Any U.S. person with more than $10,000 in foreign bank accounts must file a report of Foreign Bank and Financial Accounts (FBAR) for that tax year. The distinction between willful and non-willful FBAR violations is not always clear, as each case involving delinquent or incomplete FBARs is different.
A clear example of a willful FBAR violation would be if a taxpayer knew that their foreign financial bank accounts were over the reporting threshold and intentionally did not file an FBAR for that year. A violation might be non-willful, however, if the taxpayer was genuinely unaware of their reporting responsibility and was not objectively reckless nor did they intentionally hide foreign bank accounts.
Though penalties for non-willful violations are less severe than those for willful violations, which might also come with criminal consequences, they are not negligible. Remember, a Report of Foreign Bank and Financial Accounts is for informational purposes only; you don’t pay any taxes just by filing the FBAR. However, you could incur financial penalties if you don’t file it accurately or on time, so learning about all reporting requirements is crucial, as they might change as your financial situation does.
Call the Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing today at (800) 681-1295.
Key Differences Between Willful and Non-Willful FBAR Violations
Willful FBAR violations typically boil down to intentional acts, evasions, or objective recklessness. For example, if a taxpayer knew of the FBAR filing thresholds, whether because their tax preparer inquired about foreign accounts or was otherwise made aware, and intentionally did not file an FBAR for the necessary years, that would likely result in several willful violations.
Good faith misinterpretations of tax filing requirements, including the FBAR, might be considered non-willful violations, leading to lesser penalties for filers. This was seen in United States v. Schik, where a United States District Judge decided the defendant, Walter Schik, did not willfully violate his FBAR reporting requirements due to his tax preparer’s failure to inquire about foreign accounts and other issues with their processes. Other factors, such as Schik’s lack of formal education and the fact that he did not personally manage the foreign accounts, likely worked in his favor.
A similar case, United States v. Reyes, further illustrates the difficulties of distinguishing between willful and non-willful violations. Like in Schik, the taxpayers, this time a married couple, failed to file FBARs for a foreign account. The married couple never informed their tax preparer of the Swiss bank account in question and did not review their tax returns before submitting them.
There were other factors working against the defendants in Reyes, such as the fact that the foreign account in question represented the majority of the couple’s total wealth and that the couple warned the foreign bank against sending any statements to them in the United States or investing any of their money in U.S. securities. The court agreed that the couple willfully violated their FBAR liability, a contrasting judgment to Schik, though some of the facts were similar.
The Difference in Penalties for Willful and Non-Willful FBAR Violations
Even if taxpayers do not willfully violate their FBAR reporting requirements, they might be financially penalized. That said, the penalties for non-willful violations are far lower than those for willful violations.
The maximum financial penalty for non-willful FBAR violations is $10,000. The consequence for willful violations is much steeper: the greater the amount of $100,000 or 50% of the contents of the foreign bank accounts not reported to the Financial Crimes Enforcement Network (FinCEN).
Take the cases mentioned above. In Reyes, between 75% and 90% of the couple’s wealth was held in the Swiss bank account, and they did not report it to the IRS or the FinCEN. Since the willful FBAR violation was imposed on the couple, they likely lost considerable savings due to financial penalties. The difference between a $100,000 and $10,000 penalty alone is staggering, again showing the importance of distinguishing between willful and non-willful FBAR violations.
In addition to civil penalties, taxpayers might face criminal consequences for willful FBAR violations. These consequences vary depending on the specifics of the violation but could include additional fines and possibly jail time.
Avoiding Penalties for Any FBAR Violations
To err on the side of caution, taxpayers should typically assume that they must report detailed information about their finances, no matter where they are held. Americans living domestically or abroad with financial interest or signature authority over foreign financial accounts whose aggregate amounts exceed $10,000 must file an FBAR with FinCEN.
In Reyes and Schick, both filers used tax preparers to prepare their taxes and did not review them before submitting them to the IRS. Giving tax preparers all necessary information at the onset is crucial, as otherwise, they might need to be made aware of your new reporting responsibilities. In both of these cases, the defendants did not inform their tax preparers of their foreign bank accounts. You can protect yourself from non-willful FBAR violations to the best of your ability by providing your tax preparer with all possible financial information from the onset.
As seen in the Reyes case, updating long-time tax preparers of any changes to your finances is also important. The couple in that case used the same tax professional for over 40 years, never informing them of the foreign bank account, leading to the assessment of willful FBAR violations for the applicable years.
While the maximum penalty for a non-willful FBAR violation is $10,000, that amount is not assessed in all cases, especially if taxpayers quickly recognize the issue and file delinquent FBARs with the Financial Crimes Enforcement Network.
Call Us Today for Help with Your Case
Contact the Dual Licensed Tax Attorneys and CPAs of the Tax Law Offices of David W. Klasing by calling (800) 681-1295 today.
