Each year, most U.S. citizens with money in foreign financial accounts must report this information to the IRS in what is known as a Report of Foreign Bank and Financial Accounts (FBAR) disclosure. Any U.S. citizen with a foreign bank account that in total exceed $10,000 at any one time during the calendar year are required to file an FBAR for that account(s) on FinCen form 114. Failure to file FBARs as required can lead to both civil and criminal penalties. The most severe penalties are usually reserved for willful violations, where a taxpayer knows (or should know) of their obligations under FBAR and fails to file anyway. If the IRS determines that the FBARS were likely to have been intentionally not completed to hide an offshore stream of U.S. taxable income that also was likely to have been intentionally unreported for U.S. income tax purposes, charges of tax evasion and or willful FBAR penalties of up to 50% of the offshore account balance by the IRS are highly likely to follow and this risk should be taken very seriously.
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See part III of the following Schedule B instructions that you (not your preparer) are in most instances by law can be held responsible for: https://www.irs.gov/pub/irs-pdf/i1040sb.pdf
Below, we explain what counts as willful non-reporting under FBAR and what you should do if you are facing actual or potential trouble with the IRS.
In a series of court cases over the last few decades, the courts have clarified what counts as ‘willful conduct’ for the purpose of assessing penalties under FBAR. These cases have established that the government need only prove willfulness by a preponderance of the evidence rather than under the stricter clear and convincing evidence standard. In order to establish ‘willfulness’, the government must show that a taxpayer acted either knowingly or acted recklessly in failing to meet their reporting obligations under FBAR.
One example of behavior considered reckless would be a taxpayer forgetting to inform his accountant or tax preparer of the existence of foreign accounts. Recklessness can also exist in a situation where a taxpayer is “willfully blind” to their FBAR duties. For example, a taxpayer may sign and execute a Form 1040 without reading or understanding all of the provisions related to the required reporting of foreign accounts. In such a situation, by signing the return, the taxpayer shows that they had access to the required instructions but failed to read or listen to them. This can be considered willful behavior.
It is important to note that the taxpayer’s actual motives for not filing an FBAR are essentially irrelevant when determining willfulness. The taxpayer is not required to have acted with nefarious, specific intent in order to trigger willfulness. As described above, a failure to pay attention to reporting requirements or to be diligent in one’s handling of their tax returns can be enough to trigger willfulness and the heightened 50% (or greater) FBAR penalties that come along with it in certain cases.
Furthermore, the government is permitted to prove willfulness through circumstantial evidence. Actions taken by the taxpayer to conceal sources of income or other financial data can be inferred to imply that the taxpayer was willfully not reporting foreign accounts. Courts are also permitted to consider unprivileged communications between a tax advisor, like an accountant, and the taxpayer in determining willfulness. This is why it can be helpful to handle all your tax issues through a tax lawyer because unlike with a CPA, the attorney-client privilege will apply to all your conversations. Additionally, the original prepare is likely to be government witness number one against you if you are going to be criminally prosecuted for tax evasion or faced with 50% or greater willful FBAR penalties.
A determination about whether your failure to report under the FBAR requirements was willful or non-willful can make a big difference when it comes to the types of penalties you will be assessed for noncompliance. For non-willful violations, criminal penalties typically will not apply, and civil penalties will be limited to $10,000 for each non-willful failure to file an FBAR. With a six-year FBAR statute of limitations, this penalty maxes out at $60,000. For willful violations, criminal penalties can apply, and the fines and fees assessed as civil penalties will be much larger.
For a willful violation, the maximum penalty is increased from $10,000 per violation to the higher of $100,000 per violation or 50% of the amount in the account at the time of the violation. For foreign accounts containing large amounts of money, this could result in extremely hefty fines (see sample cases above). In addition, you will have to worry about the possibility of the IRS filing a separate criminal tax evasion case against you. If convicted of a willful failure to file FBAR, you could face separate fines of up to $250,000 and up to 5 years in federal prison (per count – 5- or 6-year statute of limitation).
Clearly, the federal government takes these types of willful FBAR violations seriously. However, not all violations are willful. Some people make genuine mistakes or are genuinely ignorant as to their duty to file an FBAR. However, this is much harder to argue if you have been using a reputable tax preparer as they often make the disclosure of offshore accounts by you mandatory in their engagement letters and client organizers and client interviews. An experienced international combo Tax Attorney and CPA like those at The Tax Law Offices of David W. Klasing can help demonstrate to the IRS that your actions do not meet the willful standard. If your actions were non-willful, there are programs a lawyer can try to get you into where you can get into compliance without having to pay large penalties.
The IRS has strict reporting requirements for those who have money in overseas bank accounts. Failure to comply with these requirements can lead to severe penalties. This is especially true in cases where information is withheld willfully, where the IRS will see your actions as a type of tax evasion. At the Tax Law Offices of David W. Klasing, our lawyers can help you understand your duty to report under FBAR and to get you into compliance for any past years in which you did not report. We will work to show the IRS that your actions were unintentional and to help you avoid the most serious penalties. Call us today at (800) 681-1295 to set up a consultation.
Note: As long as a taxpayer that has willfully committed tax and offshore information reporting crimes (potentially including intentional non-disclosure of foreign financial accounts, and required foreign entity/trust reporting coupled with intentional nonreporting of taxable offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
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