Tax Penalty - Philip Falco, Tax Attorney & CPA Dual Licensed

Whether an FBAR violation is willful or non-willful can dramatically affect potential penalties and the appropriate method of correcting prior foreign account reporting failures. Willfulness is therefore one of the most important issues to evaluate before making a Streamlined certification, filing delinquent foreign account reports, or considering the IRS Voluntary Disclosure Practice.

Colorado Legal assists taxpayers with FBAR compliance, offshore reporting problems, Streamlined submissions, IRS examinations, and potential voluntary disclosure matters. Philip M. Falco is both a Colorado attorney and Certified Public Accountant.

Do not assume that ␜I didn’t know about the FBAR␝ automatically resolves the willfulness issue. Civil FBAR willfulness can involve knowing conduct, reckless conduct, or willful blindness. Conversely, the existence of a reporting failure does not by itself establish willfulness. The determination depends on the complete facts and circumstances.

What Is an FBAR Violation?

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114, generally applies when a U.S. person has a financial interest in or signature or other authority over qualifying foreign financial accounts and the aggregate value exceeds the applicable reporting threshold.

For a detailed discussion of who must file, account aggregation, filing deadlines, late FBARs, and related requirements, see our FBAR Filing and FinCEN Form 114 page.

What Does ␜Willful␝ Mean for a Civil FBAR Penalty?

The IRS Internal Revenue Manual states that, for civil FBAR purposes, the test for willfulness includes situations in which a person:

knowingly violated a legal duty;
recklessly violated a legal duty; or
acted with willful blindness by consciously avoiding learning about a legal duty.

This is important because civil willfulness is not necessarily limited to a taxpayer who expressly admits knowing about the FBAR requirement and intentionally deciding not to file.

The IRS bears the burden of establishing willfulness when asserting a willful FBAR penalty.

Knowing FBAR Violations

A knowing violation presents the most direct form of willfulness. The issue may arise where evidence shows that the taxpayer knew of the foreign account reporting requirement and consciously chose not to report an account accurately or timely.

Evidence can include written communications, prior filings, professional advice, account-opening documents, tax organizer responses, prior FBAR filings, correspondence with financial institutions, or other evidence demonstrating actual knowledge.

Recklessness and FBAR Willfulness

The civil FBAR analysis can also encompass reckless conduct.

The IRS describes recklessness as an objective inquiry into whether the taxpayer recklessly disregarded the reporting requirements. Consequently, a taxpayer’s statement that he or she did not subjectively intend to violate the law may not end the inquiry.

This is one reason offshore compliance should not be reduced to a single question such as, ␜Did you know what an FBAR was?␝

Willful Blindness

Willful blindness generally concerns a conscious effort to avoid learning about a legal duty.

Potential evidence may involve circumstances suggesting that a taxpayer deliberately avoided information concerning reporting obligations. As with recklessness, the analysis depends on actual facts rather than labels.

What Is a Non-Willful FBAR Violation?

For purposes of the IRS Streamlined Filing Compliance Procedures, the IRS describes non-willful conduct as conduct resulting from negligence, inadvertence, mistake, or a good-faith misunderstanding of the requirements of the law.

Non-willful does not mean that no filing failure occurred. Instead, it addresses the nature of the conduct that produced the failure.

Taxpayers seeking Streamlined treatment must certify under penalties of perjury that the relevant failures resulted from non-willful conduct.

See our Streamlined Filing Compliance Procedures guide for more information.

