despite participating in the OVDP, he failed to meet the 2013 FBAR deadline and provided false and incomplete information to the IRS about his foreign assets.
The Sixth Circuit also found that the taxpayer's conduct was objectively reckless, as he failed to seek professional advice about reporting obligations notwithstanding having previously done so. Further, the taxpayer did not confirm the Swiss bank’s reporting practices and neglected to inquire about FBAR preparation. Even after becoming aware of his reporting requirements, the taxpayer did not file the 2014 and 2015 FBARs. The taxpayer's reliance on his OVDP participation and engagement of a Swiss account manager was dismissed as insufficient to excuse noncompliance. The undisputed facts demonstrated the taxpayer's intentional efforts to keep his foreign account secret, failure to consult professionals, and neglect in ensuring FBAR submissions. Consequently, the taxpayer's failure to meet FBAR requirements for 2013-2015 was deemed a willful violation of the Bank Secrecy Act.
Observations
In recent circuit courts decisions coming from the Sixth, Eleventh, Fourth, Third, and Federal Circuits, there is a discernible trend that broadens the scope of actions considered as willful violations by taxpayers. Taxpayers who believe their failure to file FBARs (and potentially other international forms) is non-willful should assess their set of facts in light of these decisions. What a taxpayer may think is non-willful intent may actually constitute a willful act.
This news alert does not constitute legal advice and only contains informative content.
For assistance with complying with U.S. tax laws, please contact:
