In September of this year, the IRS lost a case (United States v. J. Bryan Williams) in which it tried to impose the 50% penalty for willfully failing to file a Foreign Bank Account Report, TDF 90-22.1 (FBAR). This appears to be the first case that has gone to court on FBAR penalties which did not involve someone who was also being charged with drug or other serious criminal charges, other than tax charges. J. Bryan Williams had already been convicted of tax evasion, and the IRS then brought a civil law suit to collect the FBAR penalty since Williams had failed to file the FBARs. The IRS relied on the tax fraud conviction, and the fact that on his federal income tax return Mr. Williams had checked the box on Schedule B stating that he did not have an interest in a foreign financial account.

The judge rejected these contentions stating that “…the Government fails to differentiate tax evasion from failing to check the box admitting the existence of a foreign bank account.” The court also noted that “a taxpayer’s signature on a return does not itself prove his knowledge of the contents, but knowledge may be inferred from the signature along with the surround facts and circumstances.”

At trial, there were several significant facts in dispute, most significantly being when Williams first met with the Swiss authorities and when his Swiss bank accounts were frozen. There was no dispute that Williams checked the “No” box indicating that he had no foreign bank accounts and that he failed to submit the requisite TDF 90-22.1. Form by June 30, 2001 when it was due. However, these actions occurred after Williams found out that the U.S. and Swiss authorities knew about the Swiss bank accounts. On November 13, 2000, seven months before he failed to check the correct box, Williams met with the Swiss authorities about the Swiss bank accounts. At the same time, at the request of the U.S., the Swiss authorities froze the assets in the Swiss bank accounts. In response to these actions, also in 2000, Williams sought the advice of both Swiss and U.S. counsel. Williams’ subsequent disclosures throughout 2002 and 2003 corroborate his lack of intent to willfully conceal the Swiss bank accounts. The Court concluded that Williams’s testimony that he only focused on the numerical calculations on the Form 1040 and otherwise relied on his accountants to fill out the remainder of the Form is credible, and should be given more weight than the mere fact that Williams checked the “No” box on Schedule B of his Form 1040.

The case is good news for those taxpayers who have entered the voluntary disclosure program, and believe that the FBAR penalty that the IRS seeks to impose is too high.

On the other hand, it’s important to note that in the Williams case, by the due date of the FBAR Mr. Williams’ Swiss bank accounts had been frozen by the Swiss government, the IRS knew that the accounts had been frozen, and Mr. Williams knew that the IRS knew that the Swiss bank accounts had been frozen. Thus the argument went that Williams had no motivation not to file the FBAR because the IRS already knew about the accounts. It will be the unusual case where this type of factual scenario exists, and therefore the IRS will probably argue that Williams is distinguishable.

If you haven’t filed your FBARs and don’t know what to do call the international tax specialists at Sasserath & Zoraian, LLP for a consultation.

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