Willful Non-willful Conduct

Sound Advice from Experienced San Diego Offshore Account and Asset Taxation Lawyers

There is a volume of discussion surrounding the concepts of “willful” versus “non-willful” conduct on the part of U.S. taxpayers as it relates to their Report of Foreign Bank or Financial Accounts (FBAR) compliance and the effort to shelter offshore accounts, assets, and income from U.S. taxes. The IRS has long had a report (currently the FBAR) for U.S. taxpayers to report all offshore bank accounts, real property, assets, and investment income. If you did not fully or correctly disclose offshore assets and income to the IRS, there may be back taxes, penalties, and interest that are due when you come into compliance with associated FBAR reporting.

The central question surrounds whether the inconsistencies in your FBAR reporting were a willful attempt to avoid paying US income taxes, or if they were simple math errors, misunderstanding of tax code, or other non-willful conduct. The economic value of non-willful conduct when compared to willful conduct in the IRS is staggering. FBAR-related penalties are often 100% of the highest cumulative value of all of your offshore assets and accounts at any point in the “look-back period.” U.S. taxpayers may file under the Offshore Voluntary Disclosure Program, also known as OVDP, and eliminate criminal tax evasion exposure while reducing that penalty to 27.5% for the highest aggregate account balance. Non-willful tax filers may submit an application under the Streamlined Domestic Offshore Procedures and reduce that penalty to the lowest possible amount of 5%.

The Impact of FATCA on Foreign Banks and Institutions Has Exposed U.S. Taxpayers with Offshore Assets

The Foreign Account Tax Compliance Act, also known as FATCA, has been a great tool for the U.S. Justice Department and the IRS. To date, more than 100 sovereign nations and most offshore banking and investment institutions have agreed to comply with FATCA requirements that force them to disclose any account or asset belonging to a U.S. taxpayer. The failure to document their accounts and associated ownership will expose the bank or institution to hundreds of millions of dollars in fines and the loss of the ability to conduct business in the United States.

Banks and investment institutions around the world are coming into compliance with FATCA and submitting information about U.S. taxpayers and their accounts directly to the IRS. The IRS now has documented evidence of potentially unreported accounts and associated income. The exposure of U.S. taxpayers who have not fully reported these accounts and income includes draconian penalties and interest, significant assessments for back taxes, and criminal exposure for tax evasion or fraud. These are serious consequences, and most US taxpayers with offshore accounts and assets understand the need to immediately come into compliance with the IRS and required FBARs.

How will the IRS Determine “Willful” versus “Non-Willful” Conduct?

This is the essence of the question that the IRS has yet to answer. If you can claim non-willful status, the reward is significant: a 5% penalty and no criminal prosecution. Many U.S. taxpayers have simply assumed the risk and filed under the Streamlined Procedures hoping the IRS will look the other way. This is a dangerous strategy. The 2 questions you should ask yourself are:

1. Why would the U.S. Legislature take years to pass FATCA, and the U.S. Justice Department invest years and millions of dollars to pursue Swiss and other offshore institutions to obtain your information just to simply ignore it and give U.S. taxpayers amnesty?

2. What is your tolerance for risk? You are risking not only substantial financial assets, but exposure to criminal charges and the loss of your personal freedom.

Practically speaking, if you made a simple math mistake on one form in one year, or left off one institution with a minimal account balance one time, you are probably safe to consider non-willful status and apply through the Streamlined Procedures.

If you failed to report multiple accounts in different institutions, or failed to disclose assets and income over more than one year, you should give serious consideration to the risks of attempting to claim non-willful status and that you weren’t in fact attempting to hide assets and avoid the payment of U.S. taxes.

Contact an Experienced San Diego IRS FBAR, FATCA and Offshore Reporting Lawyers

If you are concerned about “willful” versus “non-willful” conduct and have not yet come into compliance with FATCA and required IRS FBARs, we urge you to contact us or call for a free consultation at 866-631-3470. The net around international banks, foreign investment houses, and sovereign tax authorities is tightening each passing month. Reduce your exposure to high penalties and interest, and eliminate your exposure to potential criminal tax evasion charges. Contact our experienced tax lawyers and learn about the protections of the “attorney-client privilege” and the extensive legal services, accounting expertise, and tax preparation services available from your single source: Allen Barron.