What’s the Difference Between Non-Willful and Willful FBAR, Examples

Willful vs Non-Willful and How to Evaluate IRS Amnesty Filing

Differences Between Willful & Non-Willful FBAR Conduct

When it comes to determining which IRS route taxpayers take to get into compliance for prior years’ missed foreign income, assets, investments, and accounts on the FBAR — the most important distinction Taxpayers have to make is determining whether their noncompliance was willful or non-willful. The difference between being classified as willful vs. non-willful is the difference between submitting to the Streamlined Filing Compliance Procedures or Delinquency Procedures (which may avoid or limit potential penalties) as opposed to making an offshore IRS Voluntary Disclosure (which typically results in a 50% penalty for taxpayers who are unable to certify under penalty of perjury that they are non-willful). And, with the IRS aggressively pursuing taxpayers who falsify non-willful certification statements, it is important to understand the distinction between willful and non-willful. To help bring some clarity to the gobbles of misinformation on the World Wide Web by tax generalists and self-purported specialists masquerading as ‘experts,’ we are providing you with an introductory guide to explain the difference between non-willful and willful FBAR conduct.

*Original Publication Date 2/2020.

Totality of the Circumstance Test

Unfortunately, there is no specific test to determine whether a person is willful or non-willful. Instead, the Internal Revenue Service looks at the facts and circumstances as a whole, and then based on the totality of the circumstance, will determine whether the taxpayer is willful or non-willful. It is a very subjective analysis, and therefore two reasonable and rational IRS examiners who examine the same set of facts and circumstances may come to different conclusions as to willfulness and non-willfulness. That is why it is crucial that taxpayers carefully frame any submission to the IRS.

Intent Is Not Required for FBAR Willfulness

Unlike the everyday concept of the term willful, in the realm of international tax compliance, the term willful does not mean intentional. In other words, a person does not have to act with any intent to be classified as willful by the US government and matters involving FBAR. Instead, there are lower levels of willfulness such as reckless disregard and willful blindness, discussed below.

Reckless Disregard

If a person acts with reckless disregard, then they will be considered willful for FBAR purposes — and they can be subject to the same fines and penalties as other taxpayers who may have acted intentionally. While there is no specific definition of the concept of reckless disregard, it is the idea that the taxpayer was essentially ‘irresponsible’ when it comes to learning about the FBAR reporting requirements. 

Willful Blindness

Similar to reckless disregard, if a taxpayer acted with willful blindness (which connotes that they had no actual knowledge of the compliance requirements), they too can be considered willful. For example, if a taxpayer had an idea that they should have been reporting their foreign accounts and assets on the FBAR but intentionally did not perform any additional research or obtain any additional knowledge sufficient to determine whether or not they should have reported the FBAR — this is typically sufficient for the U.S. government to show willful blindness.

IRM (Internal Revenue Manual)

The Internal Revenue Manual is used by IRS personnel to determine how to handle various tax situations and scenarios. Taxpayers can also reference the IRM to help determine how the IRS evaluates willfulness and non-willfulness situations — along with what factors are necessary to sufficiently prove that the taxpayer was non-willful. For taxpayers who are seeking to submit to the IRS on matters involving FBAR and willful v. non-willful, they should consider referring to the Internal Revenue Manual to get a better grasp on how IRS enforcement procedures and protocols.

FBAR Penalties (Civil vs Criminal)

While there are different types of FBAR penalties, they typically fall into three different categories:

• • • Civil Non-Willful Penalties

    • Civil Willful Penalties

    • Criminal Penalties

With the increase in FBAR enforcement, FBAR violations (and resulting fines) have become much more common. That is because most of the time, the failure to file the FBAR is due to negligence or something similar — but does not reach the level of willfulness (including willful blindness, or reckless disregard). However, some taxpayers may become subject to willfulness penalties, especially if the Internal Revenue Service believes that the taxpayers acted with willful blindness or reckless disregard (even when there was no direct intent to violate the statute).

