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Federal Court Finds “Willful” Violation Of Foreign Bank Account Reporting Requirements Where Taxpayer Apparently Didn’t Read The Appropriate Schedules

A recent opinion from the Court of Federal Claims significantly undercuts taxpayers’ ability to claim that certain errors on forms were accidental, finding that what might otherwise be seen as merely a negligent failure to report certain foreign bank accounts in fact justified a “willful” finding leading to a severe tax penalty. See below for an explanation of the case and its ruling, and contact a dedicated Texas tax fraud defense attorney at Scammahorn Law Firm for help with an IRS tax problem in Dallas or Tyler, Texas.

Court of Federal Claims: You can be “willfully” guilty of failing to report foreign accounts as long as at least once you checked “no” in the “foreign bank accounts” box

The recent case of Kimble v. U.S. concerned a taxpayer who failed to report certain foreign bank accounts on her tax return. The taxpayer’s parents had opened a Swiss investment account with the taxpayer listed as a joint owner, and the taxpayer had opened a French bank account with her former husband. She did not disclose the Swiss account during the divorce, and she became sole owner of the French account after her divorce. She did not report these foreign accounts on her tax returns from 2000 through 2009. The case concerned whether her failure was a “willful” violation of the tax laws, which carries a significant additional penalty beyond mere failure to report income.

The taxpayer did not mention either foreign account to the CPA she hired to prepare her federal and state tax returns from 2000 until 2010, and she never asked the CPA if she needed to report foreign accounts on her federal tax return. She did not report investment income from the foreign accounts during those years. Notably, she also did not review her individual income tax returns for accuracy after the CPA prepared them in the years 2003 through 2008. At least once, in her 2007 tax return, she specifically answered “no” to the question on the return as to whether she had any foreign bank accounts.

In 2009, she applied for the federal Offshore Voluntary Disclosure Program, under which taxpayers who may face civil or criminal penalties for failure to report offshore accounts can seek leniency and a reduction in penalties by voluntarily reporting offshore accounts not previously disclosed and by filing amended returns. This action later led to the IRS reviewing her previous tax returns in 2013.

Based in particular on the facts that she did not review her tax returns for accuracy, that she did not file the required Report of Foreign Bank and Financial Accounts (FBAR) for many years, and that she checked “no” in the box asking about foreign bank accounts on her 2007 return, the IRS found that she had acted “willfully.” The Court of Federal Claims agreed with the IRS and found that both “willful blindness” and “reckless disregard” of the FBAR requirements satisfied the standard of “willfully” violating the tax laws.

The court leaned heavily on her having checked the “no” box in 2007 regarding her possessing foreign bank accounts, essentially stating that that alone put her on actual notice of the FBAR requirement and that her failure to report was therefore willful. This suggests that all taxpayers who check the “no” box are therefore by default guilty of a “willful” violation for any failure to report income.

If you’re facing a complicated tax issue involving allegations of back taxes, tax fraud, tax evasion, or false returns, get skilled legal help with your case from a Texas tax lawyer at the Scammahorn Law Firm at 903-595-1000, with offices in Dallas and Tyler.

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