On July 20, 2012, in United States v. Williams, the Fourth Circuit Court of Appeals found sufficient evidence of willfulness to support imposition of a 50% penalty for willful failure to file an FBAR on a taxpayer with undeclared Swiss bank accounts. The Court found that the District Court had “clearly erred” when it found that the government had failed to carry its burden of proving willfulness. Although the Fourth Circuit discussed the taxpayer’s tax evasion guilty plea, the Court relied on a standard of willfulness that may surprise many, namely recklessness.
“The importance of this case is not that it arose in the context of a criminal prosecution, but that from a civil perspective, a taxpayer was held to a recklessness standard with respect to the 50% FBAR penalty,” said Jim Mastracchio, Co-Chair of the Firm’s Tax Controversy Practice. The Court held that, “A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Jay Nanavati, a former DOJ prosecutor, added, “The Court found that the mere signing of a tax return was sufficient to establish that the taxpayer was reckless in failing to file an FBAR. The Court found that recklessness satisfies the proof requirement in a civil monetary context.” The Court further explained that a taxpayer need only be on “inquiry notice” of the FBAR filing requirement to be found to have willfully failed to file.
For his part, the taxpayer defended himself on the grounds of ignorance, testifying at trial that he did not read the relevant part of his tax return and “never paid any attention to any of the written words” on the return. The Court seized on this as further evidence of willfulness, finding a “conscious effort to avoid learning about reporting requirements,” or in other words willful blindness to the FBAR filing requirement. The case is unpublished but can be found at United States v. Williams, No. 10-2230 (4th Cir. July 20, 2012).