Source: https://www.castroandco.com/blog/2015/january/the-willfulness-element-in-the-irss-offshore-vol/
Timestamp: 2019-04-25 08:25:58+00:00

Document:
What constitutes “willful” in determining the meaning of the term “non-willful” as used by the Internal Revenue Service in the Offshore Voluntary Disclosure Program and the Streamlined Offshore Filing Compliance Procedures?
The IRS recently published its own definition of non-willful conduct to mean “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”  This definition is identical to the standard applied under Internal Revenue Code section 7203.
As previously mentioned, the definition and meaning of willfulness are the same in both the civil and criminal context.  However, the burden of proof and evidentiary standards differ. In the civil context, the government must prove willfulness by “clear and convincing evidence.”  In the criminal context, however, the standard is, of course, “beyond a reasonable doubt.”  While a set of facts and circumstantial evidence may not be enough to prove willfulness “beyond a reasonable doubt” in a criminal case, it may be enough to prove willfulness with “clear and convincing” evidence in a civil case.
Therefore, because the government can more easily prove willfulness in the civil context, the only way to certify non-willfulness is for the taxpayer to be certain that the facts do not support of finding of willfulness by “clear and convincing evidence.” Generally, because IRS Forms 14653 and 14654 require the taxpayer, individually, to certify non-willfulness for purposes of the Streamlined Filing Compliance Procedures, practitioners will have limited liability exposure.
There must be a deliberate intent to disobey the filing requirement.  This may possibly be inferred by supporting circumstantial evidence as discussed below.
Under the first method, although the government can prove actual knowledge by simply showing that the taxpayer signed his or her income tax return, the government must still provide specific intent to disregard the filing obligation.  Nevertheless, where the government can establish specific intent by direct or circumstantial evidence, knowledge is implied. In other words, specific intent infers knowledge, which together establishes willfulness, but knowledge alone does not establish specific intent. Therefore, practically speaking, “knowledge” is a superfluous element; specific intent is the only true element of willfulness.
In Cheek v. U.S.,  the U.S. Supreme Court held that taxpayer’s belief about what the law requires, regardless of how unreasonable it appears to be, is a question of fact for the jury.  In that case, the defendant, John L. Cheek, claimed that, based on his reading of the law, it was his understanding that he was not a “person” required to file a return because wages were not “income.” The lower district court refused to instruct the jury on this defense. The U.S. Supreme Court held that it was an error to not instruct the jury on Cheek’s defense of a good-faith misunderstanding the law. Evidence that the taxpayer researched the question, attended seminars, consulted experts, inquired of the IRS, or even talked with neighbors is helpful in establishing not only that he believed it but that his belief was not a recent, convenient invention.
Essentially then, the court in Cheek stated that the requirement of willfulness is an exception to the general rule that ignorance is not an exception to criminal liability, and distinguished between two types of persons: one who, in good faith, is ignorant of a duty or misunderstands it and one who recklessly avoided knowledge of a legal duty. Although the court held that willfulness cannot attach to the former type of person, it can attach to the latter. The term “reckless” is a highly technical legal term and should not be confused the ordinary meaning of the term. Black’s Law Dictionary defines recklessness as “[c]onduct whereby the actor does not desire [an unlawful outcome] but nonetheless foresees the possibility and consciously takes the risk.” Therefore, reckless disregard of the possibility of a filing obligation despite circumstances that would have apprised an ordinary, prudent person is sufficient to establish deliberate ignorance to evidence willfulness, which is not prohibited by the decision in Cheek.  In essence, this case created what is now known as the doctrine of willful blindness.
Therefore, willfulness can “be inferred from a conscious effort to avoid learning about reporting requirements” or where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability.”  Nevertheless, the government must still prove that, at some point, the taxpayer was made aware of the possibility of compliance issues.
It should be noted that the U.S. Court of Appeals for the Eighth Circuit  has held that willfulness “cannot fairly be equated with carelessness or recklessness.”  This is not, however, the general rule; it only represents a possible exception for taxpayers in that circuit.
