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Is voluntary disclosure enough to avoid willfulness for FBAR violations?

On Behalf of | May 21, 2024 | International Tax Law |

The U.S. government requires taxpayers with a foreign bank account that has $10,000 or more at any point during the tax year to report the account using the Report of Foreign Bank and Financial Accounts (FBAR). A failure to file can result in steep penalties, including up to $10,000 in fines. If the government can show that the taxpayer intentionally failed to file this form, they can push for even more severe penalties, including the greater of $100,000 or 50% of the balance in the account at the time of the violation as well as potential criminal penalties.

But what does it mean to be willful when it comes to a failure to file? The laws are always evolving and ensuring full compliance is no easy feat. How can the courts decide if a failure was an honest mistake or a malicious attempt to avoid tax obligations? A physician recently asked this question, arguing that his failure to file was a mistake and did not rise to a willful violation, particularly since he participated in the IRS’ Offshore Voluntary Disclosure Program (OVDP) coming forward himself to begin compliance efforts.

Unfortunately, the court did not agree. The court used the following to support its reasoning:

  1. Taxpayer opened a bank account with Finter Bank in Switzerland and had accounts numbered to ensure the taxpayer’s name was not on the statements,
  2. Taxpayer opted out of mailings, asking the bank to keep any account-related correspondence,
  3. Taxpayer opted out of investing in U.S. securities allegedly to shield the account from authorities,
  4. Taxpayer completed forms upon opening account acknowledging the need to file forms with the U.S. government, yet failed to do so, and
  5. Taxpayer did not inquire about tax implications of opening the account with legal counsel or the bank but did ask the bank if it would respond to IRS requests for information.

The government pushed for the court to consider the violation willful and presented evidence the Swiss bank sent a letter to the taxpayer, encouraging the taxpayer to come into compliance with U.S tax requirements. The government argues the taxpayer only took steps to comply after receiving the letter. At this time, the taxpayer requested and received preliminary acceptance into the IRS’ OVDP.

For the purposes of establishing willfulness in a civil violation, the court reviewed the evidence to see if the taxpayer was knowing and reckless in his violation of tax reporting requirements. Although recklessness requires more than negligence, the government will argue they establish this goal when they have evidence the accused ought to have known, was at “grave risk” of failing to file an FBAR and was in a relatively easy position to find the answer. In this case, the court found the taxpayer’s participation in OVDP and the use of a Swiss account manager were not enough to overcome allegations of willfulness.

Taxpayers  looking to ensure foreign account tax compliance are wise to take this case as a word of caution. The government does not take lightly to allegations a taxpayer neglected their obligations and will pursue a case — pushing for an increase to willful violation if possible. Careful planning can help to better ensure compliance and result in the evidence needed to help build a strong defense if the government attempts to move forward with allegations of tax avoidance and other wrongdoing.