A taxpayer’s decision to voluntarily withdraw from the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) program and instead argue a reasonable cause defense for the failure to file Foreign Bank Account Reporting forms did not end well.  In the case of United States v. Ott, US DC SD Michigan, Case No. 2:18-cv-12174 the taxpayer ended up with almost $1 million in penalties when the Court determined that he had acted willfully in failing to file annual FBAR reports on his Canadian accounts.

The Court describes the history of his Canadian accounts as follows:

In 1993, Defendant opened two brokerage accounts with McDermid St. Lawrence Ltd. (“McDermid”), a Canadian financial institution, and deposited $50,000 into those accounts.

In 1994, Ott’s Canadian financial advisor, Donna Balaski (“Balaski”), moved brokerage firms from McDermid to Thomson Kernaghan & Co. Ltd. (“Thomson”), a Canadian financial institution. Following his broker, Ott closed his accounts with McDermid and transferred the contents of those accounts into the Thomson accounts.

Between 1993 and 1998, Defendant made additional deposits into the foreign accounts. The additional deposits totaled $71,478.

Balaski moved her employment again to Desjardins Securities (“Desjardins”), a Canadian financial institution. On May 2, 2002, Defendant subsequently transferred the contents of his accounts with Thomson to Desjardins, following Balaski.

On or about July 3, 2003, Ott opened two bank accounts with TD Canada Trust, a Canadian financial institution.

On July 1, 2006, Ott opened two financial accounts with Octagon Capital Corporation (“Octagon”) in Toronto, Ontario, with account numbers ending in 589-E and 589-F (the “Canadian Accounts”), and transferred the contents of the accounts with Desjardins to the Octagon accounts.

Ott has a sister with a Canadian home address. Soon after the Octagon accounts were opened, Ott listed his sister’s home address for receipt of mailings and correspondence from the Octagon firm. At all relevant times, the address associated with the Canadian Accounts was Ott’s sister’s Canadian address.

Octagon sent mail to the address listed on Ott’s account, his sister’s Canadian address, which included information regarding potential income tax obligations with respect to the Octagon accounts.

With rare exception, Ott’s sister did not transmit mailings from the Octagon firm to Ott.

Ott had regular contact with his securities broker at Octagon throughout the years 2007 to 2009.

During the 2007, 2008, and 2009 calendar years, the balance of the Canadian Accounts exceeded $10,000.

The highest aggregate balance of the Canadian Accounts in 2007 was $1,903,477. The highest aggregate balance of the Canadian Accounts in 2008 was at least $770,000. The highest aggregate balance of the Canadian Accounts in 2009 was $1,766,129.

Mr. Ott had a CPA prepare his returns for the years before the Court.  The CPA did not inquire regarding whether Mr. Ott had bank accounts outside the United States.  While the CPA did not actually make an entry in his tax software regarding whether Mr. Ott did or did not have a foreign bank account, his software defaulted to checking the boxes “No” on Schedule B.

In 2010 Mr. Ott transferred his accounts to a different Canadian banking institution. When he transferred and liquidated the accounts, he disclosed them to his CPA.  The CPA referred him to a tax attorney. 

Initially, the attorney recommended that Mr. Ott enter the OVDI program and voluntarily disclose his accounts.  In doing so he provided the IRS with

• Copies of his original and amended individual income tax returns;

• Statements for his Canadian accounts; and

• Copies of his FBAR reports he was filing late.

Mr. Ott also voluntarily paid the tax due on income that had not been previously reported.

After he entered the program, the IRS offered participants the option to voluntarily withdraw from the program if they believed the penalties they would face for their failures would be less than that under the OVDI program Mr. Ott had entered.  That would generally be true if Mr. Ott could show that his failures to file were not willful.  His attorney counseled to withdraw and instead submit evidence to show he had not willfully failed to file.  Mr. Ott followed his counsel’s advice and withdrew from the program. He submitted the required statement of reasonable cause defenses to the FBAR penalties to the government.

The IRS audited Mr. Ott’s returns for the years in question and they did not accept his reasonable cause defenses, asserting willful failure to file penalties.

The IRS position was that Mr. Ott was constructively aware of his FBAR reporting obligations by signing the return with the Schedule B questions referring to FBAR as part of the form.  As well, his use of his sister’s address represented evidence of an attempt to conceal the accounts.  And the balances in the account meant the income from these accounts were a huge proportion of Mr. Ott’s income for the years in question, showing a reckless disregard for his reporting responsibilities.

The District Court sided with the IRS.  First, the Court found that failing to read the return was not a valid reason for not filing the FBAR form, noting:

Here, the Defendant stated in both his deposition and trial testimony that he did not review the substance of his tax returns beyond “the bottom line,” meaning “what [he] owed or received back” for each year in question. ECF No. 45, PageID.550-555. Ott further testified that no interest, dividends, or capital gains from the foreign Canadian accounts were reflected in his tax returns during this time. Id. at PageID.554-555. In Mohney, the Sixth Circuit upheld the defendant’s conviction for willfully filing false returns, affirming that a taxpayer’s “signature is prima facie evidence that the signer knows the contents of the return.” 949 F. 2d at 1407 (finding that “knowledge may be inferred from the signature along with the surrounding facts and circumstances. . .”).

