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Part 3: Mr. FBAR’s Civil Penalty – 5321(a)(5): Schik – Willful Or Non-Willful And What Does Willful Even Mean?

This Is Post 3 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Introduction

The staring point is analyzing an FBAR violation is assess whether the violation was will or non-willful.

Part A – The question of willfulness is a question of fact that must be determined

Excerpts from the judgment – from MARY KAY VYSKOCIL, United States District Judge – include:

The expectation of the IRS was not borne out by courts around this country, which have uniformly held the Government to a preponderance standard in civil FBAR cases. See United States v. Demauro, 483 F.Supp.3d 68, 87 (D.N.H. 2020) (applying preponderance of the evidence standard to civil FBAR case); United States v. De Forrest, 463 F.Supp.3d 1150, 1156 (D. Nev. 2020) (same); United States v. Ott, 441 F.Supp.3d 521, 527 (E.D. Mich. 2020) (same); United States v. McBride, 908 F.Supp.2d 1186, 1201 (D. Utah 2012) (same); Bedrosian v. United States, 2017 WL 3887520, at *1 (E.D. Pa. Sept. 5, 2017) (same). Particularly instructive is a recent opinion from the United States District Court for the District of Connecticut. In United States v. Garrity, the court concluded that the standard generally applicable to civil suits for money damages-preponderance of the evidence-applied in civil FBAR penalty cases. 304 F.Supp.3d 267, 270-71 (D. Conn. 2018).

To be found liable for a willful violation under 31 U.S.C. § 5321(a)(5), the United States must prove by a preponderance of the evidence that: (1) Mr. Schik is a United States citizen, (2) Mr. Schik had an interest in, or authority over a foreign financial account; (3) the account had a balance exceeding $10,000.00 at some point during the reporting period; and (4) Mr. Schik willfully failed to disclose the account and file a FBAR. 31 U.S.C. §§ 5314, 5321(a)(5)(A); 31 C.F.R. §§ 1010.350(a) and (b). There is no dispute with respect to the first three elements. 56.1 ¶¶ 1, 5-6; see also Opp. at 9 (arguing only the willfulness prong). Mr. Schik also concedes that he did not timely file an FBAR for 2007. 56.1 ¶ 7.

At bottom, whether Mr. Schik’s conduct was “willful, ” rather than merely negligent, is a question of fact. United States v. Gormley t 201 F.3d 290, 294 (4th Cir. 2000) (state of mind is question of fact); Rykoff v. United States, 40 F.3d 305, 307 (9th Cir. 1994) (same); Chanel, Inc. v. Italian Activewear of Fla., Inc., 931 F.2d 1472, 1476 (11th Cir. 1991) (state of mind is question of fact to be determined by factfinder at trial); United States v. Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012). The Court cannot conclude that Mr. Schik’s failure to disclose his accounts was willful as a matter of law. The evidence, taken in the light most favorable to Mr. Schik, creates a genuine dispute of material fact. Accordingly, the Government is not entitled to judgment as a matter of law on the issue of willfulness.

https://casetext.com/case/united-states-v-schik

Part B – Willfulness is a question of fact. But, what is/are the facts that must be proven to establish willfulness in the civil FBAR penalty context?

The test for what constitutes a willful FBAR civil FBAR violation is an evolving and difficult area of the law. The key point is that the government can establish willfulness without proving actual knowledge of the requirement to file an FBAR. Some states of mind and levels of awareness (recklessness or willful blindness) can suffice. In some cases the failure to acknowledge the existence of foreign accounts on Schedule B of the 1040 can suffice. Evidence of attempts to conceal the existence of accounts (failure to disclose to tax preparer, etc.) is relevant. In others words, “willfulness” is usually established by a combination of factors.

I will expand on this post over time. That said, one of the best expositions on this issue is found in the November 2018 article: What constitutes a willful FBAR Penalty? – Hale E. Sheppard which concludes with:

Conclusion

As this article demonstrates, the concept of “willfulness” in the FBAR setting has been controversial for a long time, and
the scrapping is bound to increase in the coming years as the OVDP comes to an end, the IRS gets more foreign account
data thanks to FATCA, the IRS enhances its ability to cross-check account data on FBARs and Forms 8938, theIRS starts international audits to confirm compliance with the new“repatriation tax” and other aspects of the Tax Cuts and Jobs Act of
2017, etc. In other words, FBAR issues will become even more important in the future, not less. Therefore, taxpayers who
have unresolved foreign account matters, who are contemplating opting-out of the OVDP, who are analyzing their eligibility
for the SFOP or SDOP, or who have already been caught by the IRS, need to hire experienced international tax professionals
and examine all relevant issues, especially the evolving concept of “willfulness.”

