United States v. Hughes

Background

The United States brought this civil action to enforce penalties against Timberly E. Hughes for failing to file reports of foreign financial accounts, commonly called FBARs. Hughes represented herself. The court held a bench trial by videoconference on June 8 and 9, 2021. The opinion decided whether Hughes’s failures were willful; it reserved any challenge to, and determination of, the penalty amounts for later briefing.

Hughes was the sole owner and director of Takamatua Valley Vineyards Limited, a company located in New Zealand, and the sole owner of Cuba Uncorked Limited, which operated a wine bar in New Zealand. She had a financial interest in and signature authority over their accounts at ANZ Bank New Zealand Limited. The combined value of the accounts exceeded $10,000 in each year at issue—2010, 2011, 2012, and 2013—and the parties agreed that Hughes was required to file an FBAR for each year.

Hughes did not timely file any of the required FBARs. After the Internal Revenue Service requested them, she filed delinquent reports for 2011, 2012, and 2013 on September 11, 2014, and a delinquent report for 2010 on February 1, 2015. Her 2010 and 2011 tax returns did not include Schedule B, which contains questions about foreign accounts. Her 2012 return included Schedule B, and she answered that she had a foreign account and was required to file an FBAR. Her 2013 return also stated that she had a foreign account, but she answered that she was not required to file an FBAR.

Legal standard

Under the Bank Secrecy Act, the United States had to prove by a preponderance of the evidence—meaning that the violation was more likely than not—that Hughes was a U.S. person, had an interest in or authority over foreign accounts worth at least $10,000 in total, and willfully failed to file the required FBARs. The parties did not dispute the first three requirements; the disputed issue was willfulness.

The court concluded that, for civil FBAR penalties, recklessness can establish willfulness. It described recklessness under the applicable standard as conduct involving an unjustifiably high risk of harm that was known or so obvious that it should have been known. The court also distinguished negligence, which was insufficient to establish a willful violation.

Court’s analysis

For 2012 and 2013, the court found that Hughes reviewed and completed Schedule B, saw the instructions concerning foreign accounts and FBARs, and nevertheless failed to read the referenced instructions or file the reports. The court found her explanations—that she believed paying New Zealand taxes created an exception, that checking the 2012 box satisfied her obligation, or that TurboTax would include the form—not credible or consistent with the way she prepared and printed her returns. Hughes acknowledged that she would have filed the FBARs if she had read the instructions.

The court found that Hughes used TurboTax’s “forms mode,” which required her to seek out the FBAR form rather than automatically adding it when she checked the foreign-account box. Because she printed and filed paper returns, the court found it not credible that she believed the FBAR had been included automatically. The court concluded that her failures to file for 2012 and 2013 were at least reckless and therefore willful.

The court reached a different conclusion for 2010 and 2011. Hughes did not attach Schedule B to either return, and the United States presented no evidence that she reviewed Schedule B or otherwise knew about the FBAR requirement before filing those returns. The court therefore found that the United States had not proved that her failures in those years were more than negligent.

Disposition

The court concluded that Hughes’s failures to file FBARs for 2012 and 2013 were willful under 31 U.S.C. § 5321(a)(5)(C)(i). It concluded that the United States had not met its burden to show that her failures for 2010 and 2011 were willful. The court did not determine the penalty amounts in this opinion. It ordered the parties to meet and confer about a briefing schedule and to file an agreed or separate proposed schedule by October 27, 2021.