One of the primary factors US taxpayers will face when coming into FBAR compliance and other foreign informational reporting requirements is the concept of “Willful” or “Non-Willful” conduct on the part of the U.S. taxpayer.

Evading U.S. income taxes is a criminal offense, and the IRS has promised to pursue aggressive auditing and criminal tax charges against offshore account violators.

The Offshore Voluntary Disclosure Program, or OVDP, provides a conditional release from criminal exposure if the taxpayer makes a “complete and transparent” effort to come into compliance with offshore account and asset reporting. The taxpayer agrees to pay a 27.5% penalty on the highest aggregate balance for “accounts associated with tax noncompliance” in the associated look-back period.

If the taxpayer’s foreign asset and income non-compliance was “non-willful,” the IRS has provided the Streamlined Domestic Offshore Procedures, which allows the taxpayer to bring FBARs into compliance for a much lower 5% penalty. The big “catch” here is that the behavior of the taxpayer must be “non-willful,” and the IRS has been less than transparent about the types of behavior it will accept in this category. The decision point for our clients comes down to their appetite for risk:

“Are you willing to risk criminal tax exposure in order to claim “non-willful” conduct and take the lower 5% penalties provided under the streamlined program?”

If the IRS believes you purposefully withheld information or secreted money or assets to avoid paying U.S. taxes, your application to the streamlined program will be rejected, there will be no OVDP option available to you at that point, and you will be exposed to criminal tax evasion charges as well as fines and penalties up to and exceeding 100% of the cumulative balance of all your accounts at any point in the look-back period regardless of their present balance.