- 1 Willfulness FBAR Penalty Roadmap for Taxpayers
- 2 The FBAR Civil Willful Violation Example
- 3 You May Be Non-Willful
- 4 No Intentional Action is Required for Willfulness
- 5 Reckless Disregard Qualifies as Willful
- 6 Willful Blindness is Willful Too
- 7 Civil Willful FBAR Violation– Preponderance of the Evidence
- 8 Criminal Willful FBAR Violation – Beyond Reasonable Doubt
- 9 Criminal FBAR Penalties
- 10 IRS Discretion
- 11 FBAR Willful Voluntary Disclosure (Usually) Limits Penalties to 50%
- 12 Golding & Golding: About Our International Tax Law Firm
Willfulness FBAR Penalty Roadmap for Taxpayers
A civil willful FBAR violation does not mean a person violated any criminal law. It just means that the US person who did not properly disclose their foreign bank and financial accounts on FinCEN Form 114 does not qualify as non-willful. Therefore, they do not have the opportunity to show that their noncompliance was due to non-willfulness or reasonable cause and not willful neglect — in order to seek a penalty waiver. In order for the Internal Revenue Service to show that the US person violated a civil willful FBAR statute, they are only required to show the Taxpayer violated the statute by a “preponderance of the evidence” standard, which is the lowest standard. Conversely, in order to show that the Taxpayer violated a criminal statute, the government is still required to prove they committed the crime by using the “beyond a reasonable doubt“standard. Let’s go through a basic roadmap of how the civil willful penalty works:
The FBAR Civil Willful Violation Example
Taxpayer Liza has foreign bank accounts. Liza believes she may be required to report the foreign accounts and thinks there may be a form to file — but she is not absolutely certain. She does not have a CPA and does not contact any CPAs at the time. Then, life gets in the way and she forgets about the issue until a few months later when she speaks with one of her friends about it — who tells her she doesn’t think Liza has to file because she resides overseas. Liza takes her word for it and does not file the FBAR. The following year, Liza is audited for a separate reason but during the tax audit, it comes to light that she did not report her foreign accounts, and the IRS Examiner determines Liza was willful.
How can the Examiner conclude the Taxpayer was willful when Liza didn’t knowingly or intentionally fail to file the FBAR?
You May Be Non-Willful
A different IRS examiner on a different day with the same set of facts may determine this Taxpayer was non-willful. These types of analyses are based on the totality of the circumstance and may vary from one agent to the next.
No Intentional Action is Required for Willfulness
One of the biggest absurdities involving foreign bank and financial account reporting is the fact that a person does not have to have acted intentionally in order to be willful. In other words, in order for the US government to show that a Taxpayer acted willfully, they do not need to show there was any intentional action. Thus, in order to pursue willful FBAR penalties, the IRS is not required to show intent. Instead, the IRS can show the Taxpayer acted with reckless disregard or willful blindness. And, whether or not the Taxpayer acted with intent or not – willfulness penalties are the same (i.e., lower levels of willfulness will still get hit with the same penalty).
Reckless Disregard Qualifies as Willful
In the above-referenced situation, Taxpayer Liza may have violated the reckless disregard standard. The concept behind reckless disregard is the idea that the Taxpayer was extra careless in not taking the proper steps to avoid the violation. For example, the Taxpayer may have reached out to a few CPAs or should have conducted some additional research instead of taking her friend’s word for it — especially since Taxpayer thought she had foreign account reporting requirements.
Willful Blindness is Willful Too
With willful blindness, the idea is that a person almost knows for certain that they are required to do something (such as filing the FBAR) but does not do so and willfully turned a blind eye to the knowledge. For example (expanding on the example above), let’s say Liza’s friend told her that she’s not sure about whether Liza needs to file, but is leaning towards yes. Then, Liza’s friend forwards some information from her bank all about FBAR and FATCA reporting. The friend forwards the pamphlet to Liza, but Liza intentionally decides not to open the pamphlet because she does not want to really know if she should report. This would be an example of willful blindness.
Civil Willful FBAR Violation– Preponderance of the Evidence
In order for the US government to show a person violated a civil willful penalty (and could be subject to a 50% penalty on the maximum value of their unreported accounts), the level of proof required is merely by a preponderance of the evidence. The preponderance of the evidence standard is the lowest threshold. Even in situations in which the US government wants to prove civil tax fraud — which oftentimes intersects with willfulness — the IRS must meet the clear and convincing evidence standard, which is the midpoint between the preponderance of the evidence standard and beyond a reasonable doubt standard. In fact, even the IRS once surmised in its own memorandum that the FBAR penalty standard should be clear and convincing evidence, but the courts are still only requiring preponderance of the evidence at the present time.
Criminal Willful FBAR Violation – Beyond Reasonable Doubt
In order to be found guilty of an FBAR crime, the government still must show the Taxpayer acted beyond a reasonable doubt. Thus, the mere fact that a Taxpayer violated a willful FBAR civil statute does mean that they will become subject to criminal prosecution.
Criminal FBAR Penalties
The penalties for civil willful FBAR violations are up to a 50% maximum account value of the unreported accounts or $100,000 – whichever is higher. The FBAR regulation was recently updated to reflect the statute, which provides that it is the greater of the 50% maximum account value or $100,000. The $100,000 adjusts for inflation. Despite the fact that the FBAR statute is limited to 6-years, and a 6-year penalty would equal 300% — typically, the IRS is limited to a 100% penalty over a multi-year period (it used to be 300%).
As provided by the IRM:
In no event will the total penalty amount (among all open years) exceed 100 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate during the years under examination. The “highest aggregate balance” is calculated as described in IRM 188.8.131.52.6.
In general, IRS agents have discretion to reduce, minimize, or abate penalties, including civil willful FBAR penalties. But, just because the IRS agent has the discretion to reduce or abate FBAR penalties does not mean they will use it or that their Supervisor will approve it.
FBAR Willful Voluntary Disclosure (Usually) Limits Penalties to 50%
When a person is willful, they do not qualify for the streamlined procedures, delinquency procedures, or reasonable cause. With the IRS Voluntary Disclosure Program, the FBAR penalties are contained (usually) to a 50% penalty on the maximum account value — but oftentimes the FBAR penalty will be issued in lieu of all the other potential international reporting penalties the Taxpayer could get hit with if they are audited before having an opportunity to enter the voluntary disclosure program.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.
Contact our firm today for assistance.