Page 5 - An Update on Civil FBAR Penalties: Decisions Since June 2019 Citing Williams and McBride in Discussing the Willful Civil FBAR Penalty
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answering “no” to question 7(a) on Line 7a of of the FBAR filing requirements could never be
Schedule B of a 1040 tax return) in and of itself non-willful. Yet, the statute provides for non-
supports a finding of “reckless disregard” to report willful penalties. Applying the USA’s suggested
under the FBAR [sic]. … reasoning would lead to a draconian result and
one that would preclude a consideration of other
Here, it is undisputed that Rum signed the 2007 evidence presented. Accordingly, the USA cannot
tax return on February 27, 2008, … charging satisfy its burden of proof in this case on the issue
him with constructive knowledge of the FBAR of willfulness simply by relying on the fact that
requirement …. Schedule B … proceeds with a Schwarzbaum signed his tax returns or neglected
plain question, question 7(a): “At any time during to review them as thoroughly as he should have. 30
2007, did you have an interest in or a signature
or other authority over a financial account in a The court then held that the government failed to prove
foreign country, such as a bank account, securities that Schwartzbaum “knowingly violated the FBAR
account, or other financial account? See page B-2 reporting requirements” for the years 2006 through
for exceptions and filing requirements for Form 2009. In addition, Schwarzbaum was not liable for
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TD F 90-22.1 [FBAR].” … Based on the record, a willful civil FBAR penalty under a theory of will-
either Rum or his tax accountant repeatedly typed ful blindness for 2006, because he believed from his
an “X” for “No” in the relevant box …. Yet again, it accountants’ incorrect advice that a foreign account
is undisputed that Rum had an interest in a foreign should have some connection with the United States
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bank account in 2007 …. As such, Rum’s pattern before it was required to be reported on an FBAR.
of signing his tax returns without reviewing them, With respect to the years 2007 through 2009, how-
along with falsely answering “no” to question 7(a) ever, the evidence established that Schwarzbaum was
suffices to support a finding of willfulness to report willfully blind to the FBAR reporting requirement
under the FBAR [sic]. 27 because “he self-prepared his 2007 and 2009 FBARs,
and at least for 2007, he reviewed the instructions for
The court then discussed additional evidence that sup- the FBAR form.” Consequently, “by tax year 2007,
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ported a finding of willfulness, but emphasized that this Schwarzbaum was aware, or should have been aware, of
evidence was “not necessary to establish willfulness.” 28 the FBAR requirements,” and could no longer claim to
have relied on his accountant’s prior advice. 34
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5. Decisions After June 2019 That In Flume, a court in the Southern District of Texas
likewise rejected Williams’ and McBride’s reasoning
Have Directly Taken Issue with that Form 1040, Schedule B, Part III, Question 7a puts
Williams and McBride a taxpayer on constructive notice of the FBAR filing
requirement, and that signing a tax return answering
Two recent decisions have refused to follow Williams this question incorrectly may by itself support a will-
and McBride’s holdings that filing a Form 1040 income ful civil FBAR penalty. While the court found that the
tax return with a Schedule B provides constructive taxpayer was in fact willful, for various incriminating
notice of the FBAR filing requirement, precisely reasons, the court was careful to explain: “Citations
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because this reasoning ultimately leaves no room for to McBride and Williams in this Order should not be
application of the non-willful civil FBAR penalty. In understood as a reversal of the Court’s position that ‘[t]
Schwarzbaum, a court in the Southern District of he constructive-knowledge theory is unpersuasive’ as a
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Florida described why it believed the reasoning of justification for penalties based on knowing conduct.”
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Williams and McBride to be faulty: The court referred to and quoted from a prior decision
in the same case, in which it held: “The constructive-
Imputing constructive knowledge of filing require- knowledge theory is unpersuasive [because] it ignores
ments to a taxpayer simply by virtue of having the distinction Congress drew between willful and
signed a tax return would render the distinction non-willful violations of section 5314. If every taxpayer,
between a non-willful and willful violation in the merely by signing a tax return, is presumed to know of
FBAR context meaningless. Because all taxpayers the need to file an FBAR, ‘it is difficult to conceive of
are required to sign their tax returns, a violation how a violation could be nonwillful.’” 38
FALL 2020 43