US v. Horowitz: Catalyst for Reckless Disregard FBAR Willful Cases

US v. Horowitz: Court Affirms Reckless Disregard is Willful Violation

In US v. Horowitz, the US Court of Appeals of the Fourth Circuit Court Affirms Reckless Disregard is sufficient to prove willfulness for FBAR (Foreign Bank Account Violations) in accordance with FinCEN Form 114. Horowitz served as the catalyst of other recent Court opinions that came to the same conclusion in the United States Court of Appeals for the Federal Circuit and Second Circuit Court of Appeals. This case was a damaging blow to Taxpayers who may have crossed-the-line from non-willfulness to reckless disregard (which is considered the lowest level of willfulness). Let’s review some key excerpts from the Court’s Opinion in US v Horowitz.

US v. Horowitz Background (8:16-cv-01997-PWG)

• • • Peter and Susan Horowitz, U.S. citizens and a married couple, failed to file FBARs as required for the years 1988 through 2008 for accounts that they owned in Swiss banks. The Horowitzes maintain that they had no knowledge of the requirement to file an FBAR until late 2009.

    • The government, however, determined that the Horowitzes’ failure to file FBARs was “willful,” as that term is used in the Act, and, on June 13, 2014, it assessed enhanced penalties of $247,030 against each spouse for both 2007 and 2008.

    • When the Horowitzes refused to pay the assessed penalties, the government commenced this action in June 2016 to collect the penalties, along with interest and additional penalties for late payment.

Horowitzes Believe They May have been Noncompliant 

• • • Shortly after the Horowitzes’ October 2009 trip, Peter started reading “newspaper articles about people who were voluntarily disclosing” foreign bank accounts. He stated that as “the numbers of people [making such declarations] got larger and larger,” he started to wonder if he and Susan were “among the people committing some kind of wrong.”

    • Around this time, Peter also received a letter in the mail from UBS, dated November 10, 2009, that stated that the IRS was “seeking information with regard to accounts of certain U.S. persons . . . that are or have been maintained with UBS” and that their “account with UBS appear[ed] to be within the scope of the IRS Treaty Request.”

    • At “[t]he very end of November 2009,” Peter and Susan decided to consult a tax attorney, and they did so in December 2009. Both testified that when they met with the tax attorney, they learned for the first time of the requirement to report foreign bank accounts.

    • It is important to note that at this time, the Petitioners consulted a tax attorney and learned that they were required to report foreign accounts.

Horowitzes Did Not Provide Their Accountant with Foreign Account Information

• • • Since the late 1970s, the Horowitzes had retained an accountant to prepare their annual joint income tax returns. Each year, in advance of the tax filing deadline, Peter prepared summaries for the accountant of the family’s tax information for the preceding calendar year, listing his and Susan’s salaries, the interest earned in their domestic bank accounts, any dividends, and various deductible expenses.

    • The accountant would then use those summaries to prepare the returns. After completing the returns, the accountant sent them to the Horowitzes for their review and signatures, after which the accountant filed the returns with the IRS.

    • While the tax summaries included information about the Horowitzes’ interest-bearing American bank accounts, they never listed the Horowitzes’ Swiss bank accounts. Nor did the Horowitzes pay taxes on the income from those accounts until after they entered the IRS’s Voluntary Disclosure Program in 2010. 

Horowitzes Entered OVDP

• • • In January 2010, the Horowitzes submitted a letter to the IRS disclosing the FOCO, UBS, and Finter Bank accounts and requesting that they be accepted into the Department of Treasury’s Offshore Voluntary Disclosure Program. This program provided potential protection from criminal prosecution and reduced penalties in exchange for cooperation.

    • After entering the program, the Horowitzes filed FBARs, as well as amended income tax returns, for 2003 through 2008. As part of that process, they reported additional income 8 of $215,126 and paid more than $100,000 in back taxes. In 2012, however, the Horowitzes opted out of the program.

