IRS Definition Willfulness vs. Non-Willfulness
When it comes to determining which IRS route taxpayers take in order to get into compliance for prior years’ missed foreign income, assets, investments, and accounts on the FBAR — the most important distinction is that between willful and non-willful. The difference between being classified as willful vs. non-willful is the difference between submitting to the Streamlined Filing Compliance Procedures or Delinquency Procedures (which may avoid or limit potential penalties) as opposed to having to travel to the IRS Voluntary Disclosure route (which typically rings in a 50% penalty for taxpayers who are unable to certify under penalty of perjury that they are non-willful). And, with the IRS aggressively pursuing taxpayers who falsify non-willful certification statements, it is important to understand the distinction between willful and non-willful. To counteract incorrect information on the World Wide Web by tax generalists purporting to be “experts,” here is an introductory guide to explain the difference between non-willful and willful FBAR conduct.
Totality of the Circumstance Test
Unfortunately, there is no specific test to determine whether a person is willful or non-willful. Instead, the Internal Revenue Service looks at the facts and circumstances as a whole, and then based on the totality of the circumstance, will determine whether the taxpayer is willful or non-willful. It is a very subjective analysis, and therefore two reasonable and rational IRS examiners who examine the same set of facts and circumstances may come to different conclusions as to willfulness and non-willfulness. That is why it is crucial that taxpayers carefully frame any submission to the IRS.
Intent Is Not Required for FBAR Willfulness
Unlike the everyday concept of the term willful, in the realm of international tax compliance, the term willful does not mean intentional. In other words, a person does not have to act with any intent in order to be classified as willful by the US government and matters involving FBAR. Instead, there are lower levels of willfulness such as reckless disregard and willful blindness, discussed below.
If a person acts with reckless disregard, then they will be considered willful for FBAR purposes — and they can be subject to the same fines and penalties as other taxpayers who may have acted intentionally. While there is no specific definition of the concept of reckless disregard, it is the idea that the taxpayer was essentially irresponsible when it comes to learning about the requirements.
Similar to reckless disregard, if a taxpayer acted with willful blindness (which connotes that they had no actual knowledge of the compliance requirements), they too can be considered willful. For example, if a taxpayer had an idea that they should have been reporting their foreign accounts and assets on the FBAR but intentionally did not perform any additional research or obtain any additional knowledge sufficient to determine whether or not they should have reported the FBAR, this is typically sufficient for the US government to show willful blindness.
IRM (Internal Revenue Manual)
The Internal Revenue Manual is used by IRS personnel in order to determine how to handle various tax situations and scenarios. Taxpayers too can also refer to the IRM to help determine how the IRS will evaluate willful and non-willful situations and what factors are necessary in order to sufficiently prove that the taxpayer was non-willful. For taxpayers who are seeking to make a submission to the IRS on matters involving FBAR and willful v. non-willful, it is important that they refer to the Internal Revenue Manual to get a better grasp on how IRS enforcement procedures and protocols.
Recent FBAR Cases
There are various FBAR cases that either directly or indirectly touch upon issues involving willful vs non-willful. We summarized a few recent cases, and they can be found here.
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