Examples of FBAR Willfulness and Non-Willfulness, New Cases

Examples of FBAR Willfulness and Non-Willfulness You Must Know

Examples of FBAR PenaltyWillfulness and Non-Willfulness

For U.S. Taxpayers with unreported foreign accounts, assets, and investments, one of the key hurdles with getting into IRS offshore tax compliance is determining whether their non-compliance was willful or non-willful. The difference between being classified as willful vs. non-willful can mean the difference between submitting to the Streamlined Filing Compliance Procedures or Delinquency Procedures (which will avoid or minimize FBAR penalties) or submitting to the IRS Offshore Voluntary Disclosure Submission (which typically results in a 50% penalty for taxpayers on the maximum value of their unreported foreign accounts). And, with the IRS aggressively pursuing taxpayers who falsify non-willful certification statements, taxpayers should be careful to understand the distinction between willful and non-willful before submitting an FBAR offshore disclosure to the IRS.

*Golding & Golding previously published a comprehensive article about Differences Between Willful and Non-Willful FBAR Penalties in 2021 and has since updated and expanded the summary.

Totality of the Circumstance Test

Unfortunately, there is no specific bright-line 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 determines whether the taxpayer is willful or non-willful. It is a 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 FBAR submission they make to the IRS.

Intent Is Not Required for FBAR Willfulness

Unlike the everyday concept of the term willful, in the world of international tax compliance, the term willfulness does not require intent. In other words, a person does not have to act with any intent to be classified as willful by the U.S. government in matters involving FBAR violations. 

Reckless Disregard

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

Willful Blindness

Similar to reckless disregard, if a taxpayer acted with willful blindness (which means 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 establish willful blindness.

IRM (Internal Revenue Manual)

The Internal Revenue Manual (IRM) is used by IRS personnel to determine how to handle various tax situations and scenarios and is a good reference guide to help learn how the IRS evaluates FBAR willfulness and non-willfulness violations. Taxpayers who want to submit delinquent FBARs to the IRS should review the Internal Revenue Manual’s guidance on enforcement procedures and protocols.

FBAR Penalties (Civil vs Criminal)

While there are different types of FBAR penalties, they typically fall into three 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. However, more often than not the failure to file the FBAR is due to negligence or mistake and not willfulness, willful blindness, or reckless disregard. Still, some taxpayers do become subject to civil willful FBAR penalties or even criminal FBAR penalties — although criminal FBAR penalties are not common and typically only occur in situations in which the taxpayer violated other criminal statutes as well, 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 (aka one penalty per form).

Bittner Changed the Landscape for Non-Willful FBAR Penalties 

In the case of Bittner, the Supreme Court limited the amount of non-willful penalties the IRS can assess for FBAR non-compliance. For example, (pre-Bittner) 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 civil FBAR violations by a preponderance of the evidence. This is the lowest level required to prove a violation and it is typically thought of as being just over 50%.  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 only 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 specific 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 in the prior years.

Civil Willful 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 adjusts for inflation. The Supreme Court recently rejected a case that would have helped resolve the issue of willful FBAR penalties and so circuits across the country are split on various issues involving willful FBAR penalties.

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 Requirements

• • • 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 not enforced the same way civil penalties are enforced. Instead, criminal FBAR penalties go through typical criminal enforcement procedures. Defendants will usually have 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%. Noting, 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 FBAR non-compliance, it is important to realize they are probably trying to fear-monger you into believing you may be subject to criminal enforcement when that is usually not the case.

Recent Cases

Over the past few years, there have been several important FBAR cases to consider which can mpact 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 violated 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/or 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.

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