U.S. taxpayers who maintain offshore bank or investment accounts or business entities are subject to some of the most stringent tax reporting rules in existence. The IRS—and frequently the Department of Justice (DOJ)—targets those who fail to fully disclose foreign financial interests, aggressively pursuing both civil penalties and, in many cases, criminal tax charges. If you have not entirely and transparently included all of your offshore accounts (bank and brokerage), financial assets, business investment on your tax returns and FBARs, you risk life-altering consequences.
When it comes to offshore accounts, business investments, & income generating assets, taxpayers should be keenly aware of the IRS’s growing interest in foreign financial assets. Every year, new regulations and stronger international information-sharing agreements make it harder and harder to conceal offshore taxable income or hide assets abroad. The dual-licensed attorneys and CPAs at the Tax Law Offices of David W. Klasing are well-versed in helping businesses and individuals navigate these complex reporting rules. Failing to fully disclose, often inherited, foreign accounts, business investments & income generating assets can lead to significant penalties, not to mention the risk of criminal prosecution in certain cases. Below, we explore why compliance matters, which reporting obligations may apply, and what happens when those obligations are ignored.
FATCA Reporting Requirements and Enforcement Risks
Under the Foreign Account Tax Compliance Act (FATCA), U.S. citizens (including residents and certain non-residents) must file Form 8938 (Statement of Specified Foreign Financial Assets) if their offshore holdings exceed as little as $50,000. Because many taxpayers, whether intentionally or inadvertently, do not self-report, FATCA also compels foreign financial institutions (FFIs)—such as non-U.S. banks & brokerages and mutual funds—to provide customer account information to the IRS. Despite facing steep penalties themselves, numerous FFIs have not met these obligations, prompting the IRS to introduce new enforcement initiatives aimed directly at them. Unfortunately, taxpayers will also feel the impact of these efforts as foreign banks, eager to avoid fines, begin sharing more account details with U.S. authorities.
If you have undisclosed offshore accounts, now is the time to explore your voluntary disclosure options with a dual-licensed International Tax Attorney & CPA. If you received a FATCA letter or are worried about past failures to report offshore accounts, consult with a qualified FATCA attorney immediately—before your disclosure paths narrow. Failing to act swiftly may expose you to severe fines or even criminal tax prosecution under FATCA. To arrange a reduced-rate consultation with the experienced FATCA tax lawyers at the Tax Law Office of David W. Klasing, contact us online HERE or call our main office in Irvine at (888) 640-3408. Our firm has distinguished itself in the area of FATCA compliance, making us uniquely suited to address complex offshore disclosure issues.
Why These Rules Exist
From the government’s perspective, offshore disclosure rules are a way to prevent tax evasion. For many years, individuals and businesses used secret foreign accounts to hide clearly taxable offshore business and investment income and capital gains very commonly related to inherited offshore assets. Over time, international pressure and a series of high-profile crackdowns led most countries to sign information exchange agreements. The IRS can now access foreign banking data through multiple channels, making it much riskier for taxpayers to assume that their offshore accounts, trust & offshore income generating investment and business assets will remain hidden.
Penalties That Can Exceed 100% of Account Balances
The IRS has made it clear that failing to make a comprehensive, accurate, and voluntary disclosure of foreign accounts going back six to eight years can result in penalties exceeding 100% of the highest annual balance in your offshore accounts—or $100,000, whichever is greater. In some cases, this alone can wipe out an individual’s entire net worth. Worse still, the IRS routinely seeks criminal tax evasion charges against those whose conduct suggests willfulness or an intent to conceal foreign assets.
“I Didn’t Know” is No Defense
Having an undisclosed offshore account can be more than a legal matter—it can carry serious emotional and financial consequences. Investigations often force taxpayers to dig through years of records, incurring significant legal and accounting fees, not to mention stress. If the government suspects fraud, it may freeze assets or take other steps that disrupt your business operations and personal finances. Even if you ultimately resolve the issue, the anxiety and reputational harm linger.
Taxpayers who establish or hold offshore accounts are presumed to have the sophistication to comply with reporting obligations. Pleading ignorance of Foreign Bank Account Reporting (FBAR) rules or international tax forms rarely shields you from harsh civil or criminal tax penalties. Indeed, the IRS and DOJ have repeatedly stated they will not accept a mere lack of awareness as a valid excuse for noncompliance. The government has also expanded its global data-sharing agreements, significantly increasing the odds that undisclosed offshore accounts will be discovered. Contact the tax law offices of David W. Klasing if you have unreported offshore accounts. Now is the time to discuss your voluntary disclosure options with our dual-licensed international tax attorneys & CPAs.
