The IRS Recently Clarified Its Position on Willfulness in FBAR Penalty Cases and It Is Not Taxpayer-Friendly
Pursuant to 31 U.S.C. 5314(a) and 31 C.F.R. 1010.350, a United States person is required to annually report financial accounts in which it has a financial interest or signature authority over to the Internal Revenue Service on a Report of Foreign Bank and Financial Accounts Form (FBAR). If a taxpayer fails to timely submit its FBAR, 31 U.S.C. 5321(a)(5) allows the government to impose penalties on the taxpayer up to the greater of $100,000 or half the value of the account balance at the time of the violation when the failure to file is considered “willful”.
The IRS has recently released internal documentation in which it outlines its views on the standard for “willfulness” in assessing FBAR penalties against taxpayers. It also sets forth its belief in the burden of proof required to establish that a taxpayer acted willfully.
According to the IRS, willfulness is more than just ignoring a known obligation. The IRS has determined that for FBAR violation purposes, the term “willful” includes not only a knowing failure to file, but also when the taxpayer is “reckless” or “willfully blind” in its failure to file.
Courts have held that recklessness exists when a taxpayer “(1) ought to have known know that (2) there was a grave risk [in not complying with the law] and if (3) he was in a position to find out for certain very easily.” United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989).
Willful blindness exists when a taxpayer makes “a conscious effort to avoid learning about reporting requirements.” United States v. Williams, 489 Fed.Appx. 655, 659-660 (4th Cir. 2012). The Internal Revenue Manual also indicates that “willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return.” I.R.M. 4.26.16.6.5.1.
Thus, the IRS could attempt to assess a willfulness penalty even if you were not aware of your FBAR filing obligation. Although the IRS initially believed in the internal guidance that the IRS would need to prove willfulness under the clear and convincing standard, case law has indicated that a lower burden – merely a preponderance of the evidence – is all that is required to assess an FBAR penalty against a taxpayer. Thus, the IRS needs only to prove that you were more likely than not willful in failing to file your FBAR.
If you have questions, please contact us
To determine whether you should be concerned about a willful FBAR violation, it is advisable to work with an experienced New Jersey tax attorney who can review your options. At Scarinci Hollenbeck, our seasoned professionals stand ready to assist. If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Pittard, at 201-806-3364.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
IRS Position on Willfulness in FBAR Penalty Case Not Taxpayer-Friendly
Author: Scarinci Hollenbeck, LLC
The IRS Recently Clarified Its Position on Willfulness in FBAR Penalty Cases and It Is Not Taxpayer-Friendly
Pursuant to 31 U.S.C. 5314(a) and 31 C.F.R. 1010.350, a United States person is required to annually report financial accounts in which it has a financial interest or signature authority over to the Internal Revenue Service on a Report of Foreign Bank and Financial Accounts Form (FBAR). If a taxpayer fails to timely submit its FBAR, 31 U.S.C. 5321(a)(5) allows the government to impose penalties on the taxpayer up to the greater of $100,000 or half the value of the account balance at the time of the violation when the failure to file is considered “willful”.
The IRS has recently released internal documentation in which it outlines its views on the standard for “willfulness” in assessing FBAR penalties against taxpayers. It also sets forth its belief in the burden of proof required to establish that a taxpayer acted willfully.
According to the IRS, willfulness is more than just ignoring a known obligation. The IRS has determined that for FBAR violation purposes, the term “willful” includes not only a knowing failure to file, but also when the taxpayer is “reckless” or “willfully blind” in its failure to file.
Courts have held that recklessness exists when a taxpayer “(1) ought to have known know that (2) there was a grave risk [in not complying with the law] and if (3) he was in a position to find out for certain very easily.” United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989).
Willful blindness exists when a taxpayer makes “a conscious effort to avoid learning about reporting requirements.” United States v. Williams, 489 Fed.Appx. 655, 659-660 (4th Cir. 2012). The Internal Revenue Manual also indicates that “willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return.” I.R.M. 4.26.16.6.5.1.
Thus, the IRS could attempt to assess a willfulness penalty even if you were not aware of your FBAR filing obligation. Although the IRS initially believed in the internal guidance that the IRS would need to prove willfulness under the clear and convincing standard, case law has indicated that a lower burden – merely a preponderance of the evidence – is all that is required to assess an FBAR penalty against a taxpayer. Thus, the IRS needs only to prove that you were more likely than not willful in failing to file your FBAR.
If you have questions, please contact us
To determine whether you should be concerned about a willful FBAR violation, it is advisable to work with an experienced New Jersey tax attorney who can review your options. At Scarinci Hollenbeck, our seasoned professionals stand ready to assist. If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Pittard, at 201-806-3364.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
