How 2022 Helped Define FBAR Willfulness (2023 Update)

How 2022 Helped Define FBAR Willfulness (2023 Update)

2022 Helped Define FBAR Willfulness

As we come to the close of 2022, there have been several FBAR rulings that are helping shape how the IRS will enforce compliance for years to come. And, while the main issue continues to be how FBAR non-willfulness penalties can (and should) be enforced, there is another very important issue to consider – what constitutes willfulness? The term willfulness has been defined to mean more than just intentional FBAR noncompliance. In fact, the IRS takes the position that the same 50% willfulness penalty can be issued even if the taxpayers acted without intent (such as with reckless disregard or willful blindness). Let’s take a look at a few recent 2022 cases on the issue of willfulness and FBAR noncompliance.

TurboTax and Willfulness (Hughes)

In the FBAR case of Hughes, the Taxpayer was held to be both willful and non-willful for FBAR. In other words, for some years she was considered willful and in other years, she was considered non-willful. As to the portion of the ruling involving willfulness, the court used the fact that she relied on TurboTax to support their contention that she was willful for at least some years. Specifically, the court found that since she used the forms mode for some years (and not the interview mode), this contributed to her noncompliance and something she could have avoided if she used the interview mode.

It Is Not Just the Number of Accounts or Values (Bittner)

One common misconception about willfulness vs. non-willfulness is that it is based on the amount of money or number of accounts. In the FBAR case of Bittner (currently at the Supreme Court on the issue of civil non-willful FBAR violations), even though the Petitioner did not have the best set of facts regarding his noncompliance (and despite the sheer number and value of his foreign accounts), he was still found to be non-willful. Bittner is a good read, especially for Taxpayers who are being fear-mongered into believing any noncompliance for larger account values is willful.

Post-Streamlined Submission Willfulness (Flint)

When a Taxpayer submits to the IRS Streamlined Procedures, it does not mean that they have entered into a contract with the IRS. In fact, the IRS can still seek willful penalties against Taxpayers who submit to the streamlined procedures, as was the case in Flint. This is very important because Taxpayers should be aware of any tax professional who guarantees that entering the streamlined program means the IRS is prevented from issuing willful penalties or seeking a willfulness audit. 

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 of the streamlined procedures. 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

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