IRS Non-Willful Foreign Account Violations & Penalties: The IRS analysis for Non-Willful Foreign Bank Account Penalties is complex. We will summarize IRS non-willfulness and provide examples to help benefit you. When a person applies to the IRS streamlined program the most important requirement is that they show that they are non-willful. The streamlined procedures can be broken down into two different tax amnesty programs. The streamlined domestic offshore procedures (for US residents) and streamlined foreign offshore procedures (for non-U.S. Residents). While each program has its own set of requirements, both programs require the applicant to be non-willful.
IRS Non-Willful Foreign Account Violations & Penalties
Even 50-years after the FBAR was developed, the definition of IRS Non-Willful Foreign Account Penalties is still evolving. Within the Streamlined Program, the Non-Willful penalties are limited to a single, 5% penalty on the highest year-end’s aggregate balance of unreported accounts. Here is how to calculate the Title 26 Miscellaneous Offshore Penalty (aka 5% penalty). Outside of the Streamlined Procedure the Non-Willful FBAR Penalty can range extensively.
There are four (4) non-willful foreign account penalty types:
- Penalty waiver with IRS Letter 3800
- Single, combined $10,000 penalty for all violations
- Annual $10,000 penalty, per year.
- $10,000 penalty per occurrence, per year.
*The $10,000 annual penalty adjusts for Inflation, and is currently ~$13,000.
IRS Definition of Non-Willfulness
Unfortunately, the Internal Revenue Service has not developed a bright line test to determine non-willfulness. Rather, individuals and other U.S. persons who want to apply to the program, must use a totality of the circumstances analysis to determine where they fall on the willful verse non-willful FBAR spectrum. The non-willful foreign bank account analysis is crucial, because if a person is non-willful then they will qualify for the streamline program. Conversely, if a person is willful then they will not qualify for the streamline program.
And to keep you on your toes and complicate the analysis further, the IRS has lower thresholds of willfulness, which we will discuss below.
How do I Know if I am Non-Willful?
Here are some preliminary questions and concerns to consider when determining whether you are willful or non-willful.
- How long have you had U.S. person status?
- How long have you been required to file tax U.S. returns?
- Do you generally file your tax returns timely?
- When did you learn about FBAR?
- What is the total value of the unreported accounts?
- What is the total value of the unreported income?
- Did you use a CPA or EA to prepare your taxes?
- Did they ask you about your foreign accounts and assets?
- Did you answer truthfully?
- Did you complete a schedule B?
There are literally hundreds of other questions to choose from depending on how the initial fax parse out, these are some of the more introductory questions.
Examples of FBAR Non-Willful Penalties
The specific facts and circumstances for each one of these examples beyond what is summarized below will vary the outcome. But (and not considering and intricate knowledge of the underlying situation) here are a few common non-willful examples:
New U.S. Resident (Non-Willful FBAR Example 1)
Denise just moved to the United States in 2019. In 2020 she is filing her first tax return. She met the substantial presence test and therefore decided to use a CPA. Denise has several several assets abroad, and hundreds of thousand dollars in foreign bank accounts. Her CPA told her she was not required to file an FBAR, because she’s on a H-1B.
Relied on a CPA (Non-Willful FBAR Example 2)
Matthew is originally from Taiwan. He moved to the United States in 2014 and began using a CPA. Matthew has no tax background and no knowledge of reporting requirements. Each year come he completes his CPAs tax organizer, which asks several questions — but none of them ask about foreign accounts. In 2020, Matthew’s CPA went to a seminar and learned all about FBAR and FATCA. Mathew’s CPA now tells Matthew for the first time that Matthew had a prior FBAR reporting requirement in the previous years.
Foreign Resident Relied on a CPA (Non-Willful FBAR Example 3)
Scott is a green card holder who resides outside of United States. He uses a tax service for expats. Scott was unsure if he had to even file taxes, since he has no U.S. income. The tax service told Scott that since he is below the foreign earned income exclusion, he is not required to file anything with the IRS. Therefore, Scott remains unaware that he has any reporting requirement until recently.
Accidental American (Non-Willful FBAR Example 4)
Mary resides in Hong Kong. She was born in United States to U.S. parents who then moved back to Hong Kong when she was three months old. In 2020 she received a FATCA Letter from her local ban asking her to certify whether she is a U.S. citizen. In researching U.S. tax law Mary learns for the first time that she is a U.S.citizen. As such, she has an FBAR filing requirement.
Beware of Lower Levels of FBAR Willfulness
When someone thinks of the term willful, they generally think of the term intentional – as in, somebody has to act with intent in order to be willful. While this is the general rule for life in general, and criminal related tax violations — the civil FBAR thresholds are different. The IRS may pursue willful violations into specific circumstances that do not require intent or knowledge.
Streamlined Filing 5% Penalty
Under the Streamlined Procedure, a person qualifies for either a 5% Title 26 Miscellaneous Offshore Penalty, or a complete penalty waiver.
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