Willful vs. Non-Willful FBAR Violations
Many believe the difference between willful and non-willful violations is noticeable—intentional evasion versus an innocent mistake. However, the IRS, DOJ, and federal courts apply a broader definition of willfulness, encompassing:
- Intentional Cheating – outright fraud or deliberate concealment of offshore accounts;
- Objective Recklessness – “should have known” behavior where a taxpayer ignores red flags or well-publicized rules;
- Willful Blindness – actively avoiding further inquiries that might confirm an FBAR filing requirement.
If your conduct meets any of these thresholds, the IRS can pursue willful civil tax penalties—often 50% of the highest annual account balance (or $100,000, whichever is greater) per year—or even escalate matters into a criminal tax investigation if it discerns intentional wrongdoing. By contrast, non-willful FBAR penalties are typically capped at $10,000 per FBAR form (adjusted for inflation). However, courts still scrutinize closely whether seemingly negligent conduct crosses over into reckless or willful territory.
Real-World Examples: Reyes and Schik
U.S. v. Reyes
Taxpayers concealed 75–90% of their wealth in Swiss accounts, instructed banks not to mail statements, and withheld this information from their preparer. Despite claiming ignorance and bad third-party advice, the court deemed them at least reckless—applying willful FBAR penalties on summary judgment.
U.S. v. Schik
Another taxpayer also failed to review returns but had minimal formal education and a preparer who never asked about foreign accounts. The court found a genuine question as to whether this was genuinely non-willful negligence, denying the government’s motion for summary judgment on willfulness.
These cases highlight the razor-thin line between negligent oversight and willful misconduct. Courts consider multiple factors, including education level, explicit warnings from the IRS, and whether the taxpayer took any steps to hide or ignore foreign obligations.
Current Willfulness Standard for Offshore Account Reporting
A more recent development in federal courts has further clarified the standard for establishing willfulness in foreign account reporting violations. Under U.S. v. Bohanec—a Ninth Circuit District Court decision—the standard for proving willfulness in offshore disclosures is lower than the “clear and convincing evidence” typically required in criminal tax and foreign information reporting cases. Thus, it is considerably easier for the government to prove that a taxpayer has willfully violated foreign account reporting rules.
Moreover, courts have applied the “conscious avoidance” standard to determine whether an individual willfully failed to disclose offshore accounts. In United States v. Gatto—a Second Circuit case—the court reinforced that taxpayers cannot shield themselves from liability by deliberately ignoring key facts pointing to an FBAR filing requirement. Specifically, the government can show willful blindness by proving two elements:
- The taxpayer actually believed there was a significant chance a critical fact existed, and
- The taxpayer took purposeful steps to avoid learning of that fact.
Essentially, if a taxpayer had access to information indicating that a foreign account needed to be reported, they cannot simply disregard it and later claim ignorance. Doing so can cause the IRS to deem their conduct willful, which leads to far more severe civil tax penalties—and, in worst case scenarios, opens the door to exponentially worse criminal tax prosecution.
Although these recent developments offer some insights into what qualifies as willful conduct, numerous unanswered questions remain. As with any intent-based statute, a taxpayer’s state of mind is inherently complex to define and establish. At the Tax Law Offices of David W. Klasing, our dual-licensed California Tax Lawyers and CPAs draw on extensive experience with voluntary disclosures—both Streamlined and Full-blown—to resolve offshore tax and foreign information reporting challenges. We work strategically to ensure you choose the optimal disclosure pathway to safeguard your liberty and net worth and, when appropriate, demonstrate that you did not deliberately violate tax and foreign reporting laws.
Fortunately, the IRS has periodically offered various disclosure programs that incentivize taxpayers to come forward voluntarily and resolve potential issues before they escalate into criminal tax matters. Programs like the Offshore Voluntary Disclosure Program (OVDP) or its successor initiatives allowed individuals with undisclosed foreign accounts to pay reduced penalties that would otherwise apply, file amended returns to include previously omitted offshore taxable income, and clear up lingering doubts about their compliance. Although the formal OVDP closed in 2018, the IRS occasionally announces new initiatives or enforcement “campaigns” targeting offshore non-compliance. Taxpayers who suspect they have mis stepped should move quickly and consult a qualified tax attorney-CPA to evaluate their options. For a reduced-rate initial consultation, call 888-640-3408 today or contact us online HERE.
