On June 18th, the IRS announced a slew of amendments to the 2012 Offshore Voluntary Disclosure Program (OVDP). These amendments include a very attractive option to make your disclosure and receive a minimal penalty of only 5% of the account values that gave rise to your violation if you can demonstrate that you were not willful in your failure to disclose your foreign accounts on your Report of Foreign Bank and Financial Accounts(FBAR). DON’T BE FOOLED!

Not so Fast

As tempting as this offer seams, proving that you were not willful in disclosing your accounts and paying taxes is not so simple. Many laypersons assume that they can simply argue blind ignorance of the law, or that they were hiding the money for other non-tax purposes. If you want to make your non-willful argument based on one of these arguments, GOOD LUCK! If you succeed, then you will subject to the 5% penalty. However, if you certify that your violation was “non-willful” and the IRS later determines that you are willful, then you will be subject to the full gamut of civil and criminal liability which includes a life altering buffet of monetary penalties and prison time!

The IRS and the Department of Justice are not making it easy to satisfy the requirements surrounding a non-willful determination. First, your claim of ignorance is no longer justified. The courts in U.S. V. Williams have determined that making a “conscious effort to avoid learning about reporting requirements,” is evidence of willful behavior. Furthermore, there is an expectation that a person with a foreign bank account read the information specified by the relevant tax forms, especially since the inclusion of references to the FinCEN Report 114, and previous FBAR form and the information sought by form 8938. Tax Attorney David W. Klasing is concerned about the meaning of the Williams case. He explains that, “The case that causes the most concern is Williams.  Williams was a very sophisticated tax cheat who went to great lengths to cheat on his taxes.  According to one source, “the Fourth Circuit focused on an overall intent of Williams to evade taxes. “Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information” and it “can be inferred from a conscious effort to avoid learning about reporting requirements.” [citing United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir 1991)]. In addition, the Fourth Circuit noted that “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning of the facts that point to such a liability.” [citing United States v. Poole, 640 F3.d 114, 122 (4th Cir 2011)].”

In U.S. v. McBride, the court confirmed that the “willful” conduct includes the careless disregard of whether one has the right to act. What does this mean? This means that even though were you not aware of your obligation to disclose and pay taxes on your foreign accounts, the mere act of choosing not to find out can be seen as willful by the courts! Still want to try your luck?

The IRS has offered some people a wonderful option to reduce their penalties, but this program is not intended for everyone with overseas accounts who is willing to roll the dice. The IRS has taken the predictable route of disclosing willful failure to report overseas accounts and added a much less certain option with the “non-willful” option. The IRS is looking to several indicators to determine if your failure to disclose your offshore account was willful or not. Such indicators include: holding an account in a country with strict secrecy law (e.g. Switzerland), holding your account under a trust, and moving your funds to a different institution after publication that your prior banks is under investigation. These are just some of the indicators that the IRS is considering.

What About if You Have Been Using a Tax Preparer or Accountant?

If you have been using a professional tax preparer for the last 4 years claiming that your actions are non-wilful is incredibly risky. All the IRS has to do is call up the previous preparer and ask questions like:

  • Did you ask your client about foreign accounts or foreign income generating assets?
  • Did your organizer ask about these items?
  • Did you engagement letter ask about these items?
    • What answers did you receive???

Your preparer is in a position that in order to keep his or her licenses they have to meet their due diligence obligations under circular 230 due diligence requirements (see) Http://www.irs.gov/pub/irs-utl/pcir230.pdf and thus they are required to inquire into these issues. They have no attorney client privilege and must answer the IRS’s questions honestly or face tax perjury charges. If you lied to your preparer that will be sufficient to show willful conduct and expose you to all of the criminal and civil sanctions available to the government which can end your existence as you know it. Do not be penny wise and pound foolish!!! Do not make a willfulness determination on your own. Do not rely on anyone other than a seasoned criminal defense attorney as the definition of willfulness emanates from all the underlying tax centered criminal law and legal precedent in existence.

Claiming “non-willful” conduct is no easy feat, and may or may not be for you. Ultimately Klasing thinks that a minority of taxpayers will be able to take advantage of the non-willful determination and pay a reduced penalty, but not everyone will. At The Tax Law Offices of David W. Klasing, our tax attorneys and CPA’s have the experience and expertise to help you determine which filing program is right for you. They can help walk you through the process and eliminate criminal liability which helping you keep your hard earned money by minimizing monetary penalties.