A taxpayer is not excused from the offense of willfully failing to file a return because he had not previously been prompted or notified of his duty to file a return,  because he disagreed with the law,  or because he held the legal opinion that the statute  or Federal Reserve System  was unconstitutional. However, a taxpayer’s good faith belief that he need not file his tax return,  no matter how unreasonable the belief,  or a good faith misunderstanding or an inadvertence on his part,  constitutes justification for failure to file a return.
As a general rule, a taxpayer can establish non-willfulness by asserting that, based on a good-faith personal diligent reading of the law, there was a bona fide misunderstanding of the filing requirements and that the taxpayer genuinely believed he or she was not required to file the forms at issue.
It should be noted, however, that a good faith misunderstanding of the law does not constitute reasonable cause for the purpose of avoiding penalties under the Delinquent International Informational Return Procedures or Delinquent FBAR Filing Procedures.
 See U.S. v. Poschwatta, 829 F.2d 1477 (9th Cir. 1987); U.S. v. Green, 757 F.2d 116 (7th Cir. 1985).
 See U.S. v. Sempos, 772 F.2d 1 (1st Cir. 1985).
 See U.S. v. Bergman, 813 F.2d 1027 (9th Cir. 1987).
 See U.S. v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985).
 See Bradford v. C.I.R., 796 F.2d 303 (9th Cir. 1986); Stone v. C.I.R., 56 T.C. 213 (1971).
 See Spies v. U.S., 317 U.S. 492 (1943); U.S. v. McCabe, 416 F.2d 957 (7th Cir. 1969); U.S. v. Bell, 734 F.2d 1315 (8th Cir. 1984); Edwards v. U.S., 375 F.2d 862 (9th Cir. 1967); U.S. v. Sullivan, 369 F. Supp. 568 (D. Mont. 1974).
 See Ratzlaf v. U.S., 510 U.S. 135 (1994). In Ratzlaf, the Court determined that the language of section 5324 on its own was not clear as to the requisite level of knowledge required to violate the statute and consulted section 5322(a) for additional guidance. Based on that section, the Court required that the government demonstrate proof of knowledge of illegality before a defendant could be convicted. However, since Ratzlaf, Congress amended section 5324 to provide “its own criminal penalty provision so reliance on § 5322 is no longer necessary.” See U.S. v. Vazquez, 53 F.3d 1216, n.2 (11th Cir. 1995). Thus, the only mental state apparently required under the new penalty provision is a purpose to evade the filing requirement.
 See U.S. v. Buckley, 586 F.2d 498 (5th Cir. 1978); Poschwatta, 829 F.2d at 1477; U.S. v. Crowhurst, 629 F.2d 1297 (9th Cir. 1980); U.S. v. Brown, 600 F.2d 248 (10th Cir. 1979); U.S. v. Goetz, 746 F.2d 705 (11th Cir. 1984) (Secretary of Treasury’s execution of return on behalf of taxpayer as provided under statute did not relieve taxpayer of obligation to file return); U.S. v. Grabinski, 558 F. Supp. 1324 (D. Minn. 1983), aff’d, 727 F.2d 681 (8th Cir. 1984); U.S. v. Birkenstock, 823 F.2d 1026 (7th Cir. 1987) (Employer’s filing of its copy of employee’s W-2 form with government did not serve as substitute for employee’s income tax return, for purpose of relieving employee of liability for failure to file income tax return).
 See Sempos, 772 F.2d at 1; U.S. v. Verkuilen, 690 F.2d 648 (7th Cir. 1982); U.S. v. Moore, 627 F.2d 830 (7th Cir. 1980); U.S. v. Farber, 630 F.2d 569 (8th Cir. 1980); Poschwatta, 829 F.2d at 1477; Grabinski, 727 F.2d at 681.
 See U.S. v. Vitiello, 363 F.2d 240 (3d Cir. 1966); Birkenstock, 823 F.2d at 1026; U.S. v. Thompson, 230 F. Supp. 530 (D. Conn. 1964), aff’d, 338 F.2d 997 (2d Cir. 1964); U.S. v. Klein, 438 F. Supp. 485 (S.D.N.Y. 1977).
