Examples of FBAR Violations Ineligible for Non-Willful Disclosure

FBAR Violations

Examples of FBAR Violations Ineligible for Non-Willful Disclosure

With civil FBAR violations, there are two types of foreign account violations: non-willful and willful FBAR. While non-willful violations are more common than willful violations, this article will focus on willful FBAR violations and penalties. When a U.S. taxpayer fails to report (or intentionally underreports) foreign accounts, and the government can show that the taxpayer acted willfully, it may lead to significant fines and penalties. In addition, if the government believes that the willfulness crosses into the level of being a criminal violation then the taxpayer may also potentially become subject to a criminal FBAR investigation well. Noting that willful FBAR violations are much less common than non-willful violations, criminal FBAR violations are even less common. Let’s walk through the basics of navigating willful FBAR compliance risks, violations, and penalties.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, What Does Willful Mean?

While there is no hard and fast rule for the definition of willfulness, essentially it is one of taxpayer either knowingly (or with willful blindness or reckless disregard) failing to timely or accurately report the value of their foreign accounts on the FBAR.

• • • Example: Brian has foreign bank accounts but does not believe it is fair that he should have to report these accounts to the IRS. When Brian spoke with his CPA, the CPA asked Brian whether he had any foreign accounts. Brian knows he has foreign accounts and also knows he is required to report these accounts to the IRS — but he tells his CPA that he does not have any foreign accounts.

    • Example: Brad is working with a new CPA who provides Brad with an organizer for him to complete regarding his finances, income and assets. On the organizer brian sees on the second page it asks whether he has foreign accounts — and if so to list out the different accounts. Even though Brad knows he has foreign accounts and knows that the CPA requires that he provide those accounts, Brad intentionally responds on the organizer that he does not have foreign accounts because he does not want to report them to the IRS.

    • Example: Ben has accounts in a foreign country, but they are all pension accounts that have been in existence for many years before Brian became a US person. He has all but forgotten about these accounts because he has not made any contributions for many years and never received any distributions. Ben misunderstood that pension accounts are reportable as well so he told the CPA he did not have any foreign bank or investment accounts but recently learned that pension accounts were also reportable. In this situation, bends failure to report does not appear willful and he may qualify for non willfulness in the streamlined procedures, delinquency procedures, or reasonable cause.

Internal Revenue Manual Definition of Willfulness

For taxpayers seeking more information about willfulness, the Internal Revenue manual provides a good summary explanation:

• • • “4.26.16.5.5.1 (06-24-2021) Willful FBAR Violations –

      • Defining Willfulness The civil test for willfulness is whether a person either: (1) knowingly violated a legal duty; (2) recklessly violated a legal duty; or (3) acted with “willful blindness” by making a conscious effort to avoid learning about a legal duty. A finding of willfulness under the BSA must be supported by evidence of willfulness.

      • The burden of establishing willfulness is on the Service.

      • Knowing violation. Willfulness is shown when a person knew of the FBAR reporting and recordkeeping requirements and made a voluntary, intentional, or conscious choice not to accurately report an account on a timely filed FBAR or keep required records.

      • Reckless violation. Willfulness is also shown when a person recklessly disregarded the FBAR reporting and recordkeeping requirements. Recklessness is evaluated using an objective standard, not by looking at whether a person subjectively believed that he or she was not required to accurately report the account on a timely filed FBAR or keep required records.

      • The objective standard looks at whether conduct entailed an unjustifiably high risk of harm that is either known or so obvious that it should be known. The harm in the FBAR context is that the reporting or recordkeeping requirements are not being met. A person recklessly violates the FBAR reporting or recordkeeping requirements when the person clearly ought to have known that there was a grave risk that the requirements were not being met and the person was in a position to very easily find out for certain whether or not the requirements were being met.

Risk of Not Filing FBAR

Some taxpayers believe that if they do not file the annual FBAR, they can avoid detection by the IRS. Unfortunately, with the introduction of FATCA and increased enforcement compliance initiatives, it is becoming much more difficult for taxpayers to avoid filling in the FBAR:

• • • • Example: David has his foreign accounts in a country that does not have a treaty with the United States, so David believes he can avoid detection.  Unfortunately, even though the country does not have a treaty with the United States, the country has entered into a FATCA agreement with the United States and the foreign financial institution (FFI) reports David’s information to the IRS because they have him as a U.S. person.

      • Example: Dana has her foreign accounts in a treaty country, but when she opened the account she was a non-U.S. person and  was not required to provide the bank with any social security number. Fast forward several years later and Dana decides to relocate to the United States and so she updates the bank with her new address in the United States. Dana does not report her accounts because she believes that the foreign institution will not report her, but since they have a U.S. address for Dana (she updated the bank with her U.S. info), the bank believes she is a US person and therefore report her account information to the IRS.

Risk of Underreporting FBAR Values

If a taxpayer knowingly underreports the value of their foreign accounts, this can also be considered willful as well because the taxpayer is artificially reducing the value of their accounts for reporting purposes:

• • • • Example: Cheryl is a U.S. citizen who has foreign accounts. Recently, one of her foreign accounts increased in value significantly because she had received an inheritance. Cheryl thinks in the future she may consider expatriation so she knowingly does not report the value of the foreign accounts so that the IRS does not know about the money. Instead, she artificially reduces the value of the accounts. This may be considered willful.

      • Example: Chris is a U.S. citizen who has accounts in a foreign country. He knows one of the accounts will receive a large amount of money once he sells his foreign home, so in the current year he does not report that account on his FBAR because he does not want to disclose the high value of the account — since the value will only be high temporarily. Since Chris knowingly provided a false lower value on his FBAR, this may also be considered willful.

Willful Penalty Examples

Unlike non-willfulness, the penalties involving willful FBAR violations can be significant and are not limited to $10,000 (adjusted for inflation) per form:

• • • • Example: Frank is a U.S. citizen who has a foreign account worth $3,000,000 that he willfully failed to report. Frank may be subject to a 50% penalty or a $1.5 million penalty on the value of the account.

      • Example: Fred is a U.S. citizen who has foreign accounts worth $60,000. Fred willfully failed to report these accounts and therefore Fred may be subject to penalties upwards of $100,000 (adjusts for inflation). That is because with willfulness penalties, they are 50% value or $100,000 whichever is higher, which means even though the value of the accounts are $60,000, the IRS can take the position that the minimum penalty should be $100,000. This concept was successfully challenged by a taxpayer in a recent willful FBAR penalty case.

      • Example: Felicia is a U.S. citizen who has foreign accounts worth $2,000,000. She did not report these accounts for multiple years and therefore may be subject to a 50% penalty per year up to a total value of 100% of the account. In other words, the value of the penalty is not limited to just one 50% penalty.

        • • 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 4.26.16.1.6.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.