District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

 In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.

Tax Procedure Book Errata - Base to Which the Failure to File and Fraudulent Failure to File Penalty Rates Apply (9/1/16)

I did not state the penalty base for the failure to file penalty which comes in two flavors -- the fraudulent failure to file penalty and the general failure to file penalty.  See § 6651(a)(1) and (f).  (Actually, it is buried in the discussion of the fraudulent failure to file penalty, but being buried is not good enough.)  The respective failure to file penalty rates are 15% per month up to 75% for fraudulent failure to file and 5% per month up to 25% for the general nonfraudulent failure to file.  The base to which the respective rates apply is the same -- the tax due "reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return."  § 6651(b)(1).

The penalty base is important and needs to be stated explicitly.  I have made that addition as follows:

In the Student edition p. 233 and the Practitioner edition p. 331, I have added the following sentence immediately after the first sentence in the section under D. Fraudulent Failure to File Return - § 6651(f).:

The base to which the 15% per month fraudulent failure to file penalty rate applies is the same base as the general failure to file 5% per month penalty – the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
  fn § 6651(b)(1).

In the Student edition p. 248 and the Practitioner edition p. 352, I have added the following sentence immediately after the fourth sentence in the section under F.1. Most Returns with Tax Due:

The base to which the 5% per month penalty rate applies is the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
   fn § 6651(b)(1).

Remember that the indicated footnotes are not contained in the Student edition.

Civil Tax Fraud - IRS Burden of Proof and Negative Inference from Fifth Amendment Silence (8/2/12)

In the Tax Procedure class, we study fraud with respect to tax obligations.  Fraud has criminal and civil components.  Although we cover briefly the criminal components, I cover those in detail in a separate class, titled Tax Fraud and Money Laundering which will be taught next in the Spring of 2013 (see web page here).  In this Tax Procedure class we focus more on the civil components.

There are two key civil fraud penalties in the Code.  The one principally encountered in practice is Section 6663, here.  That section imposes a civil fraud penalty of 75% of the portion of an underpayment required to be shown on a return if "attributable to fraud."  The other key civil fraud penalty is Section 6651(f), here, which triples the failure to file penalty, to a maximum of 75%, if the failure to file is "fraudulent."  Each of these is viewed as a civil counterpart of the tax evasion crime under Section 7201 which can apply to a fraudulent return and a fraudulent failure to file.

Tax Procedure students might want to review an example of how the Government proves civil fraud that I discuss in a recent Federal Tax Crimes Blog entry, titled Tax Court Finds Fraud Based, in Part, On Negative Inference from Fifth Amendment Assertion (7/31/12), here.  The key points relevant to Tax Procedure that I discuss in that blog entry are:  (1) general rules of civil tax fraud cases, including certain "badges of fraud" permitting an inference of fraud for purposes of meeting the requirement that the IRS prove fraud by clear and convincing evidence and (2) the role of a negative inference when the taxpayer asserts the Fifth Amendment in a civil proceeding.