 See U.S. v. Merritt, 639 F.2d 254 (5th Cir. 1981); U.S. v. Rosenfield, 469 F.2d 598 (3d Cir. 1972). The U.S. Court of Appeals for the Ninth Circuit has held that the term willfully means “voluntary, or purposeful, deliberate, and intentional as distinguished from accidental, inadvertent, or negligent. Mere negligence, even gross negligence, is not sufficient to constitute willfulness.” See U.S. v. Hawk, 497 F.2d 365 (9th Cir. 1974).
 See Cheek v. U.S., 498 U.S. 192 (1991); Sempos, 772 F.2d at 1; U.S. v. Shivers, 788 F.2d 1046 (5th Cir. 1986); U.S. v. Burton, 737 F.2d 439 (5th Cir. 1984); Birkenstock, 823 F.2d at 1026; U.S. v. Callery, 774 F.2d 1456 (9th Cir. 1985); U.S. v. Ferguson, 615 F. Supp. 8 (S.D. Ind. 1985), aff’d, 793 F.2d 828 (7th Cir. 1986); U.S. v. Marks, 534 F. Supp. 663 (W.D. Mo. 1982); U.S. v. Powell, 955 F.2d 1206 (9th Cir. 1991).
 See U.S. v. Edelson, 604 F.2d 232 (3d Cir. 1979). Good motive is irrelevant if taxpayer knows of duty to file income tax returns and deliberately fails to file. U.S. v. Quimby, 636 F.2d 86 (5th Cir. 1981); U.S. v. Weninger, 624 F.2d 163 (10th Cir. 1980). Offenses of willful failure to file income tax returns occurred when taxpayer willfully failed to pay taxes at time or times required by law, despite taxpayer’s contention that offenses did not occur until his commodity futures trading company was closed because he expected, up until that time, to pay back his investors and did not consider any investor funds to be taxable income. See U.S. v. Morrison, 938 F.2d 168 (10th Cir. 1991).
 See U.S. v. Bishop, 412 U.S. 346 (1973) (citing U.S. v. Murdock, 290 U.S. 389 (1933)).
 See U.S. v. Pomponio, 429 U.S. 10 (1976).
 See U.S. v. Sato, 814 F.2d 449 (7th Cir. 1987).
 See Quimby, 636 F.2d at 86.
 See Weninger, 624 F.2d at 163.
 See Bradford, 796 F.2d at 303; also see CCA 200603026.
 See Stone, 56 T.C. at 213.
 See Birkenstock, 823 F.2d at 1026.
 See U.S. v. Jerde, 841 F.2d 818 (8th Cir. 1988).
 See U.S. v. Aitken, 755 F.2d 188 (1st Cir. 1985).
 See U.S. v. Phillips, 775 F.2d 262 (10th Cir. 1985).
 See U.S. v. Lachmann, 469 F.2d 1043 (1st Cir. 1972).
 See U.S. v. Santiago, 83 F.3d 20, 23 (1st Cir. 1996).
 CCA 200603026 (Jan. 20, 2006).
 See U.S. v. Boulerice, 325 F.3d 75, 80 (1st Cir. 2003).
 See Spies, 317 U.S. at 492.
 See U.S. v. Stierhoff, 549 F.3d 19, 26 (1st Cir. 2008) (citing U.S. v. Daniel, 956 F.2d 540, 543 (6th Cir.1992)).
 See U.S. v. Threadgill, 3:11-CR-86 (E.D. Tenn. Apr. 29, 2013) aff’d, 13-5897, (6th Cir. July 11, 2014).
 See U.S. v. Conley, 826 F.2d 551, 557 (7th Cir. 1987); U.S. v. Tipton, 56 F.3d 1009, 1013-14 (9th Cir. 1995).
 See Treas. Reg. § 301.7609-2(b)(3).
 See U.S. v. Bohrer, 807 F.2d 159, 162 (10th Cir. 1986).
 See Thompson, 338 F.2d at 997.
 See Cheek, 498 U.S. at 192.
 See Vitiello, 363 F.2d at 240; Birkenstock, 823 F.2d at 1026; Thompson, 338 F.2d at 997; Klein, 438 F. Supp. at 485.