The cases of Toth and Bitter suggest Mr. Sheppard’s prognostication is correct.

FBAR violation article JTAX Nov 2018

John Richardson – Follow me on Twitter @ExpatriationLaw

Part 2: Mr. FBAR’s Civil Penalty – 5321(a)(5): Interpreting The Penalty Provision – Asking The Right Questions

This Is Post 2 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Introduction – Distinguishing The Non-Willful Civil FBAR Penalty From Criminal Penalties

There have always been criminal penalties for FBAR violations. Civil penalties for FBAR WILLFUL violations were introduced as USC 31 5321(a)(5) in 1986. In 2004 USC 31 5321(a)(5) was amended to create a civil non-willful penalty. The current options for FBAR violations are:

– Criminal 31 USC 5322
– Civil willful 31 USC 5321(a)(5)
– Civil non-willful 31USC 5321(a)(5)

Each of these comes with its own permissible penalty range.

The purpose of this post is to explore ONLY the civil FBAR penalty regime in USC 31 5321(a)(5).

The text of the 53231(a)(5) …

(5)Foreign financial agency transaction violation.—

(A) Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—
(i)In general.—
Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.
(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I)such violation was due to reasonable cause, and
(II)the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i)the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(I)$100,000, or
(II)50 percent of the amount determined under subparagraph (D), and
(ii)subparagraph (B)(ii) shall not apply.

(D) Amount.—The amount determined under this subparagraph is—
(i)in the case of a violation involving a transaction, the amount of the transaction, or
(ii)in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

Analyzing the statute: What has to be proved, by whom and according to what standard?

It is generally agreed that in the context of the civil (as opposed to criminal) that the standard of proof is the civil standard of “preponderance of the evidence” and NOT the criminal standard described in Cheeks of “beyond a reasonable doubt”.

When considering the operation of 5321(a)(5) penalties (and assuming a person “who violates, or causes any violation of, any provision of section 5314” ), the order of analysis in the civil FBAR penalty context should ask the following questions:

1. Was the failure to file or report willful or non-willful? If willful reasonable cause is not a defence and massive penalties “may” be imposed. (Willfulness is a question of fact and the government bears the burden of proof on a preponderance of the evidence standard.)

(To be clear, if there is a finding of willfulness then a penalty of the greater of $100,000 or 50% of the account balance at the time of the violation “may” be imposed.)

2. If the failure to report was non-willful (maximum penalty of $10,000) can the account holder defeat the imposition of a penalty by proving on a preponderance of the evidence (note the account holder bears the burden of proof):

(A) Reasonable cause for the failure to file; and

(B) that the account was properly reported.

3. If the failure was non-willful but the penalty cannot be defeated through reasonable cause:

(A) how much should the penalty be (up to $10,000 adjusted for inflation); and

(B) can that penalty be imposed on each account or is the penalty restricted to a single FBAR penalty based on a failure to file a single form?

Note that the answer to the “non-willful” vs. “willful” question has a huge bearing on the amount of the penalty that “may” be imposed. The fate of the account holder may be effectively determined at this initial stage of the inquiry. I will explore this more in a subsequent post which discusses Ms. Toth’s meeting with Mr. FBAR.

Note also that these three questions require the analysis of a deceptively large number of legal and factual issues.

What is the FBAR law and where is it actually found?

The Law Of FBAR In Its Most Simple “Form” (pun intended)- A Three Headed Monster

The law of FBAR is composed of three components which are found in three distinct places:

1. The Federal Statue found in Title 31 USC – Sections 5314 and 5321

2. The Treasury Regulation mandated under 31 5314 which directs the Treasury Secretary to create the FBAR rules https://www.law.cornell.edu/cfr/text/31/1010.350

3. The FBAR form itself.

In summary the federal statute (USC 31 5314) directs Treasury to create the reporting rules in the form of a regulation. The Treasury regulation creates the rules (incorporating the instructions on the form). When there is a violation of the rules prescribed in the Treasury Regulation, the civil penalties are determined according to the statute (USC 31 5321). Criminal penalties may also be imposed under USC 31 5322. In other words, the law of FBAR is an unholy alliance of a statute, a regulation and the form where the actual reporting takes place. (This post will focus only on the USC 31 5321 civil FBAR penalty.)

John Richardson – Follow me on Twitter @Expatriationlaw

Raymond James: A Permanent Investing Solution For Cross Border Individuals

Raymond James Crossing Borders Wealth Management Solutions

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Mr. LJ Eiben is a Financial Advisor at Raymond James.

