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The Willfulness Standard when Failing to File FBARs

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    Under the Bank Secrecy Act, anyone who willfully fails to file an FBAR (Report of Foreign Bank and Financial Accounts) can be slapped with a huge penalty – up to half of the balance in the foreign account at the time when the FBAR was due. In the past the tricky part for the IRS was proving willfulness, until recently…

    The Fourth Circuit Court of Appeals handed the IRS a victory in its war on offshore accounts and income. In United States v. Williams, the appeals court reversed the district court’s holding that Mr. Williams did not act willfully when he failed to file FBARs.

    Until it was reversed on appeal, United States v. Williams was a ray of hope for those considering FBARs as obscure forms the IRS must prove you knew about. Williams had checked the “no” box on his tax return for no foreign account and failed to file FBARs. While Williams admitted he was a tax cheat, the district court was not persuaded that he was willful when he failed to file FBARs.


    The district court suggested the IRS would have a hard time proving willfulness when a taxpayer did not know about FBARs. That may have caused some with foreign accounts not to step forward. Some tax cases imply that you might not be willful if you have a genuine misunderstanding of the tax law even if it’s unreasonable, as was the case in Cheek v. United States.

    But the FBAR landscape is touchy and the reversal of Williams suggests treading carefully. Williams pled guilty to tax evasion and the sole question was whether the FBAR violation itself was willful. Although the district court said the IRS did not separately prove willfulness, the appeals court was willing to make that connection.

    Williams testified that he failed to report the accounts and admitted willfully evading taxes. To the appeals court, that meant FBARs, too. It was not clear that Williams knew anything about FBARs.

    Still, the appeals court said that Williams made a conscious effort to avoid learning about FBARs. That itself was willful, it suggested. Willfulness had previously been defined as a known violation of a known legal duty. Now apparently conscious ignorance, at least in the FBAR arena will suffice for willfulness.

    True, there was some evidence of willfulness, but there was other evidence Williams was not. Trial courts are generally the ones to decide such issues. But to the appeals court, Williams acted recklessly enough to warrant willfulness, despite the fact that he never indicated he knew anything about FBARs.

    The majority suggests you can be willful without a specific bad intent: willful blindness.

    In United States v. McBride, the court found that McBride had an FBAR reporting requirement and willfully failed to comply with it. Similar to Williams, the court in McBride concluded that McBride was at least reckless or willfully blind to his FBAR reporting requirements.


    As a legal standard, the definition of willfulness has taken a winding path, but to the IRS, it comes down to whether there was a “voluntary, intentional violation of a known legal duty,” according to the Internal Revenue Manual.

    For the IRS, as in Williams and McBride, proving “knowledge” was always the hardest part, but according to the courts in McBride and Williams, such knowledge may now be inferred by the taxpayer’s signature on the tax return. Schedule B of Form 1040 contains a question asking whether the taxpayer has a financial interest in a foreign account and directs the taxpayer to see the instructions for the FBAR filing requirements.

    This could fuel the government to be more aggressive in pursuing cases with the potential for willfulness penalties, until other cases come down to clarify the standard. Especially where you consider the windfall to the government in doing so where FBAR penalties go from $10,000 per year for mere negligence to up to ½ the unreported foreign account balance for every year the account was open.

    For example: a $1,000,000 foreign account that went willfully unreported for 10 years would yield willfulness penalties of $5,000,000 or 500% of the account balance!!!! Yikes…

    Perhaps fortunately for taxpayers, Williams was an unpublished decision and McBride was a district court case, so neither would be binding on the courts. Still, one should be cautious when facing a possible “willfulness” penalty in an FBAR case.

    The attorneys at the Tax Law Office of David W. Klasing know the requirements for filing FBARs and what constitutes “willfulness.” We have also represented clients under criminal and civil investigation surrounding foreign accounts. To learn more, contact us today.

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