Is Mental Disease or Impairment a defense to “Willfulness” penalties for FBAR purposes?

by Sanford Millar
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In a pending civil penalty case in Florida the government puts forth its argument in clear language to describe what constitutes “willful” failure to file a Report of Foreign Financial Account (FBAR). In its Motion for Summary Judgment in Zwerner, the government argues:

“The relevant inquiry for willfulness…is whether the failure to disclose the required information itself was purposeful rather than inadvertent, not whether the individual subjectively believed they did no possess a legal duty to file an FBAR”.

The case involves the assessment of civil FBAR penalties of 50% of the highest aggregate account balances per year for four years. The statute of limitations provides for assessment of the 50% penalty for six years. The penalty is actually the greater of $100,000 per year per account or 50% of the highest account balances per year.

The position of the government is consistent with its belief that ” a taxpayer assess with civil penalties for willfully failing to file an FBAR could not escape liability by claiming he was ignorant of the reporting requirements. The question of what is known as “willful” blindness (or reckless disregard) was addressed by the Supreme Court. The Court held that where “willfulness is a statutory condition of civil liability it covers not only knowing violations of a standard, but reckless ones as well”

The government goes on to assert that “courts have specifically applied this standard to civil FBAR penalties. What the case does not address is the issue of how and whether mental disease or infirmity affects “willfuless”.

In cases of dementia or Alzheimer’s disease with documented case histories of impairment it seems wholly unrealistic for the government to extend the Zwerner approach to such taxpayers. Zwerner did not seem to suffer from any mental disease of impairment, except for bad judgment. But in cases where such ailments exist it may be appropriate to raise the issue early in a voluntary disclosure proceeding and consider, albeit very carefully, an “opt out”. In cases where the taxpayer is not eligible to make a voluntary disclosure the defense of “mental disease or impairment” needs to be well documented as originating prior to the commencement of the statute of limitations. It is not sufficient to establish that cognitive decline exists currently, but it should be demonstrated to have been present at the earliest point possible. This is usually done with expert medical professionals who have examined the taxpayer and who can provide competent testimony about the nature and extent and evolution of the taxpayer’s mental state in order for the defense to be viable.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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