The information in this podcast was obtained from sources RJA and believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are not necessarily those of Raymond James (USA) Ltd. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.

Raymond James (USA) Ltd. is a member of FINRA / SIPC

_________________________________________________________________

Republicans Overseas Begins Its Support and Advocacy for Pure Residence-based Tax

This is an incredibly significant development. See the following posts on their Facebook site. They also have a new Twitter feed. Follow them at @RepOverseas.

Republicans Overseas position On What Pure Residence-based taxation means:

Tax Talk 1 – November 22, 2021

Tax Talk 2 – November 29, 2021

Tax Talk 3 – December 10, 2021

Tax Talk 4 – December 15, 2021

Tax Talk 5 – December 20, 2021

Tax Talk 6 – December 27 2021

Tax Talk 7 – January 3, 2022

Tax Talk 8 – January 21, 2022

Tax Talk – January 24, 2022

@AmChamCanada Presents: November 18/21: Work From Anywhere

Thursday November 18, 2021 – “Work From Anywhere” – registration link:

November Work From Anywhere Webinar Flyer

Further details:

On Thursday, November 18 from Noon-1:00PM, AmCham will be holding a webinar titled Work from Anywhere: Tax and Legal Considerations for Employers and Employees. This webinar, which was originally scheduled earlier this year and which follows from the successful webinar AmCham held addressing corporate tax issues, will analyze tax and legal matters that arise from the pandemic induced trend to have employees work from anywhere in the world.

This webinar will discuss pertinent topics in this area such as:

1. What are the recent trends regarding work from home arrangements in Canada and throughout the world?
2. What are some of the emerging issues associated with remote working arrangements? and
3. What are some of the practical steps businesses and executives may take to manage these risks?

The panel for this webinar features four knowledge leaders in the field of law and taxation.

They are:

* Michael Pereira, Partner, KPMG – Michael focuses on providing consulting and compliance services to high-net-worth individuals and senior executives with complex U.S. and Canadian tax issues. Michael specializes in intricate tax matters such as: 1) U.S. estate tax issues affecting U.S. citizens living in Canada and their U.S. citizen and/or U.S. resident children; 2) tax issues regarding foreign private equity structures, and 3) U.S. anti-deferral tax system for interests in foreign corporations, including the passive foreign investment corporation and controlled foreign corporation regimes. Michael is a Chartered Accountant and a Certified Public Accountant who earned a Masters of Science in U.S. Taxation from Wayne State University.

* Laura Tippett, Partner (Leader of Program Services – Regions East), KPMG – Laura has 15 years’ experience in Canadian and US personal tax and expatriate issues. Laura assists companies and their employees who are travelling cross-border, working with a variety of industries, including technology, defense, construction, consulting, energy, crown corporations and non-profit organizations. She works with employees who are on foreign assignment, travelling internationally on business, working remotely cross-border or relocating abroad. Laura has managed the Canadian/US expatriate programs for numerous multinational organizations, including overseeing several programs that have hundreds of Canadian-touching assignees annually.

* Kaley Dodds, Senior Manager, Employment & Labour Law, KPMG – Kaley’s is a management-side employment lawyer who represents private, public and institutional clients in a wide range of matters. Her practice covers employment, labour and human rights issues, ranging from litigation strategy, legal risk management, policy development, workplace training, to day-to-day employee relations and human resources advice. Kaley is called to the bar in Ontario and Alberta and has appeared before all levels of courts, arbitrators and human rights tribunals in both provinces.

* Ellen S. Kief, Principal and Managing Attorney at Kief Law – Ellen works with clients across Canada, the United States, and throughout the world addressing issues associated with U.S. immigration law. Ellen’s practice focuses on cross-border travel, business visas, investor visas, entertainment and sports, family visas, permanent residence and citizenship. Ellen is a national speaker and educator who has presented on numerous U.S. immigration topics including cross-border business travel, family immigration, inter-company transfers, and various types of immigrant and non-immigrant visas.

If you would like more information about this event, please see the flyer attached to this message. The flyer contains a link at the bottom where you may register to attend the event.

We hope you will be able to join us on November 18 for what should be a stimulating event. Thank you for your support of AmCham and its mission. Have a good day.

Registration link:

November Work From Anywhere Webinar Flyer

Yes, Naomi Osaka is Japanese. And American. And Haitian

Yes, Naomi Osaka is Japanese. And American. And Haitian

Netflix

Aoife Wilkinson, The University of Queensland

On Friday, Naomi Osaka lit the cauldron at the 2020 Tokyo Olympics opening ceremony. This honour sent an important message to the world: Osaka represents a diversifying Japan.