A sister district court undertook a thorough analysis of the constructive knowledge doctrine, agreeing with the Sixth Circuit and refusing “to excuse [the defendant’s] liability and knowledge of a plainly evident duty because he failed to read what he was signing.” McBride, 908 F. Supp. 2d at 1207 (D. Utah 2012). Given that McBride was not shielded from liability for failure to read the content of his tax returns, Ott should not be able to claim protection here under that same argument. Ott signed a return each year, under penalty of perjury — regardless of whether he actually read the return — certifying that he did not have an interest in foreign accounts. Accordingly, constructive knowledge of the requirement to file the FBAR is imputed to Ott, supporting a finding of willfulness here. See id. at 1208.

He also could not rely on the fact that his accountant hadn’t asked him about foreign accounts—it’s not reasonable to think it never occurred to him that it might be relevant.  At best, he was attempting to remain willfully ignorant of any reporting responsibilities:

The Defendant’s failure to discuss his foreign investments with his long-time accountant Weide, for example, indicates “a conscious effort to avoid learning about reporting requirements.” Id. at 529 (citing U.S. v. Williams, 489 Fed. Appx. 655, 658 (4th Cir. 2012)). Ott’s lack of experience in tax accounting suggests that he knew, or should have known, that relying solely on advice he received as a young adult, without consulting his accountant, was reckless conduct in disregard of potential reporting requirements. At the very least, Ott’s failure to disclose hundreds of thousands of dollars in a foreign Canadian account to his tax preparer demonstrates that he should have known there was a risk of noncompliance, and yet he failed to take any investigative or corrective action. McBride, 908 F. Supp. 2d at 1209. Therefore, Ott’s claim that he relied on his own beliefs as to his legal reporting obligations, without verifying those beliefs with his long-time tax preparer, supports a finding of recklessness here.

The Court also found the use of his sister’s address was an act of concealment of the account, further evidence of willfulness:

Here, instead of receiving the mail associated with his foreign accounts at his Michigan address, Ott provided the bank with his sister’s Canadian address. During the 2011 Offshore Voluntary Disclosure Program process, Ott stated under penalty of perjury that: “. . . I opened a bank account at TD Canada Trust . . . I used my name and address but also used my sister’s address in Toronto for ease of mailing statements.” Gov’t Trial Ex. 3, Page 5. During his trial testimony, however, Ott stated that he had no part in the address change and his broker, by herself, changed the mailing address to Ott’s sister’s address in Canada. ECF No. 44, PageID.439.

Considering the eight-year difference between Ott’s conflicting statements as well as the arguments during trial, the Court finds it improbable and lacking in credibility that the Defendant took no part in changing his mailing address to a foreign Canadian address. Using an address that matched the country of the foreign bank accounts suggests that Ott sought to avoid the detection of his account ownership. Further, sending everything to his sister allowed Ott to avoid seeing any statements concerning reporting responsibilities, including the language: “These transactions are to be reported on your annual return of income.” ECF No. 44, PageID.459. This failure to review any of the mail sent to his sister from the brokerages constitutes an act of concealment and “conduct marked by careless disregard whether or not one has the right so to act,” therefore meeting the civil recklessness standard. Safeco Ins., 551 U.S. at 57.

The opinion also noted that he spoke with the broker frequently about the account, making clear he was very aware of the accounts’ existence—this was not a “little account” that he simply failed to recall.  And that’s because it was clearly not insignificant.  The opinion notes:

…Ott consistently monitored his foreign account balances online during the years in question. He testified that he looked at the account statements online “maybe monthly” so that he “could see the value of my account.” ECF No. 44, PageID.458, 460. In other words, Ott had online access to monitor his accounts with balances at or exceeding a million dollars at their highest aggregate points. This is in stark contrast to the income amounts Ott provided on his tax returns, which ranged between twenty and forty thousand dollars for the years in question. See Gov’t Trial Ex. 13-15. The amounts on Ott’s tax returns are significantly disproportionate to the foreign accounts’ million-dollar balances. Further, bank records and Ott’s answers to the Government’s interrogatories indicate that in-person cash withdrawals and numerous checks were written on the Canadian accounts. See Gov’t Ex. 28, Page 1, Gov’t Ex. 44, Page 5. These amounts totaled thousands of dollars in withdrawals and checks. Id. At trial, the Defendant was largely unable to remember when those withdrawals occurred or what the money was spent on. ECF No. 44, PageID.515. This Court agrees with the Government that it is neither credible nor believable that Ott, who claimed an income level near the poverty line, would be unable to recall taking out thousands of dollars from his Canadian accounts.

The opinion concludes by noting “[t]he Government has met its burden by a preponderance of the evidence that Ott acted recklessly and with willful blindness by failing to report his foreign accounts.”