A district court has held that IRS may prove that a taxpayer failed to timely file a Foreign Bank and Financial Accounts Report (FBAR) by a preponderance of the evidence rather than by a higher, clear and convincing evidence standard. The court also determined that IRS could show willfulness on the taxpayer's part by proof of his reckless conduct and did not need to show that he intentionally violated a known legal duty.
What is FBAR?
Under the Bank Secrecy Act, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority.
Except in the case of willful failures, the amount of any civil penalty imposed for violating this rule will not exceed $10,000. However, those who willfully fail to file their FBARs on a timely basis, i.e., on or before June 30 of the following year, can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation (31 CFR § 1010.821)) or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. IRS has discretion as to the amount of the penalty, subject to these limits. (31 USC 5321(a)(5)(C))
A "reasonable cause" exception exists for non-willful violations, but not for willful ones.
In a case dealing with a fraudulent misrepresentation claim, the Supreme Court held that a heightened clear and convincing burden of proof applies in civil matters "where particularly important individual interests or rights are at stake". (Herman & MacLean v. Huddleston, (S Ct 1983) 459 U.S. 375) Such interests include parental rights, involuntary commitment, and deportation. The lower, more generally applicable preponderance of the evidence standard applies, however, where "even severe civil sanctions that do not implicate such interests" are contemplated.
In Grogan v. Garner, (S.Ct 1991) 498 U.S. 279, the Supreme Court rejected arguments that the higher standard of clear and convincing evidence applies to particular civil actions (where the Court held that the preponderance of the evidence standard applied to exceptions to debt dischargeability for fraud in certain bankruptcy actions).
Using these principles, courts that have considered the burden of proof issue with regard to FBAR have answered the question by holding that the preponderance of the evidence standard governs suits by IRS to recover civil FBAR penalties. (Bedrosian v. U.S., (DC PA 9/20/2017) 120 AFTR 2d 2017-5832; U.S. v. Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757; U.S. v. McBride, (DC UT 2012) 110 AFTR 2d 2012-6600; U.S. v. Williams, (2010, DC VA) 106 AFTR 2d 2010-6150, rev'd on other grounds, U.S. v. Williams, 110 AFTR 2d 2012-5298)
A number of courts have found that willfulness in the civil FBAR context includes reckless conduct. (U.S. v. Williams, 110 AFTR 2d 2012-5298; U.S. v. Kelley-Hunter, (D.D.C. 2017) 120 AFTR 2d 2017-6778; U.S. v. Katwyk, (C.D. Cal. 10/23/2017) 120 AFTR 2d 2017-6380; Bedrosian v. U.S., (DC PA 9/20/2017) 120 AFTR 2d 2017-5832; U.S. v. Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757; U.S. v. Bussell, (C.D. Cal. 12/8/2015) 117 AFTR 2d 2016-439; U.S. v. McBride, (DC UT 2012) 110 AFTR 2d 2012-6600; U.S. v. Williams, (2010, DC VA) 106 AFTR 2d 2010-6150)
Fact of this Case, and the Court's Conclusion
IRS filed suit to reduce to judgment a civil penalty that it assessed against Paul G. Garrity, Sr., under 31 U.S.C. 5321(a)(5), for his alleged willful failure to report his interest in a foreign account that he held in 2005, in violation of 31 U.S.C. 5314.
In anticipation of trial, the parties submitted briefs addressing the legal question of what standard of proof governs, preponderance of the evidence or clear and convincing evidence. IRS argued that the standard of proof was preponderance of the evidence. The taxpayer (represented by fiduciaries of the Estate of Paul G. Garrity, Sr.) argued that the standard of proof was clear and convincing evidence.
The parties also briefed the separate question of whether IRS must show that Mr. Garrity, Sr. intentionally violated a known legal duty to establish a "willful" FBAR violation (as the taxpayer's representatives contended) or whether IRS may satisfy its burden of proof by showing that Mr. Garrity, Sr. acted recklessly (as IRS contended).
Court's conclusion. The district court determined that IRS must prove the elements of its claim for a judgment under 31 U.S.C. § 5321(a)(5) by a preponderance of the evidence and that proof of reckless conduct would satisfy IRS's burden on the element of willfulness.
Standard of proof. The district court found that the civil FBAR penalty did not implicate important individual interests or rights. The court reasoned that the fact that the taxpayers might be liable for a substantially larger sum of money for a willful FBAR violation than if IRS had pursued a civil tax fraud action did not warrant a higher standard of proof. As Huddleston and Grogan indic
The district court reasoned that the sanction that the taxpayer might be exposed to, regardless of how "draconian" it might be, was monetary only. Despite characterizing the taxpayer's exposure to a monetary sanction as implicating a "property interest that require[s] protection" the taxpayer's representatives had not demonstrated how the penalty IRS sought would affect important individual interests or rights to warrant a higher standard of proof.
The taxpayer's representatives also argued that IRS's proof of willfulness likely would involve allegations of fraud, which could tarnish Mr. Garrity, Sr.'s reputation, implicating a more important interest than those involved in typical civil cases. But the court, looking to Huddleston and Grogan, noted that even allegations of fraud did not necessitate a higher standard of proof. Unlike a large number, and perhaps the majority, of the States, Congress had chosen the preponderance standard when it has created substantive causes of action for fraud.
Willfulness. While the taxpayer's representatives conceded that numerous courts had found that willfulness in the civil FBAR context included reckless conduct, relying principally on criminal cases, they maintained that IRS must prove that Mr. Garrity, Sr. intentionally violated a known legal duty in order to satisfy the element of willfulness, and that proof of reckless conduct was insufficient. The district found that the taxpayer's representatives ignored the clear distinction that the Supreme Court had drawn between willfulness in the civil and criminal contexts. See Ratzlaf v. U.S., (S Ct 1994) 510 U.S. 135. The taxpayer's representatives pointed to no other authority that would warrant deviating from the Supreme Court's holdings that statutory willfulness in the civil context covered reckless conduct.