Criminal FBAR penalties are less common and typically occur in situations in which the taxpayer violated other statutes, such as tax evasion, tax fraud, money laundering, structuring, and smurfing.

Civil Non-Willful FBAR Penalties

Before the 2023 Supreme Court’s ruling in Bittner, the issuance of FBAR penalties was like the wild wild west — a free-for-all in which some jurisdictions would penalize taxpayers based on the number of accounts they had, whereas other jurisdictions would penalize taxpayers based on the non-filing of the form.

31 U.S.C. 5321 (a)(5)

• • • • (5) Foreign financial agency transaction violation.—

        • (A) Penalty authorized.—

          • The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

        • (B) Amount of penalty—

          • (i) In general—

            • Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

          • (ii) Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

            • (I) such violation was due to reasonable cause, and

            • (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

Bittner Non-Willful Example

For example, if a taxpayer was required to file an annual FBAR to report 20 accounts with an aggregate total of $900,000, but failed to do so, the IRS could go after the taxpayer for $200,000 worth of penalties for each year it was not filed — although there was a statutory maximum for the compliance period. The Supreme Court in Bittner limits the IRS’s ability to issue civil non-willful FBAR penalties. Instead of being able to penalize taxpayers per account, rather the IRS is limited to issuing penalties per form. Thus, no matter how many accounts the taxpayer fails to report, the IRS is limited to issuing a $10,000 penalty per year, noting the $10,000 adjusted for inflation.

Burden of Proof

Interestingly, even though FBAR penalties could effectively wipe out a person’s entire net worth, the U.S. government is only required to prove FBAR violations by a preponderance of the evidence. This is the lowest level required to prove a violation and it’s typically thought of as being just over 50%.  In fact, back in 2008, even IRS counsel surmised in a previous memorandum that the burden should be at least clear and convincing evidence — which is required to prove tax fraud — and thought of as being about 75%. Unfortunately, courts across the nation have disagreed, and at the end of the day have all but concluded that even though it may be a lot of money, it is just a financial issue (unlike fraud) and the burden should be limited to a preponderance of the evidence standard.

Three Examples of Civil Non-Willful FBAR Penalties

These examples are for illustrative purposes only and each person’s facts and circumstances may change the outcome.

New U.S. Resident, Learned About FBAR for the First Time

• • • David is a second year lawful permanent resident who never lived or worked in the U.S. until very recently. He began working with a CPA this year for the first time and learned that in they prior year he should have reported his foreign bank accounts on the FBAR. This would be an example of non-wilfulness.

Unaware Foreign Pension is Reported on FBAR

• • • Mary is a U.S. person who has had a foreign bank account for several years below $10,000, but was unaware that she was also required to report her foreign pension plans, which exceed $1,000,000. When Mary aggregates her foreign pension plan with her foreign bank accounts, she exceeds $10,000. Since the total value of her foreign accounts includes pension/retirement accounts as well, she should have filed the FBAR in prior years.

$10,000 Per Account vs Total Aggregate Value

• • • Linda previously lived and worked in a foreign country and has many foreign accounts. When she researched the foreign account reporting rules, she thought it was $10,000 per account, but later realized it was $10,000 in annual aggregate total of all of her accounts. Linda had several small accounts that were all below $10,000 and thus she should have filed FBAR. prior years.

Civil Willful FBAR Penalties

The Supreme Court rejected a case that would have resolved the issue of willfulness FBAR penalties. When it comes to willfulness, the IRS is authorized to penalize taxpayers a 50% penalty on the highest value of the account. In addition, there is a floor wherein the IRS can technically issue penalties that are 50% of the maximum value or $100,000, whichever is higher. And, the $100,000 is also adjusted for inflation.

Three Examples of Civil Willful FBAR Penalties

These examples are for illustrative purposes only and each person’s facts and circumstances may change the outcome.

Knowledge of Foreign Account Reporting Requirement

• • • Dana is a U.S. citizen who began working with a CPA in the current year. The CPA told her that she is required to report foreign accounts. The CPA asked Dana to provide the foreign account information to her so that she could determine if she meets the threshold requirements for filing the different international reporting forms. Dana was aware of their request but did not want to comply and instead submitted the forms herself without the FBAR.

