There has been a lot of confusion over what will constitute “willful” versus “non-willful” conduct in terms of FBAR reporting of foreign bank acounts and associated penalties for under-reporting them. The IRS recently released new guidelines that provide insight into how they will approach individual US taxpayers when determining FBAR penalties, and willful conduct.
For cases of under-reporting over multiple years, the IRS interim guidelines recommend a penalty for each year. The pattern of the US taxpayers reporting across a period of years, actual figures provided by the institutions, and ultimately updated returns provided by the taxpayer themselves will demonstrate willful attempts to shield income from the IRS.
In most cases, the FBAR penalty for each year under examination will be 50% of the highest aggregate balance of all offshore accounts. For multiple year return audits, the IRS will determine the 50% threshold for each year, calculate the total for all years under the audit, then simply divide the total penalty by the number of years. The IRS guidelines note that in no circumstances will the penalty exceed 100% of the highest aggregate balance of the accounts during the year(s) under review.
The FBAR penalty is actually classified as a “miscellaneous penalty”, and will apply to all applicants under the IRS Offshore Voluntary Disclosure Program (OVDP) as well as the subsequent Offshore Domestic Streamlined Procedures. The pattern of non-disclosure or under-reporting over a period of years is most likely to demonstrate a “willful” pattern of behavior to the IRS, and US taxpayers should take this into consideration when determining which application to file with the IRS (OVDP or streamlined).
These are complex issues, and the risks and penalties are extremely high and real. Those who apply for acceptance into one of the programs and are rejected by the IRS due to a repeated pattern of behavior will face criminal charges. It is important to seek the counsel of an experienced and seasoned expert tax attorney. We invite you to call us at 866-631-3470 for a free consultation.
