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Signing Tax Return Without Checking the Box and Failing to File FBARs Constitutes Willfulness as a Matter of Law, Fourth Circuit Holds

On October 20, 2020, the Fourth Circuit upheld the imposition of enhanced civil penalties on husband and wife taxpayers for their willful failure to file Reports of Foreign Bank and Financial Accounts (“FBARs”), despite any evidence that they were aware of the FBAR-filing requirement. In United States v. Horowitz, No. 19-1280, 2020 U.S. App. LEXIS 33074 (4th Cir. Oct. 20, 2020), the taxpayers failed to file FBARs for a multi-million dollar Swiss bank account for 20 years and never paid tax on the account’s interest income. In affirming the district court’s grant of summary judgment, the court stressed that the taxpayers discussed whether their Swiss bank account and the interest income from it were taxable with friends, but not their accountant; failed to inform their accountant of their account; had all mail related to the account held in Switzerland; and signed tax returns that did not disclose their account without fully reading or ensuring that the return was accurate. According to the Fourth Circuit, these facts were sufficient to establish that the taxpayers were reckless – and therefore willful – as a matter of law and therefore summary judgment was appropriate. 

Penalties for Failing to File FBARs

The Bank Secrecy Act requires U.S. citizens with interests in foreign bank accounts to report the account(s) to the federal government each year by filing an FBAR. 31 U.S.C. § 5314(a); 31 C.F.R. § 1010.350(a). Failing to do so is punishable by a maximum civil penalty of not more than $10,000 or, if the failure to file was “willful,” a maximum penalty of the greater of (a) $100,000 or (b) 50% of the account’s balance at the time of violation. 31 U.S.C. § 5321(a)(5). Willful failures to file can also result in criminal penalties, including a fine and up to five years’ imprisonment. 31 U.S.C. § 5322(a). 

“Willfulness” – Context Dependent? 

In Horowitz, the Fourth Circuit looked to the U.S. Supreme Court’s decision in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), to determine the meaning of “willful” in the civil penalty context. In Safeco, the Court considered willfulness in the context of the Fair Credit Reporting Act and held that in criminal provisions, willfulness requires knowing action, while in civil provisions recklessness is sufficient. 551 U.S. at 60. The Fourth Circuit explained that given the Supreme Court’s “clear articulation of the distinct meanings that attach to the term ‘willfully’ in the civil and criminal contexts – even within the same statute – we conclude that, for the purpose of applying §5321(a)(5)’s civil penalty, a ‘willful violation’ of the FBAR reporting requirement includes both knowing and reckless violations, even though more is required to sustain a criminal conviction for a willful violation of the same requirement under § 5322.” Horowitz, slip op. at 16. Horowitz thus affirmed in a published opinion the Fourth Circuit’s earlier, well-known but unpublished decision United States v. Williams, 498 Fed. App’x 655 (4th Cir. 2012). 

The court explained that in the civil context, “recklessness” draws on an objective standard; a person is reckless if he “‘acts (or if the person has a duty to act) fails to act in the face of an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Horowitz, slip op. at 16 (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). The court adopted the Third Circuit’s test for willfulness based on recklessness in the FBAR civil penalty context:  “the defendant ‘(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.’”  Slip op. at 17 (quoting United States v. Bedrosian, 912 F.3d 144, 153 (3d Cir. 2018)). 

United States v. Horowitz

The court in Horowitz, reviewing the district court’s grant of summary judgment in the government’s favor, found that the record established as a matter of law that the taxpayers met the willfulness via recklessness standard. In support of this determination, the court stressed:

  • While living abroad in Saudi Arabia, husband and wife taxpayers reported husband’s salary earned abroad and paid U.S. income tax on it. 
  • The taxpayers moved funds earned in Saudi Arabia to a Swiss bank for the express purpose of earning interest, which Saudi Arabian banks do not pay. 
  • The taxpayers informed their accountant about, and paid income tax on interest earned in, their domestic bank accounts. 
  • The taxpayers set up their Swiss bank account as a numbered account, had the bank hold all correspondence related to the account, and failed to provide the bank with their U.S. address once they moved back to the country. 
  • In the 1980’s, the taxpayers discussed with friends in Saudi Arabia whether they needed to report their Swiss bank account or pay taxes on the interest income earned by it. Based on the advice of these friends, the taxpayers – both “highly educated professionals” – did not report their account to their accountant or ask him whether they needed to disclose it or pay taxes on its interest income. 
  • The Swiss bank account held the taxpayers’ “nest-egg retirement” and was a significant asset; it was not “susceptible to being overlooked by the [taxpayers].” 
  • The tax returns filed with the IRS asked whether the taxpayers had a foreign bank account “and on each occasion the return was prepared with the answer, ‘No.’”  The taxpayers then “signed the[ returns] knowing that they were representing to the IRS, under the penalties of perjury, that the returns were accurate.” The court found that the taxpayers’ statements that they “repeatedly failed to review the returns with the care sufficient at least to discover their misrepresentation of foreign bank accounts, while nonetheless stating that the returns were accurate, was again an aspect of their recklessness.”

Slip op. 17-19. 

Based on these facts, the court concluded, “the record indisputably establishes not only that the Horowitzes ‘clearly ought to have known’ that they were failing to satisfy their obligations to disclose their Swiss accounts, but also that they were in a ‘position to find out for certain very easily.’”  Id. at 19 (quoting Bedrosian, 912 F.3d at 153). 

Takeaways: 

  • Courts increasingly hold that “willfulness” in the context of civil FBAR penalties is satisfied by recklessness and does not require disregard of a known legal duty, as required for imposition of criminal penalties for failing to file FBARS. See, e.g., Horowitz; Norman v. United States, 942 F.3d 1111, 1115 (Fed. Cir. 2019); Bedrosian v. United States, 912 F.3d 144, 152 (3d Cir. 2018). 
  • The court stressed that filing signed returns that inaccurately responded “no” to the question about the existence of foreign accounts was evidence of recklessness. See, Horowitz, slip op. at 19. This could support a position that a taxpayer has acted willfully, within the meaning of the civil penalty provision, by filing a return that does not disclose the existence of the foreign account and not filing an FBAR. 
  • However, Horowitz likely could be distinguished from a case where the taxpayer did not file and checked the box “No” as there were many other facts supporting the recklessness determination, including use of a numbered account, hold mail service, and failure to provide the Swiss bank with their U.S. address. 

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.

About the Author

Carolyn H. Kendall is a Principal in the Firm's Internal Investigations & White Collar Defense and Health Care Practice Groups. She conducts internal investigations and defends corporations, officers, and other individuals facing criminal and civil investigation. 

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