By: Eli Noff, Partner and Mary Lundstedt
On April 3, 2018, in United States v. Garrity, the U.S. District Court for the District of Connecticut considered the Government’s suit to reduce to judgment a willful Report of Foreign Bank and Financial Accounts (FBAR) penalty and determined that: (1) the burden of proof is preponderance of evidence, and (2) proof of reckless conduct is sufficient to establish willfulness.1 Now, even the standard of proof required for civil tax fraud is higher than that required for proving a willful FBAR violation.
U.S. taxpayers with foreign financial accounts, exceeding $10,000, must annually disclose this information on the FinCEN Form 114, Report of Foreign Bank Accounts and Financial Accounts. Statutory civil penalties for failing to file the FBAR can be daunting, ranging from $10,000 per account, and per year, for non-willful violations, and up to the greater of $100,000 or 50% of the account balances per year for willful violations. If the IRS finds willfulness, criminal penalties may apply, including a $500,000 fine and/or 10 years imprisonment.
On February 20, 2015, the U.S. Government brought suit against the estate of Mr. Paul Garrity, Sr. (Defendants), to collect the FBAR penalty for Mr. Garrity’s alleged willful failure to timely report his financial interest in a foreign bank account for the 2005 calendar year, as required under 31 U.S.C.S. §5314. The court was tasked with deciding both the standard of proof required and the proof required to show the element of willfulness.
First, the court considered 31 U.S.C. §5321, which allows the Treasury to bring suit to recover an FBAR penalty. Noting that “[a]s Congress did not specify the legal standard the Court should apply in a ‘civil action’ brought by the Secretary under section 5321,”2the court set the standard here. The court cited Herman & MacLean v. Huddleston,3 for the well-established principle that preponderance of the evidence is generally the standard in civil suits for monetary damages. The Garrity court further stated that the fact that “[d]efendants may be liable for a substantially larger sum of money for a willful FBAR violation than if the Government had pursued a civil tax fraud action does not warrant a higher standard of proof.”4
After establishing the standard of proof, the court addressed the element of willfulness-distinguishing between civil and criminal approaches. Defendants argued that to satisfy the willful element of an FBAR penalty, the Government must prove that Mr. Garrity intentionally violated 31 U.S.C.S § 5321, and that reckless conduct is insufficient to meet intent. The Garrity court disagreed, citing Safeco Insurance Company of America v. Burr5, which observed that:
It 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.6
As such, the Garrity court ruled that the element of willfulness in FBAR cases requires only evidence of reckless conduct.
After Garrity, the Government will have a much easier time proving that a willful FBAR penalty exists against a taxpayer. This case is just another in a series of victories for the IRS in asserting and sustaining significant FBAR penalties. Additionally, with the IRS recently deciding that the Offshore Voluntary Disclosure Program (OVDP) will end September of 2018, taxpayers are running out of time to come into compliance and take advantage of the mitigated penalty framework provided in OVDP.
1 United States v. Garrity, No. 3:15-cv-00243-MPS (D. Conn. Apr. 3, 2018).
2 Garrity, No. 3:15-cv-00243-MPS at 3.