In United States v. J. Bryan Williams, a Virginia District Court found that the Government had failed to meet its burden to establish that a taxpayer willfully failed to report his interest in foreign bank accounts that were omitted from the individual’s 2000 tax return.

Under foreign bank account reporting requirements, a U.S. person who has a financial interest in or signature authority over financial accounts in a foreign country where the aggregate value exceeds $10,000 is required to file a Report of Foreign Bank and Financial Accounts (FBAR, Form TD F 90-22.1). The current civil penalty for an inadvertent failure to file an FBAR is $10,000, absent a reasonable cause exception, and the current penalty for a willful failure is the greater of $100,000 or one-half of the account balance.

Defendant J. Bryan Williams did not disclose ownership of two Swiss accounts on his 2000 tax return, nor did he file an FBAR for the tax year. After being made aware (prior to the due date for the FBAR filing) of the fact that the U.S. tax authorities learned of his offshore accounts, the taxpayer made certain disclosures of his offshore accounts to the IRS and filed amended returns as well as FBARs. He eventually pled guilty to tax fraud, conspiracy and criminal tax evasion.

The Court reviewed all the facts and circumstances, including Williams’ motives and actions, in order to determine if there was requisite willful intent. The court found that Williams’ signature on his original tax return, Form 1040, was not prima facie evidence that he knew the contents of his tax return. It further found that while Williams had not disclosed his offshore account on his Form 1040 or FBAR, his knowledge that the IRS was aware of the accounts and his subsequent disclosures demonstrated that he lacked any motivation to willfully conceal his offshore accounts on his 2000 tax return.

Although the issues raised by this case were somewhat unique to the defendant, some inferences can be drawn. Specifically, under the right set of facts, the signing of a tax return is not prima facie evidence of knowledge of its contents, relying on tax counsel may evidence non-willfulness with respect to filing FBARs and a guilty plea for criminal tax evasion does not necessarily establish willful failure to file an FBAR.

IRS Clarifies Status of Check-the-Box Election for Certain Foreign Eligible Entities

On September 7, 2010, the IRS issued Revenue Procedure 2010-32, which provides relief to certain foreign eligible entities that made erroneous entity classification elections (“check-the-box elections”) based on a mistaken understanding of the number of owners as of the effective date of the election.

If all the requirements of Rev. Proc. 2010-32 are satisfied, an incorrect entity classification election is treated as correct from the date on which the election was to be effective and the IRS will respect the intention of a qualified entity to be treated as a “flow-through” entity (i.e., as a partnership or as a disregarded entity separate from its owner), rather than treat the qualified entity as an association taxable as a corporation.

More specifically, if a qualified entity elected to be a partnership based on the reasonable assumption that it had more than one owner, but then determined it only had one owner as of the effective date of the election, the IRS will treat the original election as an election to classify the qualified entity as a disregarded entity, as long as the requirements of Rev. Proc. 2010-32 are met. Similarly, if a qualified entity elected to be a disregarded entity based on the reasonable assumption that it had one owner, but then determined it had more than one owner as of the effective date of the election, the IRS will treat the original election as an election to classify the qualified entity as a partnership, as long as the requirements of Rev. Proc. 2010-32 are met.

The general requirements for qualifying for relief under Rev. Proc. 2010-32 are that an otherwise valid Form 8832 “Entity Classification Election” was filed based on the reasonable assumption that the entity had either a single owner (if disregarded status was elected) or two or more owners (if partnership status was elected), and that assumption was incorrect. The IRS will treat an entity’s otherwise valid Form 8832 as an election to classify the entity either as a disregarded entity or as a partnership, whichever case may apply, provided that the actual owner(s) and purported owners file:

  • all original or amended returns consistent with the correct treatment of the entity as a disregarded entity/partnership for any affected tax year;
  • all required amended returns before the close of the statue of limitations on assessment for all relevant tax years; and
  • a corrected Form 8832, filed with the appropriate IRS Service Center and a copy of the corrected Form 8832 attached to the amended return for the tax year when the election was made with the following statement appearing across the top of the corrected Form 8832: Filed Pursuant to Rev. Proc. 2010-32.

This relief is in lieu of the letter ruling process ordinarily used to obtain relief for a late change of entity classification. Thus, user fees do not apply to the corrective actions granted under Rev. Proc. 2010-32. However, an entity that does not qualify for this relief may still request relief through the letter ruling process. Rev. Proc. 2010-32 is effective on September 7, 2010.