The IRS has become too aggressive in its enforcement of the “willfulness provision” for unfiled FBAR forms. Two court decisions in 2012 gave the IRS a green light to pretty much impose strict liability for violations. To best understand the current IRS position, some brief history is required.
The Bank Secrecy Act requires most Americans with offshore accounts to annually report their holdings. Reporting is done on Schedule B of the income tax return and on a Report of Foreign Bank and Financial Accounts, better known as an FBAR.
The penalties for the willful failure to file the FBAR form can be severe. The IRS can seek criminal or civil penalties or both. On the criminal side, the willful failure to file is a felony punishable by 5 years in prison.
The civil penalty can be up to the greater of $100,000 or 50% of the highest account balance. Those penalties can be imposed per each noncompliant account and for each year the FBAR wasn’t filed. Typically, however, the IRS only imposes the penalty on one year.
The FBAR form traces its roots back to 1970. Because it is a Treasury Department form, it is not filed with one’s tax return. Beginning in 2003, administration of the FBAR program was transferred from Treasury’s Financial Crimes Network to the IRS.
Congress tinkered with the law’s penalty provisions in 2004 but it wasn’t until 2012 that any major court decisions helped taxpayers understand how the IRS interprets the term “willful.”
In United States v. Williams, the court held that the mere failure to file an FBAR after signing an income tax return satisfies the “willfulness requirement. The court said that failure shows “a conscious effort to avoid learning” about FBAR filing requirements.
Schedule B of the 1040 return asks, “At any time during 2014, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?”
If you answer “yes,” a follow up question specifically asks if you are “to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority.”
That same year, a second FBAR willfulness decision was published, United States v. McBride. That decision came to the same conclusion. The court went even further in it’s reasoning, however, and said that knowledge of the tax code is always presumed.
There is evidence that McBride lied to IRS revenue agents so we understand the court’s decision. Unfortunately, the court’s opinion was very broad and its language intentional.
Although we believe the IRS has become more aggressive in their FBAR penalty calculations for many years, the one-two punch of Williams and McBride have become nightmare for many taxpayers.
Prior to Williams, there was little guidance from the courts on how willfulness should be determined with respect to unreported offshore accounts.
In 2006, the IRS Office of Chief Counsel issued a Chief Counsel’s memorandum. That document suggested a very strict standard in civil penalty cases, an “intentional violation of a known legal standard.”
Technically, a Chief Counsel memorandum isn’t binding on the IRS but the public and practitioners rely on them.
We can find no reason why the IRS would suddenly become so aggressive with its interpretation of the penalty provisions. Unless some other courts begin to weigh in differently, it appears that the term “willful” no longer means what it says.
Many taxpayers – millions of them – have offshore accounts that remain unreported. While a handful of taxpayers may be trying to evade taxes, most of the folks we talk to simply didn’t know that offshore accounts had to be reported. Their failure to file an FBAR was anything but intentional.
For taxpayers, the law is at best murky and at worst, simply disastrous. If you have been filing tax returns but haven’t filed an FBAR, speak with a good CPA or tax lawyer. If you unreported income associated with your offshore account, speak with a lawyer.
Although the risk of criminal prosecution is low, certain things like titling accounts in a nominee name or not reporting offshore income increase your risk of prosecution.
Need more information? Contact attorney Beth Canfield at or by telephone at (414) 223-0464. All inquiries protected by the attorney – client privilege and kept completely confidential. No fee initial consultations and flat fee pricing often available.