FBAR Willful Penalty & the IRS

FBAR Willful Penalty: The IRS FBAR Willful Penalty can be devastating. In recent years, the IRS has taken an aggressive stance against U.S. persons who are out of compliance for offshore assets, accounts, investments or income.

To date, the IRS has not developed a bright-line test for “willfulness.” Moreover, the term willfulness is not limited to intentional behavior. It includes lower standards of willfulness, such as Reckless Disregard (lacks intent) and Willful Blindness (lacks knowledge).

FBAR Willful Penalty: How IRS Proves Taxpayer Willfulness

FBAR Willful Penalty: How IRS Proves Taxpayer Willfulness

The Internal Revenue Service has also developed FBAR Amnesty programs to help taxpayers reduce or avoid FBAR penalties. While may taxpayers would prefer the streamlined program, if they are willful, their only (legal) option is traditional voluntary disclosure. The traditional voluntary disclosure program was expanded in 2019, to takeover where OVDP left off (OVDP closed in 2018)

Willfulness FBAR Penalties for Foreign Account Violations

When the IRS assesses a willful FBAR penalty under IRM 4.26, they mean business. Despite not providing a clear-cut definition of the term “willfulness,” an willful violation can result in a drastic, 50% penalty on the highest maximum balance in the unreported offshore accounts.

Complicating the willfulness issue further is that the IRS does not need to prove intent, in order to assess a willful FBAR Penalty. Rather, the IRS can provide (civil) willfulness merely by showing reckless disregard or willful blindness.

U.S. Code citationCivil Monetary Penalty DescriptionCurrent Maximum
31 U.S.C. 5321(a)(5)(B)(i)Foreign Financial Agency Transaction – Non-Willful Violation of Transaction$12,921
31 U.S.C. 5321(a)(5)(C)Foreign Financial Agency Transaction – Willful Violation of TransactionGreater of $129,210, or 50% of the amount per 31 U.S.C.5321(a)(5)(D)
31 U.S.C. 5321(a)(6)(A)Negligent Violation by Financial Institution or Non-Financial Trade or Business$1,118
31 U.S.C. 5321(a)(6)(B)Pattern of Negligent Activity by Financial Institution or Non-Financial Trade or Business$86,976

How does the IRS Define Willfulness?

There can be “lower” forms of willfulness, which do not require willful or intent — these additional willful standard are referred to as:

If you have any concern of willful vs. non-willful, It is crucial that you consult with an experienced Streamlined and Offshore Disclosure Lawyer before making any submission.

What is Reckless Disregard?

Reckless disregard is a lower standard of willful. It does not require intent, but rather behavior which shows the U.S. person could have known and/or could have filed the FBAR.

How do the Courts Define Reckless Disregard?

Reckless Disregard In offshore disclosure, essentially means: “I Could have known better.”

The court in Bohanecs summarizes reckless disregard as:

 

“Although Defendants assert that “willfulness” encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties, no court has adopted that principle in a civil tax matter.

Where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering “not only knowing violations of a standard, but reckless ones as well.” Safeco, 551 U.S. at 57.

– Recklessness” is an objective standard that looks to whether conduct entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Safeco, 551 U.S. at 68 (internal quotation marks and citation omitted).

– Several other courts, citing Safeco, have held that “willfulness” under 31 U.S.C. § 5321 includes reckless disregard of a statutory duty. See United States v Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012); United States v. Bussell, No. CV15-02034 SJO(VBKx), 2015 WL 9957826 at *5 (C.D. Cal. Dec. 8, 2015); see also United States v. McBride, 908 F.Supp. 2d 1186, 1204, 1209 (D. Utah 2012).”

 

What is Willful Blindness?

Willful Blindness is a form of “deliberate ignorance.” It is the concept that a person could readily obtain information, which if they did, would inform them that their actions could be criminal. Instead of seeking out the information, they “intentionally” avoid learning the information (aka burying their head in the sand).

What does Willful Blindness Mean?

It means you are “willfully” staying ignorant to a fact that would inform you that your actions are illegal.

Is Willful Blindness a Crime?

Yes. It is a substitute for willfulness. In other words, while you may have not intended to cause a crime, the fact that had you made yourself uninformed to the fact that your actions were illegal — takes you over the willfulness threshold. 

What is the Mens Rea of Willful Blindness?

The idea of Mens Rea of Willful Blindness is the idea that the knowledge of the crime is presumed, due to the intentional lack of knowledge on the part of the participant.

What is Deliberate Ignorance?

Deliberate ignorance is essentially a synonym for willful blindness.

Willful Blindness Law School 101 Definition

Outside of the world of FBAR Penalties, the willful blindness standard is nothing new.

Here’s a typical example you learn in your first-year criminal law and procedures class:

David and his friends are hanging out in a seedy part of Tijuana. A Gentlemen approaches them and tells David and his two buddies that he will pay them each $1 million if they drive a car across the border.

None of the individuals ask the man why he is paying them that much to drive a vehicle for a few hours.  Clearly, they should have some questions, but the money is just too good.

Therefore, David and his friends avoid asking any questions, believing if they do not ask, then they cannot know what is in the car – and that will absolve them from liability.

When they get pulled over and the police discover 50 pounds of cocaine in the car, the fact that they “didn’t know about the drugs” would not matter — since they were “willfully blind.”

Recent FBAR Court Cases (5 Important Case Holdings)

FBAR Willful Case: Williams (III) 

If a person sign the tax return, marks “No” on Schedule B, Question 7 and the facts otherwise show that the person acted fraudulently regarding their taxes, the court can impute willfulness without any true intent to not report foreign counts.

FBAR Willful Case: Mcbride

The government does not need to show intent in order to prove willfulness in the context of FBAR Penalties. Rather, the government must only show reckless conduct, and reckless conduct includes willful blindness, even without direct evidence of willfulness.

FBAR Willful Case: Bohanec

As with the prior, the court again confirms that reckless disregard this efficient the Government to meet the burden of willfulness, and the Government must only meet the preponderance of the evidence standard, and not clear convincing evidence.

FBAR Willful Case: Garrity

The Government can provide Reckless Disregard to establish willfulness and the standard of proof is the preponderance of the evidence.

FBAR Willful Case: Bussell

Despite the fact that in this case the Willful FBAR penalties exceeds $1 million, that in the end FBAR penalties (even willful), are just monetary penalties, and therefore the preponderance of the evidence standard of proof is proper.

Another import aspect of Bussell, is to give you an idea of what arguments are destined to fail on appeal, and that the Supreme Court refuses to hear the matter regarding what constitutes FBAR Penalties.

FBAR Penalties can be Mitigated

There are 5 main versions of the program. In addition, there is an “illegal” version of Voluntary Disclosure as well, which is referred to as “Quiet Disclosure” or “Silent Disclosure.”

If you were willful, you do not qualify for Streamlined, Delinquency or Reasonable Cause.

A few important considerations:

Golding & Golding (Board-Certified Tax Law Specialist)

We specialize exclusively in international tax, and specifically IRS offshore disclosure.

We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced FBAR Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.

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