To the extent that the examiner attempts to assert a willful FBAR penalty, the burden is on the IRS to show that the violation was, in fact, willful. The IRS has embraced the same definition of willfulness here, in the civil context, as the one that applies in criminal tax cases: “an intentional violation of a known legal duty.” However, the standard of proof is less than what it is for willfulness in the criminal context. Instead of “beyond a reasonable doubt,” the standard of proof is “clear and convincing evidence.”

How easy (or difficult) is it for the IRS to prove willfulness under the “clear and convincing evidence” standard? Thanks to a recent fourth circuit court of appeals case, which is one of eleven in the United States and ranks right below the United States Supreme Court, the quantum of evidence needed to show that the failure to file an FBAR was intentional has been substantially diluted. For this reason, J. Bryan Williams is a name that U.S. persons with undisclosed foreign bank accounts may come to dread.

Williams, a US citizen, deposited $ 7 million in Swiss bank accounts from 1993 to 2000 without disclosing the money to the Internal Revenue Service. He was indicted for tax evasion and in 2003, he pleaded guilty. In 2007, Williams filed FBARs for each of the years in which he held the accounts.

In 2009, Williams became the target of a rare civil suit initiated by the IRS. In that suit, the IRS sought to impose a $200,000 penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (Treasury Department Form 90-22.1), on Williams’ two Swiss accounts. This form is commonly known as the FBAR.

The district court ruled in favor of Williams. But the Fourth Circuit Court of Appeals reversed. By holding that the IRS lacked evidence to prove Williams’ willful violation of the FBAR filing requirement, the district court ruling had given hope to FBAR non-filers. Specifically, the court rejected the government’s arguments that Williams was liable for FBAR penalties because he did not list income from his Swiss account on his 2000 tax return and had checked “No” in Schedule B, the section which asks the filer if he has an interest in any financial accounts in another country.

The court reasoned that Williams’ failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.” And what was the context in which this failure to disclose occurred? Mr. Williams admitted to never reviewing his tax return, much less looking at the FBAR. Because it is impossible to intentionally violate a duty that one does not know to exist, the district court held that Mr. Williams could not have intentionally failed to disclose the accounts on his returns.

This holding had been widely accepted to be the standard for willfulness. But all that was soon to change. In reversing, the Fourth Circuit Court of Appeals reasoned that Williams made a “conscious effort to avoid learning about reporting requirements.”

While the majority could have rested there and concluded that the record established willful blindness and reversed on that basis alone, they decided to go one step further. That one step created a firestorm of opposition among critics. The majority held that Williams’ signature on his tax return was “prima facie evidence that he knew the contents of the return,” even though Williams denied ever reviewing it.

To understand how sweeping this was, some background information is needed. Every 1040 contains a “jurat,” just above the signature line. It states the following: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

This means that there is a presumption in the law that a taxpayer who signed his 1040 did, in fact, examine the return and that it is “true, correct, and complete” – even if the taxpayer did not actually review it.

Because Mr. Williams was presumed to have known the contents of his return (by virtue of having signed the 1040), the court reasoned that he was cognizant of the FBAR-filing requirements. Why? Because Section III of Schedule B specifically refers the taxpayer to FinCEN Form 114 (FBAR) and its accompanying instructions, which contain the FBAR-filing requirements. That question asks: “If ‘Yes,’ are you required to file Form TD F 90-22.1 [FBAR] to report that financial interest or signature authority? See Form TD F 90-22.1 and its instructions for filing requirements and exceptions to those requirements.”

Thus, Schedule B’s reference to FinCEN Form 114 (FBAR) and its accompanying instructions were deemed to have put Williams on “inquiry notice” of the FBAR-filing requirements, even though he never reviewed the return, much less the filing instructions on the FBAR.

What does this case mean for the average taxpayer with an unreported foreign bank account? Very simply, such taxpayers are presumed to be cognizant of the FBAR-filing requirements merely by signing the tax return so long as the return contains “Schedule B.”

The practical effect of this opinion is nothing short of mind blowing. First, instead of having to prove a specific intent to “violate a known legal duty,” which other tax cases have upheld as the standard for proving willfulness, Williams makes a taxpayer liable for willful FBAR penalties based on nothing more than his or her presumed understanding of the FBAR requirement. As some tax professionals have artfully put it, Williams has given the IRS carte blanche to assert a willful FBAR penalty for something as arbitrary as a distaste for the color of a taxpayer’s shoes.

