Nardone Limited’s tax attorneys advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. If a taxpayer has a financial interest in or signature authority over a foreign financial account and the account exceeds certain threshold amounts, the taxpayer may be required to report the account annually by electronically filing a FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). But, if a taxpayer has failed to file the FBAR, the Internal Revenue Service (“IRS”) offers various programs that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations.
Background Regarding Foreign Accounts and Voluntary Disclosure
The Offshore Voluntary Disclosure Program (“OVDP”) and the Streamlined Filing Compliance Procedure Program (“SFCP”) offer taxpayers who have undisclosed foreign accounts a way to become compliant with U.S. tax law. The OVDP was created for taxpayers with exposure to potential criminal liability and substantial civil penalties due to a willful failure to report foreign financial assets and to pay the tax due on those assets. The SFCP, on the other hand, was developed to provide relief for taxpayers whose failure to report foreign financial assets and pay due taxes, did not result from willful conduct. But, taxpayers must use caution when considering whether their failure to disclose foreign accounts was due to willful conduct.
NL COMMENT: It is important to note that the Offshore Voluntary Disclosure Program is ending on September 28, 2018. The IRS has indicated that additional information on the voluntary disclosure process will be forthcoming. But, if a taxpayer is concerned that their failure to report foreign income was due to willful conduct, it is important that they contact a legal professional to discuss their options.
The Standard for Willfulness in the Civil Context
Failure to file an FBAR can have significant civil or criminal penalties, depending on whether the violation was non-willful or willful. For non-willful violations of the FBAR requirements, the maximum penalty is $10,000. The maximum civil penalty for a willful violation is the greater of $100,000 or fifty-percent of the balance in the account at the time of the violation. The statues and regulations, however, do not define “willfulness.” Thus, it is up to the courts to determine how to interpret the term willful.
Every federal court that has considered the willfulness standard for civil FBAR cases has concluded that the civil standard applies. See Bedrosian v. United States, No. CV 15-5853, 2017 WL 4946433. Further, the courts are consistent with regard to the burden of proof for civil FBAR penalties, concluding that the government must prove the civil FBAR penalty by a preponderance of the evidence. IRS Program Manager Technical Assistance (PMTA), 2018-013. Unfortunately, for taxpayers this means that taxpayers will have a more difficult time convincing the courts that their non-compliance was due to non-willful behavior, while the government will have an easier time proving a violation.
In the criminal context, the Supreme Court has narrowly interpreted the term “willful,” limiting it to knowing violations. But, the standard for civil FBAR cases includes “willful blindness” and “recklessness.” PMTA 2018-013. The government can establish willful blindness by evidence that the taxpayer made a conscious effort to avoid learning about reporting requirements. United States v. Williams, 489 F. App’x 665. Further, the reckless standard can be met if the government can show that the taxpayer clearly should have known that there was a grave risk that withholding taxes were not being paid and if the taxpayer was in a position to find out for certain very easily. United States v. Vespe, 868 F.2d 1328. Thus, if utilizing the SFCP, it will be more difficult for taxpayers to claim that they did not know of the requirements, especially when the internet and computers are so easily accessible.
We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their financial foreign accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported foreign financial accounts. Ultimately, if you have a foreign account and are concerned that your failure to report income, pay tax, and submit the FBAR was due to willful conduct, we encourage you to contact Nardone Limited at 614-223-0123 to discuss your options.