    • *It is important to note that the Horowitzes submitted to OVDP in 2010, before the stand-alone streamlined procedures were implemented. At this time (2010) both willful and non-willful submitted to the same OVDP “program.”

Willfulness Penalties for FBAR

• • • In May 2014, the IRS sent letters to the Horowitzes proposing FBAR penalties for the unreported Swiss bank accounts that the Horowitzes had owned in 2007 and 2008. In the letters, the IRS proposed enhanced penalties based on its determination that the Horowitzes’ failure to file the required FBARs was willful.

    • The letters informed the Horowitzes that if they did not take any action by June 2, 2014, the IRS would proceed with assessing the penalties. When the Horowitzes did not respond by that date, the IRS assessed the proposed penalties on June 13, 2014.

Is Recklessness Sufficient for Willful FBAR Violations?

The Horowitzes contend they are not willful, but the Court disagrees, and provides the following:

• • • In their reply brief, the Horowitzes present what appears to be a new argument — that “[u]nder the FBAR statutory scheme, a willful violation cannot be established through mere recklessness.”

    • They acknowledge that we reached a contrary conclusion in our unpublished opinion in Williams. But they contend, in effect, that Williams overlooked the Supreme Court’s decision in Ratzlaf v. United States, 510 U.S. 135 (1994), where, in the context of a criminal prosecution under the Bank Secrecy Act, the Court held that establishing that the defendant committed a “willful violation” required proof that “the defendant acted with knowledge that his conduct was unlawful.” Id. at 137.

    • The Horowitzes argue that “willful” should be given the same meaning throughout the statute. 14 At the outset, it is far from clear that the Horowitzes sufficiently argued in their opening brief that recklessness is not sufficient to establish the willfulness of a civil FBAR violation to preserve the argument for consideration. See United States v. Al-Hamdi, 356 F.3d 564, 571 n.8 (4th Cir. 2004) (noting the “well settled rule that contentions not raised in the argument section of the opening brief are abandoned”).

    • But even if we construe their opening brief generously as having advanced a version of that argument, we conclude that it nonetheless fails on the merits.

    • Moreover, in the circumstances of Safeco, the Court gave “willfully” two distinct meanings within a single statute (the Fair Credit Reporting Act), reading “willfully” in a civil provision to reach reckless violations even though criminal enforcement provisions paired “willfully” with “knowingly.” 551 U.S. at 60 (citing 15 U.S.C. §§ 1681q, 1681r). The Court emphasized again that “in the criminal law ‘willfully’ typically narrows the otherwise sufficient intent . . . in contrast to its civil law usage”; “[t]he vocabulary of the 16 criminal side of [the Fair Credit Reporting Act] is consequently beside the point in construing the civil side.” Id.

Willfulness & Civil FBAR Violations in US v. Horowitz

• • • In the civil context, “recklessness” encompasses an objective standard — specifically, “[t]he civil law generally calls a person reckless who 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.” Farmer v. Brennan, 511 U.S. 825, 836 (1994); see also Safeco, 551 U.S. at 68 (same). I

    • In this respect, civil recklessness contrasts with criminal recklessness and willful blindness, as both of those concepts incorporate a subjective standard. See Farmer, 511 U.S. at 836–37 (recognizing that the criminal law  “generally permits a finding of recklessness only when a person disregards a risk of harm of which he is aware”); Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011) (explaining that willful blindness requires a subjective belief that “there is a high probability that a fact exists” and “deliberate actions to avoid learning of that fact”).

    • At the same time, civil recklessness requires proof of something more than mere negligence: “It is [the] high risk of harm, objectively assessed, that is the essence of recklessness at common law.” Safeco, 551 U.S. at 69. Thus, as the Third Circuit has held, when imposing a civil penalty for an FBAR violation, willfulness based on recklessness is established if 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.” Bedrosian, 912 F.3d at 153 (cleaned up).

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