What are willful conduct and willful blindness in IRS FBAR audits and court cases? It is important to begin with an understanding regarding IRS FBARs and when they are required. Any US taxpayer who has offshore bank or investment accounts (outside the United States) is required to prepare and file an FBAR for that tax year if the accumulated balance in those accounts exceeds $10,000 at any point in the tax year, even if only for a day. The failure to file FBARs exposes US taxpayers to some of the heaviest penalties and interest as well as criminal tax evasion charges the IRS is able to pursue against a US taxpayer. The IRS can charge the greater of $100,000 or 50% of the highest accumulated balance of the account in that tax year, whichever is higher. It does not matter what the present balance may be.
There are two options to come into compliance with IRS FBAR requirements if you have not filed the required reports in the past: the Offshore Voluntary Disclosure Program or OVDP and the Streamlined Domestic Offshore Procedures. The OVDP requires the taxpayer to pay a penalty of 27.5% to 50% of the account balance depending upon the actual bank or financial institution where the account resides, and releases the taxpayer from any criminal tax exposure. The Streamlined option reduces the penalties to 5% but does not relieve the taxpayer of the potential for criminal violations.
Everyone wants to take advantage of the Streamlined option for an obvious reason: a substantially lower penalty for non-compliance. What are willful conduct and willful blindness in IRS FBAR audits and court cases? What is the difference between the two programs? The “willfulness” of the taxpayer. Of course most US taxpayers wish to claim non-willful negligence and take the Streamlined option. Unfortunately, in most court cases and IRS audits today the IRS has clearly demonstrated a US taxpayer cannot use “ignorance of the rules” to assert non-willful conduct. The IRS has characterized this behavior as “willful blindness” and it has become the basis to reject the Streamlined application and apply the harshest penalties available under IRS law.
Allen Barron provides extensive domestic and international tax expertise, with deep insight into the complexities of FBAR reporting. Janathan Allen has spoken on national panels providing CLE training to attorneys, clients and large financial adviser groups. We invite you to contact us or call 866-631-3470 for a free consultation.
