Expert Witness Barred from Testifying for Taxpayer in an FBAR Case
An expert witness was prevented from testifying in a case seeking to reduce a penalty the IRS assessed against a taxpayer for failing to timely file a Report of Foreign Bank and Financial Accounts (FBAR).
In the case heard in the U.S. District Court for the District of Connecticut, the IRS alleged that a taxpayer had willfully failed to report his interest in a foreign account that he held in 2005. The taxpayer wanted his expert witness to testify that the IRS shouldn’t and couldn’t determine without specific supporting evidence that he should have known of his foreign bank account reporting requirements. The taxpayer’s expert was a CPA with more than 25 years of experience whose practice focused on international tax planning and compliance for both individual and multinational taxpayers.
Specifically, the proposed testimony included opinions on:
· The state of published guidance and public awareness of the reporting requirements to provide an objective backdrop or perspective,
· How such guidance evolved in the years before and after the year in question and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers, and
· Whether an individual taxpayer could have been unaware of his foreign income and asset reporting requirements.
The court determined that the testimony wouldn’t help the jury to understand the evidence or to determine a fact in issue. The court also found that the evidence was irrelevant to the question of willfulness and would risk jury confusion and invade the province of the court.
The district court reasoned that whether the taxpayer should have known of the FBAR requirement wasn’t part of the IRS burden of proof because it didn’t reflect the standard applicable to this case. The key question for the jury was whether the taxpayer’s failure to file an FBAR for the 2005 calendar year was willful.
The expert witness didn’t plan to address the subjective standard at issue in the case. Instead, he planned to speak only about whether the taxpayer should have known of the reporting obligation, considering the IRS’s public education on the issue at the relevant time. Whether the taxpayer was negligent in his failure to file an FBAR wasn’t the issue in this case.
The key issue was what the taxpayer knew (or consciously chose to avoid learning), and there was no evidence that the taxpayer knew (or believed) that there was uncertainty about the IRS guidance on reporting foreign financial accounts or about whether such accounts had to be disclosed. In short, there was no evidence that the taxpayer’s state of mind was influenced by any lack of IRS guidance.
No connection to taxpayer
The court concluded that the evidence about any uncertainty or lack of clarity in the IRS guidance was irrelevant because it bore no connection to the taxpayer. It cited U.S. v. Ingredient Technology Corp., in which the U.S. Court of Appeals for the Second Circuit sided with prior cases on willfulness that consistently required factual evidence of the defendants’ state of mind to negate willfulness under any theory.
As the U.S. Court of Appeals for the Sixth Circuit held in Curtis v. U.S., willfulness was personal, and related to the defendant’s state of mind. Unless there was a connection between the external facts and the defendant’s state of mind, the evidence of the external facts wasn’t relevant.
The court in the current case found that — after discussing the issue with the taxpayer’s counsel at the pretrial conference — it remained unaware of any evidence suggesting a “factual link” between the taxpayer’s state of mind and IRS published guidance or enforcement policy concerning the reporting of foreign financial accounts.
Misleading and confusing
Further, the court found that whatever slight probative value the issue of public uncertainty had was substantially outweighed by the danger of confusing the issues and misleading the jury. The expert’s testimony could lead them to incorrectly conclude that willfulness depended on the degree to which the IRS enforced, publicized, or explained the reporting obligation or the degree to which others were aware of it.
In addition, to the extent that the expert witness planned to offer an opinion on the legal requirements of filing an FBAR, he would be attempting to explain the tax law. That, the court said, is generally within the purview of the court, not expert witnesses. Diverting from that standard would again only confuse the jury.