A recent U.S. court decision sheds a little light on the intention behind the Internal Revenue Service’s crackdown on its citizens with offshore accounts who haven’t filed FBARs or reported worldwide income on their U.S. tax returns.
Last month, the Fourth Circuit Court of Appeals in Virginia overturned a lower court’s decision and found former Mobil Oil Corp. senior executive Bryan Williams liable to pay two civil penalties of US$100,000 each for failure to report his interest in two foreign bank accounts for the 2000 tax year.
Under U.S. law, its citizens are required to file a federal income tax return as well as Reports of Foreign Bank and Financial Accounts (FBARs) every year, no matter where they reside. Penalties for failure to file FBAR Form TD F 90-22.1 range from a willful failure-to-file penalty starting at US$100,000 to non-willful failure-to-file penalty of US$10,000 per violation.
In 1993, Mr. Williams opened two Swiss bank accounts and up until the year 2000, deposited more than US$7,000,000 into the accounts, earning more than US$800,000 in income on the deposits. For each of those tax years, Mr. Williams neither reported the income earned to the IRS nor disclosed his interest in the offshore accounts on an FBAR form.
Mr. Williams was ultimately charged with criminal tax evasion for evading tax on more than US$7-million in unreported income, including a US$2-million kickback he received in connection with Mobil’s oil business in Kazakhstan.
In addition to nearly four years in jail, he was ordered to pay a fine of US$25,000 and pay more than US$3.5-million in restitution to the IRS as well as penalties and interest.
The question in this case was whether he should also be hit with US$100,000 willful failure-to-file penalties for failing to disclose those two Swiss accounts.
In January 2001, Mr. Williams was sent a questionnaire by his accountant regarding his 2000 U.S. tax return. When responding to the question, “[Do you have] an interest in … a financial account in a foreign country,” Mr. Williams responded, “No.”
Furthermore, on his 2000 U.S. tax return, he replied “no” to the question as to whether he had an interest over a financial account in a foreign country. He did not file the required FBAR form by the June 30, 2001, deadline.
Mr. Williams testified he “never paid any attention to any of the written words” on his tax return. The Court said Mr. Williams made a “conscious effort to avoid learning about reporting requirements … and his false answers on both the tax organizer and his federal tax return evidence conduct that was ‘meant to conceal or mislead sources of income or other financial information.’ ”
The court concluded “this conduct constitutes willful blindness to the FBAR requirement” and restored the two US$100,000 penalties.