by Brian Mahany
The IRS received an important victory last week from a federal appeals court in Virginia. The 4th Circuit Court of Appeals redefined the standards for imposing harsh penalties against taxpayers who fail to report offshore bank or brokerage accounts.
U.S. taxpayers with foreign bank accounts must report their offshore holdings annually on a Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR. Failure to file FBARs can trigger criminal prosecution and massive monetary penalties. The penalty for a willful violation is the greater of $100,000 or 50% of the high balance for each year an account is unreported. If the IRS believes the FBAR violation was not willful, the penalty is $10,000 per year (and sometimes just a warning letter.)
Obviously much of that determination turns on the IRS’ definition of “willful.”
We believe that most violations are not willful. For example, many dual nationals and foreign born Americans simply do not understand the need to report foreign accounts. Often they believe that they are simply sending money “home.” Although opening a foreign account is completely legal, not telling Uncle Sam is the problem.
Most CPAs and tax attorneys believe that the failure to read the fine print on tax returns and the tax form instructions does not give rise to willfulness. There is a far cry from the wealthy American businessman that deliberately hides money in a Swiss account or a money launderer hiding the proceeds from drug sales in the Cayman Islands versus a hard working doctor who sends home after tax money to her family in India.
The IRS takes the position that checking the “NO” box on Schedule B to the question that asks if you have a foreign bank account is evidence of willfulness. They believe that not reading all the fine print shows willfulness too.
In the case of U.S. v. Bryan Williams, a trial judge in Alexandria, Virginia ruled that Williams did not act willfully when he failed to let the government know that he had $7 million dollars in a Swiss account. The appeals court, disagreed, however.
Although the specific facts of this case actually favor the government, the appeals court went the extra step to recognize a “willful blindness” standard. That means the IRS need not prove that a taxpayer acted willfully or intentionally. The court said that simply ignoring the obvious or disregarding the instructions could be enough to establish willfulness.
What does this mean for taxpayers?
In the future, the IRS may be less reluctant to simply accept that a taxpayer was unaware of the rules or relied on his or her accountant. In the Williams case, by not reading the return that he was signing, the court said he made a “conscious effort to avoid learning about reporting requirements.”
Do we agree with the decision? On the facts, yes. But on the law, absolutely not.
The decision was not unanimous. One of the 3 judges hearing the appeal refused to go along with the majority. And the decision is unpublished, meaning it is not necessarily binding against other courts (although appeals court decisions still carry tremendous weight.)
If you have an unreported account, give serious consideration to the current IRS amnesty program, the 2012 Offshore Voluntary Disclosure Program (sometimes called OVDI or OVDP). That program allows taxpayers to avoid prosecution and pay a single reduced penalty for just 1 year instead of a 50% reduced penalty for each year the account was unreported.
Although taxpayers can still elect a traditional disclosure and opt out of the OVDP program, this case makes it more likely that the IRS will exercise heightened scrutiny in deciding whether to reduce the penalties. The decision to remain in amnesty versus taking on the IRS just got a bit tougher. Make sure you consult with an experienced tax lawyer well versed in foreign reporting requirements and the FBAR rules.
The tax attorneys at Mahany & Ertl have helped a number of taxpayers with offshore reporting issues; FBARs, the new FATCA legislation, OVDI, opt outs and foreign gift reporting are a few of the services we offer. All inquiries are protected by the attorney – client privilege and kept in strict confidence.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota & coming soon, San Francisco, California (IRS tax matters only). Services available worldwide.