Intentionally Failed to File FBAR and Other Forms 

• • • Scott is a lawful permanent resident who received a very large inheritance overseas and failed to file Form 3520. He was worried about Form 3520 penalties so he did not file the late 3520 Form under one of the amnesty programs — and also did not file the FBAR. The reason he did not file the FBAR was that hoped that the IRS would not detect the non-compliance, since he was concerned if he filed the FBAR, they IRS may inquire as to where the sudden influx of money came from, leading to multiple foreign account and gift reporting penalties.

Willful Blindness

• • • Miranda was speaking with some of her friends who are all originally from outside of the United States. Miranda’s friends were talking about the different tax forms they file, including the FBAR. Miranda realized she had the same exact type of foreign accounts but she got worried and decided not to look into the matter any further even though she was pretty sure she would also be required to file these forms. 

Criminal FBAR Penalties

Criminal FBAR penalties are sought through criminal procedures and do not go through the same civil penalty enforcement processes. Typically, defendants are granted a right to jury and the government must prove their case by the beyond a reasonable doubt standard which is thought of as being 90% to 95%. Again though, criminal FBAR penalties are rare so if you are speaking with tax professionals who are goading you into believing that you are criminal because of your noncompliance, it is important to note that they are probably trying to fear-monger you and get you for a large fee to avoid an outcome that would probably not happen (aka getting arrested).

Assessed Penalties and Appeal

Various ways that taxpayers may be placed on notice that an FBAR penalty is brewing. First, some lucky taxpayers may receive a Letter 3800 which is not a penalty, but rather a warning to get it together and begin filing timely FBARs — but this letter does not result in a penalty. Otherwise, taxpayers may receive a penalty notice or a letter instructing them that they are now under audit and this will typically also include an IDR letting the taxpayer know what the IRS is looking for in terms of information about the foreign accounts. Typically, in this type of situation, the IRS already has information about the noncompliant accounts.

Liens, Levies, Seizures

Once the penalty has been assessed, taxpayers have to be cognizant of the fact that the IRS may use different common not-so-friendly methods to collect the assessed penalty. The IRS may finally notice a federal tax lien, issue a levy against a person’s bank account or wages, and even pursue a seizure notice even though seizure notices are less common.

Jeopardy Assessment

When the IRS believes that the taxpayer may flee the country or deplete the assets making it difficult for the IRS to collect on penalties they believe are rightfully due and owing they may pursue a jeopardy assessment. With a jeopardy assessment, the IRS can bypass all the typical hurdles it must face before being able to collect an assessed penalty. Noting, a jeopardy assessment does give the taxpayer the immediate right to go to court as was the case in a recent foreign grantor versus non-grantor trust case that was filed in 2024.

Recent Cases

Over the past few years, there have been several very important FBAR penalty cases to consider which will impact how a taxpayer is penalized and how they can challenge the penalty. Let’s take a look at some of the more recent cases.

Non-Willful Penalty Limitations (Bittner)

In Bittner, the Supreme Court held that the IRS is limited to a per form non-willful civil FBAR penalty and not a per account penalty.

Pre-Payment Flora Rule (Mendu)

In Mendu, the Court held that a Taxpayer was not required to pre-pay the FBAR penalty before filing a lawsuit in Federal Court.

Treaty Election (Aroeste)

In Aroeste, the court held that Taxpayers who qualified for a treaty election to be treated as foreign persons for tax purposes should not be subject to FBAR requirements.

Reckless Disregard (6^th Cir, Kelly)

In Kelly, the court held that reckless disregard still qualifies as willfulness when it comes to FBAR violations.

Repatriation Order and Contempt (Kelly)

In Kelly, the court held the Defendant in contempt (including jail) because the court found he was in violation of the Court’s order to repatriate his funds to satisfy an FBAR penalty.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.