Second, it gives a major boost to the IRS’s current intensive pursuit of overseas tax evasion by making it easier for the IRS to prove willfulness in the context of a willful FBAR penalty. Very simply, the IRS now has enormous leverage to collect the hefty penalties that accompany the willful FBAR penalty. Indeed, the civil penalty for willfully failing to file an FBAR may reach $100,000, or 50% of the value of the offshore account, whichever is greater.

As one expert observed, “This case is likely to be the start of a wave of FBAR audits for the IRS because of the sheer sums the IRS stands to collect by ramping up civil FBAR enforcement.”

While Williams might strike fear in the hearts of even the bravest taxpayers, taxpayers can take some comfort in the following. First, the case was a gross example of offshore tax evasion. Not only did Mr. Williams fail to disclose his Swiss accounts on his tax returns, but he also denied having overseas assets to his accountant and attorney. Indeed, this was the equivalent of waiving a red flag in front of a bull.

Second, Williams is an unpublished opinion. Therefore, it is not binding precedent on federal courts in the fourth circuit, much less any of its sister circuits. And third, if the IRM is any indication, it appears that the official position of the IRS is to require a higher quantum of proof to establish willfulness than what the court in Williams deemed adequate. In other words, the IRS will not indulge in the fiction that a taxpayer knows and understands his FBAR-reporting requirements merely by having signed his return. However, a word of caution is in order. As one expert said, “The IRS would be crazy not to use this ruling to its advantage. There is simply too much money at stake.”

Balancing the carrot of voluntary disclosure with the stick of criminal prosecution and willful FBAR penalties requires the IRS to walk a fine line. Indeed, the more they enforce FBARs, the more the IRS risks driving people away, as opposed to enticing people into the system. If recent cases are any indication, it appears that the IRS cares little about the impact that its heavy-handed approach to FBAR compliance has on the willingness of those with undisclosed foreign accounts to make a voluntary disclosure.

The IRS has shown that it will not hesitate to seek maximum willful FBAR penalties. For example, in July 2012, a jury found Carl R. Zwerner responsible for civil penalties for willfully failing to file FBARs for tax years 2004-2006. Mr. Zwerner is the latest casualty of the IRS war on offshore accounts.

The account exceeded $1.4 million, and the jury found that for two of the three years, Mr. Zwerner met the “willful” criteria in failing to file an FBAR. He was assessed a whopping 50 percent of the value of the account. That’s over $2.2 million, which far exceeded the amount of the original account.

What is the likelihood that the IRS will assert the willful FBAR penalty?

Thanks to the Fourth Circuit Court of Appeals decision in Williams, the likelihood that the IRS will assert a willful FBAR penalty is high. While the IRS has the burden of proving willfulness, keep in mind that if it follows Williams, it can circumvent the heightened standard of willfulness altogether (i.e., a specific intent to “violate a known legal duty”). The IRS need merely prove that the taxpayer had “inquiry notice” of the FBAR filing requirement and then intent, which it can take the liberty of proving under the diluted standard of willful blindness.

How does the IRS prove inquiry notice? By showing nothing more than the taxpayer’s signature on his or her tax return. As the fourth circuit court of appeals held, a taxpayer is presumed to be cognizant of the FBAR requirement simply by signing the tax return.

Under the theory of willful blindness, the only intent needed to constitute a willful violation of the FBAR requirement is a conscious choice not to file the FBAR. If the IRS can prove willfulness, the applicable FBAR penalties for the years in question will be calculated under the willful mitigation guidelines.

Examples of Willfulness for Purposes of the Civil FBAR Penalty

The following examples illustrate situations in which willfulness may exist:

(1) Jill has a foreign bank account. She admits knowledge of, but fails to answer the question on Schedule B of her return concerning whether she has an interest in a foreign account. When asked, Jill does not have a reasonable explanation for failing to answer the question and for failing to file the FBAR. A determination that the violation was willful would be appropriate in this case.

(2) Jack has a foreign bank account that he has failed to disclose. He received a warning letter informing him of the FBAR filing requirement. Notwithstanding that, he continues to fail to file the FBAR in subsequent years. When asked, Jack does not provide a reasonable explanation for failing to file the FBAR. To make matters worse, Jack failed to report income associated with the foreign account. A determination that the violation was willful would be appropriate.