Willful vs. Non-Willful
Willful vs. Non-Willful is an analysis which is both simple…and complex.
You are willful if you knew you were supposed to report and disclose your foreign income and assets but choose not to. If you decide to enter one of the IRS Offshore Voluntary Disclosure Programs, you will be required to submit to OVDP instead of the Streamlined Program. You may also be willful if you acted with Reckless Disregard or “Willful” Blindness.
You are non-willful if you were unaware of any reporting requirement and/or relied upon a CPA, Enrolled Agent, Accountant, or Tax Preparer who was unaware of any reporting requirement – but recent changes in the law may limit the ability to rely upon an “uninformed CPA.”
If you make false representations or omissions to your CPA, EA, or Accountant — you are presumably willful, despite what inexperienced Attorneys desperate for your business will tell you.
For more on this topic, click here: The IRS OVDP Willfulness Dilemma – Penny Wise & Pound Foolish.
A Summary of the simple basics:
If you know or should have known (or acted with Reckless Disregard) that you had a duty to report the information on an FBAR (Report of Foreign Bank and Financial Accounts) or to the IRS on a U.S. Tax Return (8938 – Statement of Specified Foreign Assets), but intentionally do not report your accounts, then the IRS will want to try and prove you acted “willfully,” in order to collect massive fines and penalties from you.
If you knew you had to report but were unaware what a FBAR or FATCA Reporting was, it does not negate the willfulness. If your CPA sent you a questionnaire that you completed improperly, chances are you are willful as well — unless you did not understand the questions in the questionnaire.
You are non-willful if you acted unintentionally and/or did not know you were required to either report or disclose your foreign income, accounts, or other specified assets.
Offshore Disclosure is the process of coming forward and disclosing overseas assets and foreign income to the IRS in exchange for (in most cases) a much reduced chance of prosecution by the Internal Revenue Service. Whether a taxpayer is Willful or Non-Willful will determine which Offshore Disclosure Program the taxpayer should enter — and what their penalty will be.
Whether or not an applicant will have to pay an OVDP penalty (and if so, how much they will have to pay) or qualify for a reduced penalty (or penalty waiver) under the Streamlined Compliance Procedures will depend on a few different factors – with the most important factor being whether the applicant was willful or non-willful.
I Knew I was Required to Disclose But Didn’t…
Then you are willful.
While there is no strict definition of the word willful, it generally boils down to knowledge of the requirement to disclose. Alternatively, if you did not know that you were required to report your foreign accounts, then technically you could not have “willfully” failed to report the accounts, because you did not know about the requirement to do so in the first place.
– If you were willful, then you should be careful not to enter the IRS Streamlined Program (in order to take advantage of reduced penalties), because if you are “caught” entering Streamlined when you were actually willful, there can be very stiff civil and criminal penalties. Rather, you should enter the Offshore Voluntary Disclosure Program if for no other reason than because you were willful and you will require IRS Tax protection from criminal prosecution. If at the conclusion of the OVDP you disagree with the penalties, you will have the opportunity to “Opt-Out” at that time.
– While the penalty for OVDP is high, consider the alternatives: would you rather admit willfulness, pay a 27.5% penalty (or 50% penalty) for one-year’s worth of high-balance and both prevent a future audit and almost always prevent criminal prosecution, or would you rather live in constant fear of being audited, pay upwards of $1 million in fines and penalties, have a “felony” on your record, and do 5 to 20 years in federal prison with real criminals if you get caught?
I Didn’t Know I was required to Disclose Foreign Money?
The IRS is aware that many people simply did not know of the requirement to report. Unlike OVDP (where generally individuals are earning active income overseas or are intentionally placing money overseas), if a person is Non-Willful, they qualify for the Modified Streamlined Program which has a significantly reduced penalty structure (or zero penalty for individuals who qualify as a Foreign Resident).
– There are plenty of people who have overseas accounts for legitimate reasons. For example, they may have immigrated or relocated to the United States from another country, or maybe they received a foreign inheritance and had no idea regarding IRS reporting requirements. These are not the people the IRS is seeking to prosecute, since they were “Non-Willful.”
– Therefore, the IRS modified a small streamlined program (now called “Streamlined Offshore Compliance Filing Procedures”) that authorizes pretty much anyone who was non-willful to enter the program. There are several benefits of this program, including a reduced if not forgiven penalty, as well as strict limitations as to what items can be penalized — and which items will not be penalized.
– Under the traditional OVDP program, almost any type of asset that earns income is subject to the penalty; under the modified streamlined program, only items that are included on an FBAR or 8938 are generally included in the penalty computation. For example, income generating real estate is excluded from the penalty computation in a Streamlined submission but it IS included in the traditional OVDP penalty computation.
Taking the First Step Toward Compliance
Deciding whether to disclose your foreign income and assets is a big decision but a decision which overall is beneficial to you and your family. Why? Because with the implementation and enforcement of the new FATCA laws (Foreign Account Tax Compliance Act) 100+ foreign countries and tens of thousands of Foreign Financial Institutions have agreed to report US taxpayer information to the IRS – whether they were willful or non-willful. In fact, foreign banks are pretty much reporting everybody who they have in their records who maintains a U.S. address.
– That means that even if you are only living in the US temporarily, there is a good chance your foreign financial institution will report you to the IRS. And, if it turns out that you were required to file a W-9 instead of a W-8 BEN, this can cause a major problem for you down the line, as well as an issue if you are seeking future Legal Permanent Resident status or Citizenship/Naturalization.
– It is important to note that if the IRS contacts you first, then you are normally disqualified from the program (whether you were willful or non-willful). Moreover, if you are under audit from the IRS for any reason involving foreign or domestic tax issues, you’re disqualified from the program as well.
– In addition, the IRS can terminate the program at any time and history has shown that the penalty amount increases almost every year.
– Further, the Department of Justice recently issued a bulletin letting individuals know that they will be seeking strict enforcement against anybody who is found entering into the streamlined program when they should have entered into the traditional OVDP.
We can assist you with all of your OVDP and International tax law questions!
Offshore Voluntary Disclosure Options
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status, and residence status of the taxpayer.
If you are required to file a U.S. tax return, it is very important that you do so timely and on an annual basis. The failure to file a tax return or pay outstanding tax liabilities may result in devastatingly high penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations.
If you would like to Learn More about Offshore Disclosure, We Can Help.