Non-Willfulness Defined for FBAR & Streamlined Offshore 2024

Willful & Non-Willful Differences for FBAR & FATCA

Willful & Non-Willful Differences for FBAR & FATCA 

When it comes to Foreign Bank and Financial Account Reporting Penalties, two of the most important terms to distinguish bad civil penalties from really bad penalties are “willful” and “non-willful.” Unlike everyday life in which the idea of “willful” means you intentionally committed an act and the idea of “non-willful” only means you did not intentionally commit the act, these commonsensical concepts do not apply to the wacky world of IRS foreign account, asset, and investment reporting. To be willful for FBAR, a Taxpayer does not have to have acted with any intent to defraud or actual knowledge of doing so. Likewise, because no intent or actual knowledge is needed to be willful, just because a Taxpayer did not have actual knowledge or intent does not mean they were non-willful ––

Confused yet?

Here are five important facts to know about willfulness and non-willfulness:

Analysis of Non-Willfulness

The IRS has not developed a bright-line test for non-willfulness. Also, to prove willfulness, the IRS is not required to prove that the Taxpayer acted with either actual intent (Reckless Disregard) or actual knowledge (Willful Blindness). 

How to Analyze Willful vs. Non-Willful

• • • What is your US status?

    • How long have you been in the United States for?

    • How many years have you filed US tax returns?

    • What types of investments do you have overseas?

    • Do you utilize a financial planner?

    • Do you have a CPA or EA?

    • Is your CPA or EA experienced in international tax?

    • Did your CPA or EA send you questions in writing, asking about Foreign Accounts or Income?

    • Did you respond truthfully to the CPA or EA?

    • Did you complete a Schedule B (part of your tax return)?

    • Are you tax compliant in the country in which the accounts are maintained?

    • Did you have unreported income as well?

Totality of the Circumstances

As there is no bright-line test to determine whether or not a Taxpayer is either willful or non-willful, the Taxpayer must use a totality of the circumstance analysis to assess the facts for each noncompliance to determine whether or not they would be willful or non-willful. Complicating matters more is the recent case of US v. Hughes; this has gotten infinitely more complicated if for no other reason than because at the District Court level, the court found that a Taxpayer could actually be both willful and non-willful for the same compliance – but (presumably) not the same year (see below).

Can You Be FBAR Willful and Non-Willful?

Yes, you can — kinda sorta. In Hughes (District Court Case), the court determined that the Taxpayer was non-compliant for several years. In the early part of the noncompliance period (tax years 2010 and 2011), the Taxpayer did not submit a Schedule B and so the court determined that she was non-willful for those years. In the subsequent years, the Taxpayer did submit a Schedule B and did identify that an FBAR would be required, but did not file the FBAR. The Taxpayer took the position that the TurboTax instructions and process were confusing and therefore, she thought it was filed through TurboTax – which on its face seems like a perfectly valid argument. The court rejected this argument and determined that because she used the forms method instead of the interview method for the program, she should have known when she printed the forms that the FBAR was not included – – and therefore found for the subsequent years that she was willful.

Only Preponderance of the Evidence is Required for Willful and Non-Willful

While civil FBAR penalties only result in monetary penalties (albeit mammoth-sized penalties), penalty amounts can far exceed penalties that derive from something such as civil tax fraud, and oftentimes with willfulness, they share the same common nucleus of fact. But, with civil tax fraud, the government must show clear and convincing evidence. Yet, for FBAR penalties, the government only must show a preponderance of the evidence – which is the lowest standard required.  An interesting side note is that in 2006, an IRS memorandum was circulated in which IRS Counsel actually presumed that the standard for FBAR penalty should also be clear and convincing evidence –– and in fact, the memo is very convincing that the Clear and Convincing Standard should apply to FBAR.  Still, at the current time, courts are only requiring preponderance of the evidence for either willful or non-willful penalties.

Lower Standard of Willfulness Can Blur the Non-Willfulness Standard

To be willful, a person does not need to have acted with intent. Rather, Courts across the nation have affirmed that a Taxpayer can be subject to willful FBAR penalties if the Government can merely show reckless disregard or willful blindness. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.