Yet, some still question whether she really is Japanese.
The question we should be asking instead is: who is Naomi Osaka, really?

Netflix’s new three-part documentary series attempts to answer this question. Director Garrett Bradley followed the tennis player over two years from her first grand slam win in 2018 to her third in 2020.

The documentary touches on her tennis career, her mental health and her call to change the format of post-match press conferences.

But it also gives viewers a closer look at Osaka finding her voice in the world as a young, mixed-race Japanese Haitian woman.

The difference between nationality and race

In the documentary, Osaka speaks about her decision to renounce her American nationality in 2019. Reflecting on the public’s response to her decision, she felt “people really don’t know the difference between nationality and race”.

She is right when she says there is a difference.

Nationality is a form of legal identification specifying our membership to a nation. Race refers to physical appearances, and is often described as a social construct: not determined by scientific fact, but rather by the social meaning collectively attributed to biological traits. To avoid uncomfortable conversations, some choose to use the word “ethnicity” instead of race, a term used to define groups based on invisible factors like language or customs.

Osaka holding a tennis racquet.
The documentary follows Osaka as she plays tennis, but also as she finds her way as a young woman.
Netflix

Despite the difference in their meanings, race, nationality and ethnicity are deeply interconnected in the ways we discuss identity.

Osaka was born in Japan in 1997 to her Japanese mother and Haitian father. She moved to the United States when she was three and grew up there as a Japanese-American dual national.

During the two years when the documentary was in production, Osaka celebrated her 22nd birthday. According to Japanese Nationality Law, dual Japanese nationals are required to renounce one of their nationalities before they turn 22.

For many, the decision to forfeit one nationality is tricky, uncomfortable and, where possible, avoided by dual nationals only showing their Japanese passport at Japanese airports.

In my research on mixed-race Japanese youth in Australia, participants told me their dual nationality opens up economic and personal opportunities for them to live or work in Japan without the restrictions of a visa.

But perhaps more importantly, the thought of forfeiting their nationality was a great concern for those who saw it as an intrinsic part of their identity.

In the documentary, Osaka says her decision to become a sole Japanese national was an obvious one. “I’ve been playing under the Japanese flag since I was 14”, she says. “It was never even a secret that I was gonna play for Japan for the Olympics.”

But while it was obvious, it wasn’t easy. Some people saw this renouncing of her American citizenship as a decision to forfeit her Black identity:

I don’t choose America and suddenly people are like, “your Black card is revoked”. And it’s like, African American isn’t the only Black, you know?

Despite choosing to become a sole Japanese national, Osaka is both Japanese and Haitian, and holds deep connections to America, Haiti and Japan. The film follows her as she plays for Japan, wears face masks to the US Open in support of the Black Lives Matter movement, and travels with her family to the Osaka Foundation — a school for Haitian children established by her parents.

Navigating identity and expectations

Osaka isn’t the only person facing interrogation into their identity.

Many people of mixed-race heritage often have a sense of “racial impostor syndrome”: the sense of doubt they feel when others question the authenticity of their mixed-race background.

It is common for young persons of Japanese background living outside of Japan to only be beginner to intermediate speakers of Japanese. Speaking about her self-confessed “broken” Japanese skills, Osaka worries she is “doing something wrong by not representing the half Black, half-Japanese kids well.”

But Osaka’s openness about these difficulties is exactly how the half Black, half Japanese kids need to be represented.




Read more:
When Naomi Osaka talks, we should listen. Athletes are not commodities, nor are they super human


It is important for us to challenge static ideas of race, ethnicity and nationality by sharing the voices of people of mixed backgrounds like Osaka.

Our identities are complex, and they change over time. There is more to being Japanese than fluently speaking the Japanese language, looking Japanese or holding a Japanese passport.

We shouldn’t forget who Naomi Osaka is. A strong tennis player, a passionate activist, and a mixed-race woman who represents contemporary Japan.The Conversation

Aoife Wilkinson, PhD candidate, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

It’s 11:00 pm – Do You Know What The @TheDemocrats Are Up To?

On May 14 – 16 the Democratic Party had its Global Annual Meeting. It’s interesting to see the resolutions proposed. (Those not dealt with will considered at a later meeting.)

Americans abroad who understand that the single most important issue facing them is US citizenship-based taxation, should be aware of resolution 18. Shockingly this resolution was proposed by FOUR MEMBERS OF DEMOCRATS ABROAD and includes (but is not limited to):

1. A strong endorsement of US citizenship-based taxation and the proposed US Wealth Tax

2. Some proposals to make US citizenship-based taxation, FATCA and FBAR work a little better

Notice in this excerpt they completely acknowledge that at best, their proposal is designed to create “de facto” residence-based taxation for some Americans abroad. To put it very simply:

Clearly (at least) some members of Democrats Abroad:

1. Do NOT want pure residence-based taxation; and

2. Are playing the same game of proposing some “carve outs” for some people, some of the time, under some circumstances.

(The retention of citizenship-based taxation allows them to keep changing the rules.)

