For taxpayers doubtful as to whether their conduct will be considered willful, the IRS recommends that the taxpayer enter into the IRS’ Voluntary Disclosure Practice, and to seek advice from attorneys or other tax professionals.
When it comes to determining whether a taxpayer will be recommended for criminal prosecution, it is fruitless for a taxpayer to deduce what the outcome will be for them based on previous, similar cases that came before the IRS. (See IRM 126.96.36.199 - Voluntary Disclosure Practice).
The IRS states that “[t]he Voluntary Disclosure Practice creates no substantive or procedural rights for taxpayers.”
Given the difficulty in determining willfulness and the potential consequences that can result from being held criminally liable, this is certainly one issue that you would not want to tackle alone.
Whether or not you decide to retain our firm to assist you, you would be doing yourself a great disservice to try to face this on your own.
If your conduct is considered non-willful, then it is worthwhile to determine your eligibility for the SFOP or SDOP program. These programs will be discussed in the next and final chapter of this book.
Penalties will not be imposed if there was “reasonable cause” for violating the law, and if the amount of the transaction or the balance in the account at the time of the transaction was properly reported. (See 31 U.S.C. 5321(a)(5)(B)(ii)).
What constitutes reasonable cause will depend on the nature of the violation. However, some facts that will be taken into consideration are whether the taxpayer relied on professional advice, and whether the taxpayer knew or should have known of the violation. See 26 CFR § 1.6664-4 to read through the guidance that the IRS uses in determining reasonable cause.
Relying on the advice of a CPA or attorney evidently would be considered “reasonable” but the Supreme Court has placed some limits on this reliance. In U.S. v. Boyle, 469 U.S. 241 (1985), it was held that it was unreasonable for an executor of an estate who worked with an attorney to have failed to file Form 706 (estate tax form) because the filing deadline statute was “unambiguous.”
Similarly, a taxpayer’s failure to review his tax filings, even if prepared by a professional, may also be deemed unreasonable. Additionally taxpayers that could not file on time despite having “exercised ordinary business care and prudence” will be deemed to have reasonable cause for not filing. (See also Treas. Reg. 301.6651-1(c)(1)).
Furthermore, taxpayers unable to pay their liability on time despite having “exercised ordinary business care and prudence” will also be deemed to have reasonable cause for their non-compliance.
The non-willful penalty has been limited to a $10,000 penalty per open year, regardless of the number of accounts. Unfortunately, the government has taken the position that the fine can be applied to each non-disclosed account.
Thus, in practice, some courts have held that penalties can be placed on multiple accounts while on the other hand, the Eastern District of Texas has recently held that only one penalty can be imposed per FBAR filing. (See United States v. Bittner, 4:19-cv-415 (E.D. Tex. Jun. 29, 2020)).
While Texas’ recent ruling may shift the way these penalties are applied, taxpayers should operate under the assumption that they may be penalized on each account that they do not report.
As mentioned previously, the IRS has generally operated under a circumscribed policy limiting the application of the penalty to its full extent. However, depending on the facts and how egregious the violations are, the IRS may push the penalties further than they normally do.
The IRS has had cases go in their favor in this area, but these FBAR penalty cases are still being litigated.
For now, this means that if you have three foreign bank accounts that fall under FBAR reporting obligations, you could potentially be fined $30,000 (3 accounts x $10,000 fine) for every year that you did not fulfill your filing requirements.
This stacking of penalties under the non-willful penalty imposes a pretty severe punishment on taxpayers who unintentionally failed to file.
While non-willful disclosure is not quite as severe as willful disclosure, nonetheless, it can still carry penalties. You and your tax preparer (if you used one) will have to provide valid answers to some hard questions from the IRS.
One solution is to enter into the IRS’ Voluntary Disclosure Program, which will demonstrate good faith to the IRS and allow you to get into compliance. It will not come cheap as you will need to file outstanding forms and there still might be penalties.
I always urge taxpayers who are not sure of their FBAR status to come in for a consultation. Together, we can determine your status and create a plan to get you back in compliance.