When people think about their noncompliance with foreign account disclosure, as required by Foreign Account Tax Compliance Act (FATCA) and the Banking Secrecy Act (BSA), they typically consider the situation in the most favorable of terms. Oftentimes, these considerations are even made using the regular and ordinary definition of willfulness rather than the definition used by the Internal Revenue Service. Unfortunately, these assumptions can cause an individual to delay in seeking professional tax advice. In some instances a delay can foreclose certain options that would allow you to come back into compliance with reduced penalties. In other instances, you may be less prepared and thus you may exacerbate your tax problems by making inadvertent admissions or by otherwise compounding your potential liability.
At US Tax Help our tax professionals are committed to helping well-intentioned, but non-compliant, taxpayers fix their tax problems. This blog post will discuss the general concepts surrounding the IRS’ definition of willfulness. However, as always, your concerns are unique and fact specific. They can only be specifically addressed after undergoing an individualized tax consultation with an experienced tax professional.
What is a willful and non-willful FBAR compliance failure?
If you have failed to disclose a foreign financial account where that balance exceeded $10,000 at any point in the year and in which you have signature authority over or have an interest in, you have likely violated the reporting provisions of the BSA. The IRS defines a willful violation as a, “voluntary, intentional violation of a known legal duty.” On the surface, this standard might appear to offer some leeway. However, the truth of the matter is that the IRS is aggressive in enforcing tax laws. Furthermore, the process an Offshore Voluntary Disclosure filer must engage in creates a number of hurdles and legal obligations in relation to the definition of willfulness.
To begin with, a US taxpayer who utilizes the OVDP program to come back into compliance must certify that his other conduct was not willful. Beyond providing a certification under the penalty of perjury, the filer must also explain his or her failure to comply with reporting requirements. They must:
“provide specific reasons for [their] failure to report all income, pay all tax, and submit all required information returns, including FBARs. If [the non-compliant filer] relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.”
This can be a difficult standard to meet and the difficulty is only compounded by most individual’s unfamiliarity with how the IRS operates. For instance, people often believe that the IRS will take their word at face value. However, IRS agents are free to, and often do, disbelieve the statements that you make on account of the likelihood that the statements are self-serving. Furthermore, certain innocent actions can nevertheless be interpreted as signs of fraud. These can include:
- Delivery of financial statements from a foreign financial institution to an address outside of the United States.
- Use of a business entity or other arrangement to hid one’s ownership or interest.
- Request for secret meetings with financial institution officials
- Holding financial accounts in countries or jurisdictions typically considered to be tax havens due to their banking secrecy laws.
Thus, even a innocent disclosure can, perhaps, trigger allegations of willful disregard of a known tax obligation. While penalties for a nonwillful Report of Foreign Bank and Financial Accounts (FBAR) violation are $10,000 per an account per a year, penalties for a willful violation can easily exceed the amount originally in the account. A willful violation could result in a penalty of the greater of 50% of the account value or $100,000. The penalty is imposed for each and every tax year where the account went unreported. This means that with a 5 year FBAR statute, a 250% penalty – more than double the original balance — is possible.
The Hoffman Tax Law Office is dedicated to helping US tax payers correct filing, reporting, underpayment and other tax mistakes to resolve their tax compliance issues. To discuss your tax issues, contact Robert Hoffman by calling (800) 897-3915 or contact him online.