[Ed. Note – several days ago we wrote a post about willfulness as it relates to FBAR penalties. That article gave specific examples of what constitutes willful behavior. Since that post was written, we received several inquiries regarding the legal standards. Readers interested in this topic should read both posts.]
As regular readers of this blog well know, the willful failure to file an FBAR can result in some of the largest penalties in the IRS’ arsenal. Lest you blame the bureaucrats at IRS, Congress set the penalties. Although a non-willful violation “only” garners a maximum $10,000 penalty, if the IRS determines your actions were willful the penalties jump up to the greater of $100,000 or 50% of the highest account balance. Worse, these huge penalties can be imposed for each year the account was not reported. In some cases, the IRS can seek to have you thrown in prison too!
Taxpayers with offshore financial assets are required to annually report their accounts on a Report of Foreign Bank and Financial Accounts (or FBAR for short). Ask any FBAR lawyer and they will tell you that the IRS has been relentless in seeking unreported offshore bank and financial accounts. Willfully not reporting a foreign account for just two years could generate an FBAR penalty high enough to wipe out the entire account. Determining when a violation is “willful” versus “non-willful” becomes critical.
Back in 2006, the IRS’ Chief Counsel decided that the definition of willful for the purposes of civil penalties was the same as for criminal penalties. That high standard made the IRS reluctant to impose a huge FBAR penalty absent proof of really egregious conduct. In 2010, a federal court in Virginia ruled in U.S. v. Williams that the IRS failed to prove the taxpayer acted willfully. Shortly thereafter, however, a federal appeals court overruled that decision and said that mere recklessness by the taxpayer was enough to impose the higher penalties.
A federal court in Utah similarly found that “willful blindness” was enough to justify the higher “willful” FBAR penalties. (US v. McBride).
The IRS own Internal Revenue Manual now states that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements.” In other words, “willfulness” now includes “willful blindness.” As the court cases show, it also means mere recklessness.
The facts of both cases are somewhat troubling. In McBride, the taxpayer signed his 1040 individual income tax form even though the box on Schedule B that asks if one has an ownership interest in or signatory authority over a foreign account was checked “no.” The court found that was reckless.
Unfortunately, in the “real world,” taxpayers frequently rely on tax preparation software or paid preparers to complete their return. Because people trust their advisers and because the offshore reporting rules are so complex, many folks innocently check the wrong box or worse, sign a return in which their accountant checked the wrong box. They are potentially liable for the higher “willful” FBAR penalty.
If you have more than one year of unfiled FBARs, you should speak with an experienced FBAR lawyer immediately. The penalties for non-compliance are simply too great to try and navigate these dangerous waters alone.
The IRS offers several amnesty and other programs that can lower penalties. In many instances taxpayers can go through a traditional disclosure and have all or most of the penalties abated.
For more information and a no cost review of your options, contact us today. Let an experienced IRS attorney from our team do the worrying for you. We have helped taxpayers across the world and usually offer flat fees for our services. Because we handle so many FBAR penalty cases, we can perform our services for much less cost than many other tax lawyers.
Post by Brian Mahany, Esq.