A key determination in whether a taxpayer is subject to criminal and/or civil penalties for the failure to disclose foreign bank accounts on an FBAR is whether the failure to file the FBAR form was “willful”. In general, the test for FBAR willfulness is whether there was a voluntary and intentional violation of a known legal duty. The willfulness requirement is designed to exclude a failure that was done by accident, mistake or for some other innocent reason. In order for the government to provide willfulness under the Bank Secrecy Act (BSA), it must be supported by proof of the taxpayer’s knowledge of the FBAR reporting requirements and the taxpayer’s conscious choice not to comply with those requirements.
In other words, if a taxpayer knows about the FBAR reporting requirements and intentionally chooses not to report foreign accounts that should be reported, then the taxpayer has committed a willful violation. However, willfulness can rarely be proven by direct evidence, since it is a state of mind. It can be established by an inference from the available facts. For example, willfulness can be inferred from the conduct of the taxpayer, such as keeping a double set of books, concealment of assets, covering up sources of income, destroying records and any conduct to mislead or conceal.
A common example of where there would be willfulness is where a person previously completed and filed an FBAR, but fails to file an FBAR in subsequent years when required. The previous FBAR filing establishes that the person had knowledge of the filing requirement and provides strong evidence of willfulness. Even if a taxpayer does not actually know of the requirement to file an FBAR, willfulness could be inferred from a conscious effort to avoid learning about the FBAR filing requirements. This is often known as willful blindness.
An example of willful blindness could be where a taxpayer answers “no” on Schedule B to having financial interest or signature authority over a financial account in a foreign country. Adjacent to this question, the form states “See instructions”, which provides instructions on the taxpayer’s responsibilities and the filing requirements to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority. These instructions indicate that the taxpayer could have learned of the filing requirements easily and that failure to read these instructions and learn of the reporting requirement as noted on the Schedule B is an indication of willful blindness.
Thus, if a person has the knowledge about filing requirements, the only intent to show FBAR willfulness is a conscious choice to not file the FBAR. Whereas, for willful blindness, the only intent is a conscious choice to not learn about the FBAR filing requirements.
In a situation where there is FBAR willfulness, the taxpayer could be held to the higher criminal penalty in addition to a civil penalty.
IRS Burden Of Proof
In all cases, the IRS has the burden of providing FBAR willfulness.
Factors Supporting FBAR Willfulness
Below is a list of common facts that would provide additional support or evidence of supporting FBAR Willfulness:
- Opened the foreign bank account
- Owner of, or a financial interest in the foreign account
- Tax non-compliance
- Did not seek advice, or relied upon the advice of a promoter, foreign banker or other unqualified tax professional
- Violations persist after notification of FBAR reporting requirements
- Foreign account not disclosed to return preparer
- No business reason for the foreign account
- No family or business connection to the foreign country
- An offshore entity owns the account
- Previously filed FBARs do not include all foreign accounts
- Illegal income in the foreign account
- Participated in an abusive tax avoidance scheme
Factors Not Supporting FBAR Willfulness
Below is a list of common facts that would provide additional support or evidence of not supporting FBAR Willfulness:
- Inherited the foreign bank account
- Only signature authority over the foreign bank account
- Tax compliance
- Relied upon the advice of tax return preparer, a CPA, an attorney or another qualified tax professional
- Full compliance after notification of FBAR reporting requirements
- Foreign account disclosed to return preparer
- Business reason for the foreign account
- Family or business connection to the foreign country
- Person owns the account in own name
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