The Bank Secrecy Act and FBAR Filing Basics
Under the Bank Secrecy Act, a U.S. taxpayer must file an FBAR (FinCEN Form 114) if the aggregate balance of their foreign financial accounts exceeds $10,000 at any point during the calendar year. Failing to file or filing incomplete FBARs can lead to:
Non-Willful Civil Penalties
Capped at $10,000 per form (post-Bittner, adjusted for inflation). Still, even these fines can add up, and the IRS may argue that seemingly innocent lapses were willful.
Willful Civil Penalties
Potentially 50% of the highest aggregate account balance per year—or $100,000, whichever is greater. This can be ruinous across multiple years and might serve as a springboard to criminal tax charges if the IRS suspects deliberate deception.
Criminal Tax Liability
Rare but exponentially more severe. If the IRS Criminal Investigation Division (CID) believes your offshore noncompliance was willful, you could face tax evasion charges, money laundering allegations, and potentially prison time.
An offshore-related IRS audit often starts as a civil examination, but red flags can trigger a referral to the Criminal Investigation Division—which boasts a 92%+ conviction rate in the cases it takes to the DOJ for prosecution. Common triggers include
- Accounts in well-known secrecy jurisdictions (e.g., Swiss or Cayman banks)
- Complex structures (trusts, foreign corporations) seemingly designed to obscure beneficial ownership
- Transfers to or from offshore entities that appear designed to avoid normal banking channels
- Repeated non-filing of FBARs, Form 8938 (Statement of Specified Foreign Financial Assets), or other international forms—particularly where the taxpayer is otherwise financially savvy
If you suspect you might be under scrutiny, never speak directly with IRS auditors or Special Agents without consulting a dual-licensed Criminal Tax Attorney & CPA. Anything you disclose could be used against you, and non-attorney tax preparers are legally prohibited from offering the same confidentiality protections, Attorney Client Privilege and Work Product Privileged. Not to mention it is the unauthorized practice of law for a non-attorney to engage in criminal tax defense. Your original preparer is likely to be witness number one if you are prosecuted.
Contact the Tax Law Offices of David W. Klasing if You Failed to Make a Full Disclosure of Offshore Accounts to the IRS
If you have a history of offshore tax fraud or suspect that your past conduct might be deemed willful, you may still avert criminal tax prosecution and potentially secure more lenient civil penalties by entering a domestic or offshore voluntary disclosure—provided the IRS has not yet initiated an audit or criminal tax or foreign information investigation. This approach typically involves admitting your noncompliance, paying owed back taxes, and accepting certain penalties in exchange for a nearly guaranteed pass on criminal tax charges.
Non-attorney tax preparers, however, are ill-equipped to manage the legal and strategic aspects of voluntary disclosure, cannot offer attorney-client privilege, and risk committing the unauthorized practice of law. For taxpayers who can credibly establish that their mistakes were non-willful, the Streamlined Filing Compliance Procedures may reduce or even eliminate penalties, though meeting the eligibility requirements often demands detailed legal and accounting evaluations. Relying on your original tax preparer in a high-risk situation can be dangerous, as they may be subpoenaed or shift responsibility onto you to protect themselves. By contrast, a qualified attorney can insulate interactions with the firm’s accountants ensuring your communications remain privileged—a critical advantage in eggshell audits, reverse eggshell audits, or potential criminal tax referrals.
At the Tax Law Offices of David W. Klasing, our Dual-Licensed Criminal Tax Defense Attorneys & CPAs unite robust legal advocacy with forensic accounting expertise, ensuring comprehensive defense strategies for both civil and criminal tax issues. We have never had an audit client criminally prosecuted, underscoring our success in preventing cases from escalating to that point. With the support of attorney-client privilege, sophisticated negotiation tactics, and decades of combined experience, we stand ready to help protect your liberty and net worth—whether by crafting a voluntary disclosure strategy or guiding you through eggshell audits where criminal tax exposure is imminent.
Time is of the essence if you suspect the IRS might categorize your foreign reporting as willful or if you are already the subject of an offshore audit. Once the IRS pursues a criminal referral, the stakes and potential penalties rise exponentially. We regularly help taxpayers avoid draconian civil fines and head off criminal tax charges through well-planned voluntary disclosure or streamlined filing solutions. Call us at (800) 681-1295 for a reduced-rate initial consultation or contact us online to learn more about how we can safeguard your future. Our A+ BBB-rating and 10.0 Avvo-rated firm have multiple satellite offices, and thanks to our firm-owned Cirrus SR22 airplane, David W. Klasing, an instrument rated private pilot, can personally meet with you at the location most convenient for you—at no extra travel cost (preceded by a one-hour phone call). We have designed this service to benefit our clients, with no additional travel time or travel expenses added to your bill. Call us at 800-681-1295 or complete our online contact form today.