It’s shocking that this proposal is coming from members of Democrats Abroad!

Here it is in all of its glory …

All 25 DPCA Resolutions submitted to the 2021 Global Meeting_Adopted, Withdrawn, or Deferred

Treasury 26 CFR § 301.7701-2 – Business entity definitions discriminate against Canadian Controlled Private Corporations

Synopsis:

Canadian corporations should NOT be deemed (under the Treasury entity classification regulations) to be “per se” corporations. The reality is that corporations play different roles in different tax and business cultures. Corporations in Canada have many uses and purposes, including operating as private pension plans for small business owners (including medical professionals).

Deeming Canadian corporations to be “per se” corporations means that they are always treated as “foreign corporations” for the purposes of US tax rules. This has resulted in their being treated as CFCs or as PFICs in circumstances which do not align with the purpose of the CFC and PFIC rules.

The 2017 965 Transition Tax confiscated the pensions of a large numbers of Canadian residents. The ongoing GILTI rules have made it very difficult for small business corporations to be used for their intended purposes in Canada.

Clearly Treasury deemed Canadian Controlled Private Corporations to be “per se” corporations without:

1. Understanding the use and role of these corporations in Canada; and

2. Assuming that ONLY US residents might be shareholders in Canadian corporations. As usual, the lives of US citizens living outside the United States were not considered.

These are the problems that inevitably arise under the US citizenship-based AKA extraterritorial tax regime, coupled with a lack of sensitivity to how these rules impact Americans abroad. The US citizenship-based AKA extraterritorial tax regime may be defined as:

The United States imposing worldwide taxation on the non-US source income of people who are tax residents of other countries and do not live in the United States!

It is imperative that the United States transition to a system of pure residence-based taxation!

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Introduction

The United States imposes a separate and more punitive tax system on US citizens living outside the United States than on US residents. There are numerous examples of this principle – a principle that is well understood (but not directly experienced) by tax preparers.

The US tax system operates through a combination of laws, Treasury Regulations, enforcement by the tax compliance community and IRS administration. There are many instances where the extraterritorial application of the US tax system results in absurdities, that are very damaging to those who try their best to comply with those laws.

Treasury regulations have an enormous impact on how the Internal Revenue Code applies to Americans abroad. In a previous paper coauthored with Dr. Alpert and Dr. Snyder, we described how Treasury could provide “A Simple Regulatory Fix For Citizenship Taxation“. Treasury regulations can be extremely helpful to Americans abroad or extremely damaging. It is therefore crucial that Treasury consider how its regulations would/could impact the lives of those Americans abroad attempting compliance with the US extraterritorial tax regime. In some cases it may be appropriate to have different regulations for resident Americans than for Americans abroad.

Treasury has demonstrated that it can be very helpful

Although this post will focus on difficulties, it’s important to note that Treasury has demonstrated that it can be very helpful to Americans abroad. It has interpreted the Internal Revenue Code in ways that have mitigated what could have been extreme damage. Here are two recent examples from the GILTI context where Treasury:

– interpreted the 962 Election to allow individuals to receive the 50% deduction in GILTI income inclusion that was allowed to corporations; and

– interpreted the Subpart F rules to mean that ALL income earned by a CFC should be entitled to the high tax exclusion

Clearly some of the news coming from Treasury has been good!

The power to regulate is the power to destroy

This post provides examples of how certain Treasury regulations contribute to the application of the United States extraterritorial tax regime. The examples are found in the following two categories of regulations:

Category A: Foreign Trusts – The Form 3520A Penalty Fundraiser – Regulations That Are Unclear Resulting In Penalties

Category B: Business Entities Designated as “per se” Corporations – Creating CFCs In Unreasonable Circumstances (Canadian Controlled Private Corporations) – Regulations That Are Clear But Over-inclusive

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Continue reading

Comments from Americans abroad about the effects of #FATCA and @CitizenshipTax

Those contributing to conversations on Social media about FATCA and US citizenship-based taxation would find the following to be of great value.

Those who are trying to provide education on this topic should use this book.

Those who are trying to learn about this topic should use this book.

Submission_SFC

Also, see the following video accounts here:

http://www.vimeo.com/citizenshiptaxation

John Richardson – Follow me on Twitter @Expatriationlaw