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District Court Finds Willful Failure to File FBARs

This article applies to any U.S. person who has a financial interest in or signature or other authority over a financial account or accounts with an aggregate value that exceeds $10,000 at any time during the calendar year. This article highlights the nature of a willful violation of FBAR rules in the case of U.S. v. Goldsmith, where the IRS imposed a civil penalty for the plaintiff’s willful violation of the FBAR rules.

Abstract: A U.S. district court recently concluded that a taxpayer was liable for a willful violation of the rules related to filing FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR). This article takes a closer look at the case.

U.S. v. Goldsmith, No. 3:20-cv-00087-BEN-KSC, May 25, 2021 (U.S. District Court, Southern Dist. of Calif.)

District Court Finds Willful Failure to File FBARs

If a taxpayer is required to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR) but fails to do so, the amount of the resulting penalty depends on whether the failure was non-willful or willful.

If a court finds the latter, the financial hit is much more substantial. The recent case of U.S. v. Goldsmith provides insights into what circumstances can lead a court to make such a finding.

Penalty Basics

Under the Internal Revenue Code, every U.S. person who has a financial interest in or signature or other authority over a financial account or accounts in a foreign country must report the account(s) annually using an FBAR if the aggregate value of the foreign financial account(s) exceeds $10,000 at any time during the calendar year. One FBAR is used to report multiple accounts.

The U.S. Secretary of the Treasury may impose a civil money penalty on any person who violates or causes a violation of the FBAR filing requirements. The maximum amount of the penalty depends on whether the violation was non-willful or willful.

The maximum penalty for a non-willful violation is $10,000. In the case of any person willfully violating, or willfully causing a violation, the maximum penalty is the greater of $100,000 or 50% of an amount determined under specific tax rules.

Facts of the Case

In Goldsmith, the plaintiff was the owner of a Swiss bank account that, for the years in question, contained more than $10,000. His accountant had asked him annually whether he held a foreign account, and the bank had informed him of potential U.S. reporting requirements. There was also other evidence (discussed below) that he knew he should have filed FBARs. The plaintiff, however, didn’t file them.

The IRS imposed a civil penalty for his willful violation of the FBAR rules, and the plaintiff turned to a U.S. district court.

The Court’s Decision

The court first reviewed various cases that discussed the nature of a willful violation. It concluded that a willful violation may be found where the violation results from conduct qualifying as either:

  • Knowing and intentional, or
  • Reckless, including because of willful blindness.

The court said that willful intent may be proven by circumstantial evidence and reasonable inferences drawn from the facts. It came to this conclusion because, according to the court, direct proof of a taxpayer’s intent is rarely available.

Upon reviewing the facts and circumstances in Goldsmith, the court agreed with the IRS that the plaintiff’s failure to file FBARs was willful. It cited a variety of evidence.

For example, following the death of his mother, the plaintiff inherited both the Swiss bank account and an interest in commercial property. He disclosed the commercial property interest to his accountant but not the bank account — even though the accountant had explicitly asked him whether he had a foreign account.

Also, the plaintiff set up the account (after his mother’s death) specifically as a numbered account; that is, his name wasn’t associated with it. Then, in 2000, the Swiss bank asked the plaintiff to sign a form (as part of an IRS program) that referenced “new U.S. withholding tax and reporting obligations.”

The bank gave the plaintiff a choice between disclosing his account to the IRS or divesting his U.S. securities. He chose to divest the account of U.S. securities rather than disclose it to the IRS.
In addition, the plaintiff regularly paid a fee to the Swiss bank to establish a “hold mail” order. In other words, he asked the bank not to send him any mail in the United States. The court pointed out that many other courts have interpreted a “hold mail” request to a foreign bank as evidence of intent to conceal a foreign account from the U.S. government.

You Can Run But …

The finding in Goldsmith serves as a reminder of the “you can run, but you can’t hide” principle of FBARs. Although the plaintiff went many years without making the proper filings, the IRS eventually caught on and the evidence left him liable for a hefty penalty. Consult your tax advisor if you have a financial interest in, or signature or other authority over, a financial account in a foreign country.

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