Standard of Proof for FBAR vs Tax Fraud: Which is Higher?

Standard of Proof for FBAR vs Tax Fraud

Offshore Tax Fraud vs Willful FBAR Standard of Proof

Standard of Proof for FBAR vs Tax Fraud: The IRS continues to make offshore compliance of foreign accounts, assets, investments, and income a key enforcement priority. While the taint associated with Tax Fraud is bad and the monetary penalties can also tough, the monetary penalties associated with offshore tax fraud pale in comparison to willful FBAR penalties (even non-willful penalties). And, while the standard of evidence required to prove offshore tax fraud (or any tax fraud) is Clear and Convincing Evidence (~75%), the standard of proof required to prove FBAR willfulness is merely a Preponderance of the Evidence (~50%). This is despite the fact that the IRS’ own internal memoranda from several years ago surmised the standard of evidence in FBAR civil cases should be clear and convincing evidence.

We will summarize Offshore Tax Fraud and FBAR Penalty standard of proof below.

Civil FBAR Willful Penalty

Civil FBAR penalties for willfulness can be very high.

Even if a person has a relatively small balance, the penalties in a willful FBAR situation can reach as high as $100,000 per year, or 50% annual penalty on gross unreported maximum balances — whichever is higher.

As a result, you would think the IRS has a pretty heavy standard of proof to provide willful FBAR penalties — but you’d be wrong.

In fact, it is the lowest threshold of proof allowable by law.

*The $10,000 Non-Willful and $100,000 Willful Penalties adjust for inflation.

FBAR Willful: Less Evidence, More Penalties

Even though willfully failing to file an FBAR may result in higher fines and penalties than committing civil tax fraud, the amount of evidence the U.S. government needs to prove FBAR willfulness is less than the proof needed to prove civil tax fraud.

Why?

Because according to the Courts, civil FBAR violations are just about money.

FBAR Standard of Proof

Courts nationwide are (so far) unanimous that the standard for FBAR willful penalties should be preponderance of the evidence.  

In the sliding scale of “standards of proof,” preponderance of the evidence ranks as the lowest (as in, the government requires the least amount of evidence to prove its case).

In multiple different cases, Taxpayers have argued that while FBAR willfulness penalties are “civil penalties,” they are criminal-like in nature and therefore, the government should have to prove a higher standard (clear and convincing standard) which is typically quantified at ~75%, as opposed to preponderance of the evidence, which is essentially more than 50%.

U.S. v. Garrity

U.S. v. Garrity presented two main issues:

1. Does reckless disregard qualify as willfulness?
2. What standard of proof should apply to FBAR willful penalties?

What Do the Courts Say?

In Garrity, the court addressed these issues and provided the following:

“As Congress did not specify the legal standard the Court should apply in a “civil action” brought by the Secretary under section 5321, I must determine what standard of proof applies.

The starting point for this inquiry is the well-established principle that “[i]n a typical civil suit for money damages, plaintiffs must prove their case by a preponderance of the evidence.” Herman & MacLean v. Huddleston, 459 U.S. 375, 387 (1983).”

“The Supreme Court noted in Huddleston that where Congress has not specified a standard of proof, the Court has applied the clear and convincing evidence standard in civil matters only “where particularly important individual interests or rights are at stake,” such as in cases involving termination of parental rights, involuntary commitment, and deportation. 459 U.S. at 389.”

FBAR Civil Penalties are Just Money

According to the court in Garrity, the default position in a civil matter is preponderance of the evidence.

And, just because the amount of penalties can be staggeringly high — it does not increase the burden.

Therefore, even though a person may be subject to hundreds of thousands, if not millions of dollars in FBAR penalties, courts across the nation have held that these are still just money penalties in a civil matter and therefore, there is no additional burden of proof required by the U.S. government to invoke willful penalties.

IRS Memoranda and the Higher Evidence Standard

While Defendants could not point to any case law holding that the clear and convincing evidence standard applies to civil FBAR penalty cases, they argue in support of a prior IRS Memoranda, which surmised that FBAR penalties should require a higher burden of proof on the government.

IRS Memo re: FBAR Penalties

Several years ago, the IRS Office of Chief Counsel circulated a memoranda regarding the standard of proof that IRS counsel believed should be applied to FBAR penalty enforcement.

In that memo, it was a opined that the standard of proof should be clear and convincing evidence.

In Garrity, the judge refused to apply the heightened standard of proof and further provided that the memoranda is nothing more than IRS counsel’s opinion and not an operation of law.

Criminal vs Civil Willfulness Distinguished

Defendants argued that the willfulness standard in FBAR cases required the government to prove intent.

The court was quick to distinguish civil and criminal willfulness:

“Defendants also argue that the Government must prove that Mr. Garrity, Sr. intentionally violated a known legal duty in order to satisfy the element of willfulness, and that proof of reckless conduct is insufficient.

The court found Defendants’ arguments unpersuasive, as they do not account for the well-established distinction between civil and criminal formulations of willfulness.“

Criminal Willful vs. Civil Willful

The Supreme Court explicitly acknowledged in Safeco that

“[i]t is different in the criminal law. When the term ‘willful’ or ‘willfully’ has been used in a criminal statute, we have regularly read the modifier as limiting liability to knowing violations . . . . Civil use of the term, however, typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.” 551 U.S. at 57 n.9.

Defendants concede that numerous courts have found that willfulness in the civil FBAR context includes reckless conduct. (ECF No. 106 at 11.) See United States v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012) (reversing the district court’s ruling, as “at a minimum, Williams’s undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314”)

• United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017)
• United States v. Katwyk, No. CV 17-3314-GW, 2017 WL 6021420, at *4 (C.D. Cal. Oct. 23, 2017)
• Bedrosian v. United States, Civ. No. 15-5853, 2017 WL 4946433, at *3 (E.D. Pa. Sept. 20, 2017)
• United States v. Bohanec, 263 F. Supp. 3d 881, 888-89 (C.D. Cal. 2016)
• United States v. Bussell, No. CV 15- 02034 SJO, 2015 WL 9957826, at *5 (C.D. Cal. Dec. 8, 2015)
• United States v. McBride, 908 F. Supp. 2d 1186, 1204 (D. Utah 2012)
• United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311

Defendants cite no case in which a court has held to the contrary. Rather, despite the clear distinction the Supreme Court has drawn between willfulness in the civil and criminal contexts, the cases Defendants principally rely on are criminal cases.

As the Supreme Court has made clear, those criminal cases do not control this case.”

Reckless Disregard & Standard of Proof

The Garrity case is very important, because it confirms several key issues:

1. Civil FBAR Penalties only require only preponderance of the evidence
2. FBAR willfulness (unlike criminal willfulness) includes reckless disregard
3. FBAR Standard of Proof is preponderance of the evidence
4. The Amount of Penalties has no impact on the Standard of Proof required

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