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Analyzing the Jones Decision Regarding Actual Knowledge in Applying the FBAR Willfulness Penalty

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    By now, our readers know that U.S. taxpayers are required to disclose an ownership interest in or signature authority over a foreign bank account with a balance of $10,000 or more, on an annual basis. Those taxpayers who fail to do so face civil and criminal sanctions including a civil willfulness penalty that some practitioners have called draconian. Additionally, willfully failing to comply with the Foreign Bank Account Reporting (FBAR) regime can result in a criminal prosecution and a federal prison sentence. If you have a foreign bank / financial account that has previously not been disclosed as a part of the annual FBAR regime, it is in your best interest to contact an experienced tax defense lawyer to establish a strategy to bring you into FBAR compliance.

    Although we typically focus on the potential risk of criminal tax prosecution and physical incarceration, we think it important to discuss the civil repercussions of willfully failing to file an FBAR, as well as the necessary facts that the government must establish to prove a taxpayer acted willfully.

    If a taxpayer fails to disclose the existence of a foreign bank account and their failure was considered non-willful, the government may assess a penalty of up to $10,000 per year of non-compliance. If the failure to disclose is considered willful, the civil penalty increases to the lesser of $100,000 or 50% of the high balance of the account at issue during the reporting year at issue. As one could imagine, the potential willful penalty could be incredibly high, depending on the value of the account. Thus, it is clear that the line between willful and non-willful action (or inaction) of a taxpayer is critical in determining the appropriate civil penalty.

    For civil fraud penalties associated with income taxes, the government must prove willfulness under the “clear and convincing evidence” standard. Unfortunately for taxpayers accused of willfully failing to file an FBAR, a taxpayer’s willfulness in foreign bank account reporting cases must only be proven by a “preponderance of the evidence”, a lower evidentiary standard. This raises a crucial question: what is willfulness?

    Understanding the FBAR Willfulness Standard

    Although one may commonly think of willfulness as a person having knowledge of a legal requirement and failing to satisfy such requirement, the willfulness standard in the civil context can also be satisfied through willful blindness to a legal obligation or recklessness. The willful blindness doctrine stands for the proposition, in part, that if a person makes a “conscious effort to avoid learning about the reporting requirements”, they cannot then claim to not have not willfully violated the law. Over the past few decades, the government has been successful in many cases arguing that based on the taxpayer’s education level, discussions with others, relationships with banks, and signing of a tax return, if the taxpayer did not know of their legal obligation to disclose their foreign bank account, it was because they were willfully blind to it.

    Though, some taxpayers are victorious in arguing that they did not act willfully, nor were they willfully blind or reckless with regard to their obligation to disclose their foreign bank account. In Jones (DC-CA, 125 AFTR 2020-2067), a husband and wife from New Zealand and Canada, respectively, moved to the United States as adults. While they gained U.S. citizenship, they kept existing bank accounts in their origin countries. While they built a life in the U.S., they sought the advice of a tax attorney who, while knowing of their previous citizenship status, did not indicate that they had a legal obligation to report their foreign bank accounts. Upon the husband’s death, the wife sought the assistance of a tax attorney. At that time, she discovered that she and her husband should have been filing an FBAR annually. She took steps to rectify the situation by amending tax returns and filing delinquent FBARs. She even paid the non-willful penalty associated with her late filings. Nonetheless, the IRS attempted to assess willful penalties against her and her husband’s estate. The government argued that the taxpayers’ signed tax return indicating that they had no foreign bank accounts was prima facie evidence that they had knowledge of the requirement to disclose their bank account. The district court, in denying the government’s motion for summary judgement (before ultimately dismissing the action altogether), indicated that the taxpayers did not act with any ill-intent. Further, the court weighed heavily the fact that the taxpayers’ accountant had not indicated a requirement to file an FBAR. Furthermore, the court recognized the wife’s quick action to come into compliance as soon as she found out that they were supposed to file an FBAR annually. The court acknowledged that while the signing of a tax return is prima facie evidence of actual knowledge, such presumption can be rebutted, and in this case, it was.

    Needless to say, the intricacies of the FBAR framework and its associated penalties is dense and complicated. Luckily for our readers and clients, the Tax Law Offices of David W. Klasing performs substantial work in the FBAR space, working with our clients to come into compliance with foreign bank & financial account reporting requirements. If you have a foreign bank / financial account that you have not disclosed annually, you should consider scheduling a consultation with an experienced international tax defense attorney as soon as possible. As the U.S. ramps up its cooperation with foreign governments, information continues to flow more freely and bank accounts that were once considered “secret” are coming into reach of the federal government. Given the life-changing penalties associated with FBAR noncompliance, it is crucial that you establish a plan to come into compliance.

    Questions and Answers About Foreign Tax Audits

    Questions and Answers about FBAR Compliance and Disclosure

    Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)

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