In an unpublished opinion the Fourth Circuit Court of Appeals may have given the IRS a further lever in moving taxpayers in the Offshore Voluntary Disclosure Program (OVDI) and discouraging “opt outs”.
In United States v. Williams, the issue before the appellate court ultimately came down to whether the conduct of a defendant in a civil case brought for failure to file a Report of Foreign Bank Account (FBAR) could be deemed to be willful and therefore subject the defendant to a penalty of 50% or the account balance per year per account for each year of the claimed violations. The defendant in this case had already been convicted of tax evasion for failing to report income earned on Swiss accounts when the civil case was brought.
The case on appeal turned on the fact that the defendant answered “No” to questions on Schedule B of his Form 1040 relating to the existence and control of foreign accounts. The court found that the defendant should have known the contents of his return were false and answered Yes instead and then separately filed and FBAR. Based upon that fact the court found that his conduct was either deliberate or he was reckless in not knowing that he had an FBAR filing requirement. His conduct was,therefore, found to be “willful”. One cannot be “willfully blind” to facts and avoid the claim of a willfulness penalty.
What this may mean for some taxpayers is that the IRS may pursue “willful” claims against taxpayers who “opt out” from the OVDI program. The grounds for an “opt out” are found in IRS FAQ 51.1 et. seq. It may also prove to be a reason for those taxpayers who have not yet made a voluntary disclosure through the OVDI to do so. Taxpayer who have unreported income from foreign accounts but did not file returns, because they were, without the foreign income not required to file, may still face “willful” FBAR penalty actions if there was a deliberate action in not filing. These taxpayers should also consider an OVDI even if their income is insufficient to require filing..