The Tax Crimes Handbook of the Office of Chief Counsel, Criminal Tax Division of the Internal Revenue Service defines “Willfulness ” as follows:

“[a] Willfulness is defined as the “voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 U.S. 192, 200-01 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973); United States v. Pensyl, 387 F.3d 456, 458-59 (6th Cir. 2004); United States v. George, 420 F.3d 991, 999 (9th Cir. 2005). 10

[b] Subjective Test. A defendant’s good faith belief that he is not violating the tax laws, no matter how objectively unreasonable that belief may be, is a defense in a tax prosecution. Cheek v. United States, 498 U.S. 192, 199-201 (1991). See also, United States v. Grunewald, 987 F.2d 531, 535-36 (8th Cir. 1993); United States v. Pensyl, 387 F.3d 456, 459 (6th Cir. 2004)”

Whether a taxpayer’s conduct is “willful” or not is particularly complicated when dealing with individuals who suffer from mental impairment . Recently, David Horton, acting deputy commissioner (international), IRS Large Business and International Division illustrated an approach to documenting a claim of “non-willfulness” . the approach suggest the use of medical records to establish the taxpayer’s cognitive impairment by way of third party circumstantial evidence.

According to the Alzheimer’s Association ” an estimated 5.3 million Americans of all ages have Alzheimer’s disease in 2015.” These are the diagnosed cases. Of those diagnosed cases the state of medical records will be somewhat imperfect, meaning that the defense of “non-willful” behavior might be difficult to sustain. This is particularly true when tax or foreign bank account reporting issues arise. The burden is on the taxpayer and his or her representative to establish the failure to file or failure to properly report income or foreign accounts was the result of mental impairment leading to the conclusion of non-willful action. This burden becomes exaggerated when the taxpayer is in a Conservatorship.

A Conservator is a fiduciary appointed by a state court judicial officer, who is charged with taking care of the health and well being and/or the financial affairs of an individual found no longer capable of doing so.

Often a psychiatric report and medical report are required to convnicne a court of the need for the appointment of a Conservator. The medical and psychiatric reports will usually focus on the immediate health and state of mind of the individual which is the issue before the court. But the immediate moment is not the issue for tax and foreign account reporting. The state of mind that is at issue is what ws the taxpayer’s intent when he or she signed thet return or failed to file. This act could be six-eight years earlier or more. Establishing the state of mind of a taxpayer years earlier when the tax rturn or Report of Foreign Financial Account (FBAR) was due or filed, is or could be critical to a decision about whether the individual qualifies for the Domestic Streamline Procedure or whether the Conservator should muse the formal Offshore Voluntary Disclosure Program (OVDP). The financial difference to the Conservatorship Estate is or can be quite substantial.

Under the Domestic Streamline Procedure rules the taxpayer must pay a penalty of five percent (5%) of the prior six years highest foreign account balance and file three years of amended returns. Under the OVDP the taxpayer must pay a penalty of either 27.5% or 50% of the highest foreign account balances for the preceding eight years along with amended returns for the same period. The taxpayer must also pay a 20% accuracy related penalty on the unpaid tax. The 50% penalty applies if the taxpayer’s account was at a financial institution listed by the Department of Justice under the Swiss Bank Program.

It is therefore very important for a Conservator to obtain the most comprehensive medical report possible to document the taxpayer’s state of mind at the earliest possible date, not just the current moment. A skilled forensic psychiatrist should be able to help in this regard.

It is noteworthy to reiterate that a non-willful defense based upon mental impairment is a complex defense to build and can be expensive in terms of professional fees. But in the proper circumstances the time and effort are justified if measured by potential savings to the Conservatorship estate.

We at MillarLaw, a P.C., have significant experience representing professional Conservators and guiding them through tax and foreign account compliance issues.