- 1 Willful & Non-Willful Differences for FBAR & FATCA
- 2 Analysis of Non-Willfulness
- 3 Totality of the Circumstances
- 4 Can You Be FBAR Willful and Non-Willful?
- 5 Only Preponderance of the Evidence is Required for Willful and Non-Willful
- 6 Lower Standard of Willfulness Can Blur the Non-Willfulness Standard
- 7 Golding & Golding: About Our International Tax Law Firm
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 the bad civil penalties from the 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. In order 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 in order to be willful, just because a Taxpayer did not have actual knowledge or intent does not mean they were non-willful ––
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 in order 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 determine 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
In order 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.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax and specifically, IRS offshore disclosure.
Contact our firm for assistance.