Willful Blindness Beyond FBAR
Oftentimes, when US taxpayers hear the phrase willful blindness in the realm of international tax it involves the FBAR (Foreign Bank and Financial Account Reporting) and willful penalties. But, willful blindness is not limited to unreported foreign accounts. Rather, willful blindness impacts all aspects of domestic and international tax law. The basic premise behind willful blindness is the idea that a person intentionally avoids knowledge that would otherwise educate them on a specific fact. For example, with FBAR, it could be that the CPA sent an email identifying who has to report foreign bank and financial accounts — and the taxpayer intentionally deletes the email without reading it. Or, the Taxpayer could find out about reporting but decides to bury their heads in the sand instead. Let’s look at a few examples of her waffle blinders can impact other aspects of international tax.
Examples of Willful Blindness
Let’s take a look at three (3) different examples of how willful blindness can impact international Tax matters beyond the FBAR. (Noting, each person’s facts and circumstances are different):
Jeffrey is a US person who relocated overseas. In the new country he resides in, Jeffrey wanted to start his own parasailing business. Therefore, he went to a local accountant who helped him prepare his paperwork to start the new business. Since Jeffery is an American, the accountant tells he believes he may to file some paperwork with the IRS — Form 5471. He provided Jeffrey with the name of the accountant, as well as a link to resources for Americans with foreign businesses, but Jeffrey decides the less he knows, the better. This may be considered willful blindness.
Michelle is a Green Card Holder. She recently learned her Grandma overseas passed away and left her a sizeable inheritance. She travels back to Taiwan and receives $1,500,000. She returns to the U.S. and files her tax returns. Then about 2-years later after starting her own business. She received another gift from her great aunt that passed away (an NRA who left her $300K). She decides she needs help for her business, so she uses a CPA to prepare her current return. While working on her return, the CPA informs her that she should file Form 3520 and that she also should have filed it prior for the inheritance as well. The CPA provides her information about foreign gifts to review and some forms to complete. Michelle decides she does not want to report the gifts if she is required to, so she does not continue with the CPA — even though she is pretty sure — but not certain — that she is supposed to. This too may be considered willful blindness.
Peter is a US Citizen. Several years ago he developed an Offshore Asset Protect Trust. He was told he would probably have to file certain U.S. tax forms since he was a U.S. Person. The foreign trust services company referred him to a U.S. accountant. Peter waited a few years to schedule an appointment with the accountant. Before going to the appointment, he learns about the penalties for failing to file a foreign trust. And, while he is not completely sure he has to file since he owns the trust through a holding company, he has a pretty good idea he should have filed the form. He decides to take his chances and continue filing returns without meeting with the accountant or determining if he for sure has to report the trust. This could become a problem for Peter if he is audited by the IRS or the trust company reports the information to them under FATCA.
Current Year vs Prior Year Non-Compliance
Once a taxpayer has 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 that 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.
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