 See U.S. v. Mohney, 949 F.2d 1397, 1407 (6th Cir.1991) (“A taxpayer’s signature on a return… is prima facie evidence that the signer knows the contents of the return.”); U.S. v. Harper, 458 F.2d 891, 894 (7th Cir.1971); U.S. v. Drape, 668 F.2d 22, 26 (1st Cir.1982) (holding that a defendant’s signature is sufficient to establish knowledge).
 See 498 U.S. at 192.
 See Cheek, 498 U.S. at 203.
 See U.S. v. Stadtmauer, No. 09-1575 (3d Cir. 2010); U.S. v. Anthony, 545 F.3d 60 (1st Cir. 2008); U.S. v. Dean, 487 F.3d 840 (11th Cir. 2007); U.S. v. Bussey, 942 F.2d 1241 (8th Cir. 1991).
 See U.S. v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012).
 The Eighth Circuit covers the states of Arkansas, Iowa, Minnesota, Missouri, North Dakota, Nebraska, and South Dakota.
 See U.S. v. Bengimina, 499 F.2d 117 (8th Cir. 1974).
 See U.S. v. Commerford, 64 F.2d 28 (2d Cir. 1933); U.S. v. Bressler, 772 F.2d 287 (7th Cir. 1985).
 See U.S. v. McMullen, 755 F.2d 65 (6th Cir. 1984); Moore, 627 F.2d at 830; U.S. v. Gleason, 726 F.2d 385 (8th Cir. 1984); U.S. v. Romero, 640 F.2d 1014 (9th Cir. 1981); U.S. v. House, 617 F. Supp. 232 (W.D. Mich. 1985), aff’d, 787 F.2d 593 (6th Cir. 1986).
 See U.S. v. Kraeger, 711 F.2d 6 (2d Cir. 1983); Bressler, 772 F.2d at 287; Moore, 627 F.2d at 830; U.S. v. Hairston, 819 F.2d 971 (10th Cir. 1987); U.S. v. Erickson, 676 F.2d 408 (10th Cir. 1982); House, 787 F.2d at 593.
 See U.S. v. Jones, 628 F.2d 402 (5th Cir. 1980).
 See U.S. v. Pry, 625 F.2d 689 (5th Cir. 1980); U.S. v. Pinner, 561 F.2d 1203 (5th Cir. 1977); U.S. v. Mann, 884 F.2d 532 (10th Cir. 1989).
 See Powell, 955 F.2d at 1206.
 See Burton, 737 F.2d at 439; U.S. v. Wilson, 550 F.2d 259 (5th Cir. 1977); Green, 757 F.2d at 116; Callery, 774 F.2d at 1456; U.S. v. Buras, 633 F.2d 1356 (9th Cir. 1980); Hairston, 819 F.2d at 971.
 See Cheek, 498 U.S. at 192; U.S. v. Mueller, 778 F.2d 539 (9th Cir. 1985).
 See Crowhurst, 629 F.2d at 1297.
 See Hairston, 819 F.2d at 971.
 See Buras, 633 F.2d at 1356.
 See Kraeger, 711 F.2d at 6; Romero, 640 F.2d at 1014; Moore, 627 F.2d at 830.
 See Gleason, 726 F.2d at 385.
 See U.S. v. Kahl, 583 F.2d 1351 (5th Cir. 1978).
 See U.S. v. Massey, 419 F.3d 1008 (9th Cir. 2005).
 See Cheek, 498 U.S. at 192; Aitken, 755 F.2d at 188; U.S. v. Wells, 790 F.2d 73 (10th Cir. 1986); U.S. v. Edgington, 727 F. Supp. 1083 (E.D. Tex. 1989), aff’d, 897 F.2d 527 (5th Cir. 1990).
 See Mann, 884 F.2d at 532.
 See Pinner, 561 F.2d at 1203.
 See Edgington, 897 F.2d at 527.
 See U.S. v. McCorkle, 511 F.2d 482 (7th Cir. 1975); U.S. v. Murdock, 290 U.S. 389 (1933).
 See U.S. v. Collins, 457 F.2d 781 (6th Cir. 1972).

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