9th Cir Affirms FBAR Recklessness as a Willful Violation

Ninth Circuit Affirms FBAR Recklessness is a Willful Violation

Ninth Circuit Affirms Reckless as FBAR Willfulness in Hughes

The case of the United States vs. Hughes (Ninth Circuit) is an important FBAR case we have written about previously. In August of 2024, the United States Court of Appeals affirmed the District Court of California Northern District ruling. The Court of Appeals ruled in favor of the U.S. government and against the taxpayer on the issue of FBAR recklessness and willfulness (foreign bank and financial account reporting). The court makes specific reference to the fact that the recklessness standard is an objective standard and that the ‘Ninth Circuit joins every other Court of Appeals’ to have considered the question, to affirm the objective recklessness standard can be used to prove willful FBAR violations. Therefore, Taxpayers in the Ninth Circuit who want to challenge the FBAR willfulness should be cognizant that the Court of Appeal affirmed that reckless behavior qualifies as willful blindness.

Let’s take a brief look at some of the key excerpts from the court ruling:

Procedural Background

• • • “The district court held a bench trial and, in October 2021, issued a decision finding that Hughes’s failure to file in 2012 and 2013 was “willful” for purposes of the FBAR statute. Relevant here, the court concluded that, for purposes of civil FBAR penalties, “willfulness” can be shown through “recklessness or willful blindness.” The court reasoned that the Third and Fourth Circuits and several district courts had so held, that the Supreme Court’s decision in Safeco supported such a conclusion, and that Hughes “does not dispute that [the] applicable standard encompasses recklessness.” Although the district court acknowledged that the Ninth Circuit had not addressed the issue, the district court found “the cases applying a recklessness.”

Safeco and Willfulness

• • • I”n Safeco, a case concerning the Fair Credit Reporting Act, the Supreme Court held that, “where willfulness is a statutory condition of civil liability,” it generally applies to “not only knowing violations of a standard, but reckless ones as well.” 551 U.S. at 57. “This construction reflects common law usage, which treated actions in ‘reckless disregard’ of the law as ‘willful’ violations.” Id. The Court reasoned that limiting “willful” violations to “knowing” ones, as the Court has done in the criminal context, is usually inappropriate in the civil context, which “typically presents neither the textual nor the substantive reasons” for requiring subjective knowledge of wrongdoing. Id. at 57 n.9.”

Safeco Applies to FBAR Willful Penalties

• • • “Safeco’s reasoning applies equally to civil FBAR penalties under the Bank Secrecy Act. Like the Fair Credit Reporting Act, the Bank Secrecy Act contains civil and criminal penalties, both of which apply a willfulness standard. Compare 31 U.S.C. § 5321 (civil penalties), with 31 U.S.C. § 5322 (criminal penalties). True, “[a] term appearing in several places in a statutory text is generally read the same way each time it appears.” Ratzlaf v. United States, 510 U.S. 135, 143 (1994). However, the Supreme Court has repeatedly explained that “willfully” is different: it is a “word of many meanings whose construction is often dependent on the context in which it appears.” Safeco, 551 U.S. at 57 (quoting Bryan v. United States, 524 U.S. 184, 191 (1998)). Indeed, Safeco cited Ratzlaf in explaining that the meaning of “willfully” in the civil context differs from its meaning in the criminal context. Id. at 57 n.9.”

Negligence is Not the Same as Reckless

• • • “Against Safeco’s clear ruling and this weight of authority, Hughes contends that the FBAR statute is inherently punitive, unlike the allegedly merely compensatory Fair Credit Reporting Act, and so embracing an objective recklessness standard would punish “what are, in reality, negligent actors.” Thus, she suggests that, under a recklessness standard, “nearly every FBAR violation could be deemed a willful one,” rendering the non-willful provisions of the statute superfluous. Yet she points to no evidence that other courts have conflated mere negligence with recklessness. On the contrary, our fellow circuits have expressly stated that “civil recklessness requires proof of something more than mere negligence.” Horowitz, 978 F.3d at 89; Rum, 995 F.3d at 889–90 (same); Kelly, 92 F.4th at 603 (same). All other Courts of Appeals have correctly insisted that a determination of a willful failure to file an FBAR requires a finding that (1) the filer “clearly ought to have known that there was a grave risk that” the filing requirement was not being met, and (2) the filer “was in a position to find out for certain very easily.” Bedrosian, 912 F.3d at 153 (cleaned up).”

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.