by Brian Mahany
Willful Blindness has long been a tool of federal prosecutors in a wide variety of criminal tax and drug cases. The doctrine holds that one can’t avoid criminal responsibility by simply ignoring the obvious. For example, drug couriers have unsuccessfully attempted argue that they couldn’t be found guilty of transporting drugs since they never asked or learned what was in the packages they were carrying.
The U.S. Supreme Court identified a two prong test to prove willful blindness. First, the defendant must subjectively believe that there is a high probability that a fact exists. Second, the defendant must take deliberate actions to avoid learning of that fact. Recognizing that the doctrine could easily be misused, courts have said that willful blindness must extend well beyond negligence and even recklessness.
The Court’s test is somewhat abstract. To explain it better we will return to its origins and drug smuggling cases. If I am asked to send a FedEx envelope for a very good friend; a person I believe to be honest and upstanding, there is no criminal liability if the package contains narcotics. However, if a stranger approaches me in the Medallin, Columbia airport and offers me $10,000 to swallow 50 rubber balloons filled with a powdery substance and deliver once inside the United States, surely a jury could convict me even if I truthfully didn’t know what the balloons contained. Simply because I didn’t ask and know if the balloons contained heroin or cocaine will not absolve me of liability.
There is a tremendous expanse of gray area in between both extremes, of course.
In recent years, the Department of Justice Tax Division has been successful in getting willful blindness jury instructions in criminal tax cases. Often these are used in tax protester cases (now called tax defiers by the IRS). In the jurisdictions that allow such instructions, defendants can’t say they simply relied on crazy information they gleaned from the Internet and ignored decades of case law and thousands of pages of instructions and information from the IRS.
The willful blindness doctrine started out in criminal cases but has found its way to civil matters. The doctrine was successfully used in civil patent infringement cases where marketers of file share services said they never asked how their technology was being used. The court found that some of these services were used almost exclusively to download pirated movies and music.
Earlier this year, the United States Tax Court used the doctrine in a civil tax case against a well known tax attorney. Owen Fiore went to prison for evading his 1999 taxes but after his release, the IRS wasn’t finished. They claimed that he committed fraud in other years as well.
There were not many records in the civil Fiore case. That apparently was deliberate. Other than bank deposits, Fiore didn’t keep records. There was no documentation of his expenses, for example. Because he did not maintain records, arriving at tax deficiency was relatively easy. Proving fraud (and thus obtaining a civil fraud penalty) was not quite as simple.
The U.S. Tax court borrowed the willful blindness case law from the criminal courts. The court said that the IRS could meet its burden of showing fraudulent intent to evade taxes with clear and convincing evidence that Fiore was
1) aware of a high probability of unreported income or improper deductions, and
2) deliberately avoided steps to confirm this awareness.
The Court’s full opinion can be found here.
We worry about extending the willful blindness doctrine to civil tax cases. While it does have its place in certain cases, it also invites shoddy investigation. The doctrine invites imposition of high penalties based on mere negligent conduct.
We know many taxpayers who are terrible record keepers. Virtually every preparer has been forced to complete returns on less than perfect documentation. Should the IRS be allowed to impose tax and interest when a taxpayer cant properly document expenses and other items on the return? Of course. But lack of documentation alone shouldn’t be enough to impose a 75% fraud penalty.
Use of the willful blindness doctrine in civil fraud tax cases is relatively new. The Tax Court bar and front line CPAs should monitor any expansion of the doctrine carefully.
The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of criminal and civil tax matters. From criminal tax evasion investigations to audit defense and U.S. Tax Court litigation, we can help.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. Whether you hire or us or not, we will gladly discuss your options at no cost and without obligation.
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