by Brian Mahany
For the few lawyers that extensively help taxpayers with offshore reporting and FBAR problems, the case of United States v. J. Bryan Williams decided in 2010 was a watershed moment. For those not familiar with the case, Bryan Williams was convicted of tax evasion and conspiracy to defraud the IRS back in 2003. Williams had deposited $7 million in Swiss bank Credit Agricole Indosuez but failed to file a Report of Foreign Bank and Financial Account (FBAR) and did not properly disclose the hundreds of thousands of income generated from those accounts on his tax return.
In addition to the criminal conviction, the IRS sought to impose civil penalties against him. As most of our readers already know, the government can levy a penalty of up to 50% of the highest account balance for each year in which there is a willful violation. The key word here is “willful.”
The government had the burden to prove that Williams’ failure was willful. Pretty easy since Williams pled guilty to willfully evading taxes, right? Believe it or not, the case was a rare loss for the IRS. The government appealed and the case presently sits in the 4th Circuit Court of Appeals in Richmond, Virginia. On the last day of 2011, the court set the case for a hearing early this spring.
Lawyers, CPA’s and taxpayers with offshore reporting violations are all watching the case.
In the original case, the government focused on the box found on Schedule B of the income tax return that requires taxpayers to disclose if they have an interest in or signature authority over a foreign bank account. Williams checked the “no” box. The government says that’s enough.
The law says that willfulness can be proven by reckless conduct or repeated failures to comply with known regulations. Fortunately for Williams, the trial court found that neither factor was present. Because Williams knew that he was under investigation, he may have thought that the accounts were already disclosed.
Although the case is very fact specific, it does have ramifications in other cases. The government has long contended that simply checking the “no” box on the income tax form question relating to foreign accounts is enough to demonstrate “willfulness.” Using that standard, there are many taxpayers that could find themselves liable for huge penalties.
In its appeal, the government now carefully argues that point and makes a second argument that Williams’ failure to disclose the Swiss accounts to his tax preparer is evidence of willful intent.
It will be interesting to see how the court rules this spring. The court can uphold the trial judge or reverse and find that willfulness was present. Even if it does the latter, much depends on whether the appeals court validates the IRS policy of finding that all taxpayers who miss check the foreign bank question box are liable for the high penalties. The court could uphold the IRS and sidestep the entire policy issue by simply deciding the case on other grounds.
Whatever the result, savvy taxpayers can win these penalty appeals. It is not as easy to find willfulness as the IRS would like people to believe. The difference can mean hundreds of thousands of dollars in penalties – the stakes are certainly high.
If you have a pending U.S. Tax Court case, are under audit or contemplating making a voluntary disclosure of your offshore accounts, give us a call. We have helped many taxpayers with a variety of tax amnesty (OVDI), FBAR, voluntary disclosure, quiet disclosure and other foreign reporting problems.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan, Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Services nationwide.