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How Does the IRS Define Willfulness for FBAR Audit Purposes

How does the IRS define willfulness in terms of IRS FBAR compliance?  When will the actions of a US taxpayer amount to a “willful or non-willful” evasion of IRS FBAR responsibilities?  If you have offshore bank or investment accounts you have probably heard by now that you are required to file the IRS Foreign Bank Account Report or FBAR to disclose the existence and nature of all offshore accounts.  This is required from the point in time where the accumulated balance of all of your accounts exceeds $10,000 at any point in the tax year.  There are two programs for US taxpayers to come into compliance with previously undisclosed bank accounts: The OVDP or Offshore Voluntary Disclosure Program and the Streamlined Domestic Offshore Procedures.  The difference between the financial impact of these two programs is quite significant, and the central issue related to this choice is one of “willfulness” on the part of the US taxpayer.

Unfortunately, the IRS has not provided a definition of “willfulness” for US taxpayers to follow.  In fact, the IRS and subsequent court decisions have resulted in a very loose interpretation leaning heavily in the IRS’ failure.  A lawsuit on behalf of a US taxpayer recently asserted a legal standard for “willful” conduct which was rejected by a US Tax Court.  In the case, the taxpayer asserted the government “must apply the same standard for the civil penalty as it does in the criminal context.”  The taxpayer asserted case law indicating the IRS had a burden to prove his actions “amounted to a voluntary, intentional violation of a known legal duty in order to assess a willful penalty.”

The Court flat rejected this argument, and the IRS has levied an assessment of penalties and interest well in excess of $1,000,000 in his case.

How does the IRS define willfulness when a taxpayer is attempting to come into FBAR compliance?  This has yet to be determined.  The failure to come into FBAR compliance is financially devastating: 50% of the highest accumulated balance of all accounts or $100,000 per incidence, whichever is higher and exposure to criminal prosecution and jail time for tax evasion.

The OVDP provides a reduction in many of those penalties to 27.5% while the civil penalties for non-willful violations can amount to as much as $10,000 per year. The failure to report 2 accounts can still result in a substantial financial penalty, even in a non-willful situation.  The look-back period is six years based upon the statute of limitations.  If the violation is declared willful by the IRS a taxpayer’s exposure in this case would be a minimum of $100,000 per account or $200,000 per year (for 6 years) for a total of $1,200,000 penalty.  Two unreported accounts for six years would amount to $20,000 per year or a $120,000 penalty.

The experienced IRS FBAR and international tax attorneys at Allen Barron are prepared to advise US taxpayers, as well as residents of the US who are foreign nationals.  You might be working under an H1-B visa, or have made an investment exceeding $500,000 to come to the US.  How does the IRS define willfulness when a taxpayer isn’t aware they were required to file?  The IRS clearly states “ignorance is no excuse for non-compliance.”  We invite you to contact Allen Barron for a free consultation at 866-631-3470.  Ask about the protections of the attorney-client privilege and the integrated tax, legal, accounting and tax preparation services available through our single-source company.