Facts the IRS May Consider in Evaluating Willfulness

There is no single universal checklist that decides every FBAR case. Relevant facts can include:

whether the taxpayer previously filed FBARs;
whether foreign income was reported on the federal income tax return;
answers on Schedule B concerning foreign accounts;
what information was provided to the return preparer;
whether a CPA, attorney, financial adviser, or bank discussed U.S. reporting requirements;
the taxpayer’s education, occupation, and financial sophistication;
the reason the foreign account was opened;
whether the taxpayer inherited the account or had longstanding family assets overseas;
whether statements were mailed to the United States;
whether funds were moved between foreign institutions;
whether entities, trusts, foundations, nominees, or other structures were used;
whether the account was disclosed to other government agencies or financial institutions;
the taxpayer’s citizenship and residence history;
whether Forms 8938, 5471, 3520, 8621, 8865, or other international returns were filed;
prior IRS contacts or examinations; and
the credibility and consistency of the taxpayer’s explanation.

The significance of any one fact depends upon the surrounding circumstances.

Schedule B and Foreign Account Questions

Individual income tax returns can contain questions concerning foreign financial accounts and foreign trusts on Schedule B.

How those questions were answered may become relevant to an IRS willfulness analysis, but the answer is not necessarily dispositive by itself. Other facts can include who prepared the return, whether the taxpayer reviewed it, the information supplied to the preparer, the taxpayer’s understanding of the question, and whether foreign income or other international forms were reported.

Reliance on a CPA or Tax Return Preparer

A taxpayer may have relied on an accountant or other return preparer, but merely having a professional preparer does not automatically establish either willfulness or non-willfulness.

Important questions can include what the taxpayer told the preparer, what questions the preparer asked, what documents were provided, and whether the taxpayer had information suggesting additional foreign reporting obligations.

Contemporaneous emails, tax organizers, engagement correspondence, and copies of prior returns can be important evidence.

Non-Willful FBAR Penalties

Federal law authorizes civil penalties for non-willful FBAR violations, subject to the applicable statutory maximum as adjusted for inflation.

Following the Supreme Court’s decision concerning non-willful FBAR penalties, the IRS treats the failure to file a legally compliant FBAR as a single non-willful reporting violation rather than imposing a separate non-willful penalty for every account omitted from the same annual FBAR.

The IRS also recognizes a reasonable-cause exception for qualifying non-willful violations when the statutory conditions are satisfied.

Willful FBAR Penalties

The potential civil penalty exposure for a willful FBAR violation is substantially greater.

For applicable violations, federal law authorizes a maximum penalty for each willful violation of the greater of the inflation-adjusted statutory dollar amount or 50% of the amount in the account at the time of the violation.

IRS examination procedures also include mitigation guidelines and examiner discretion. Actual penalty exposure therefore requires analysis of the number of violations, account balances, years at issue, mitigation criteria, and the specific facts of the case.

The possibility of willful penalties is one reason a taxpayer with substantial unreported foreign accounts should evaluate the compliance strategy before making new filings.

Willful vs. Non-Willful: Why the Difference Matters

Issue	Non-Willful	Potentially Willful
Nature of conduct	May involve negligence, inadvertence, mistake, or good-faith misunderstanding	May involve knowing conduct, recklessness, or willful blindness
Streamlined procedures	Potentially available if all eligibility requirements are satisfied	Generally inconsistent with the required non-willfulness certification
FBAR penalty exposure	Lower statutory structure; reasonable cause may be relevant	Potentially much greater civil penalties
Criminal exposure	Generally not the defining concern of the Streamlined procedures	May require evaluation of the IRS Criminal Investigation Voluntary Disclosure Practice

Streamlined Filing Compliance Procedures

The Streamlined Filing Compliance Procedures are intended for qualifying taxpayers whose failures resulted from non-willful conduct.

A Streamlined submission requires more than preparing amended returns and delinquent FBARs. The taxpayer must provide a certification explaining the relevant conduct.

The certification should be based on the taxpayer’s actual facts and history rather than generic or boilerplate language.

What If the Conduct May Have Been Willful?

A taxpayer with facts suggesting possible willfulness should consider the consequences before filing a Streamlined certification or making a quiet disclosure.

The IRS maintains a separate Criminal Investigation Voluntary Disclosure Practice for taxpayers with potentially willful tax noncompliance who seek to come forward before they are detected.

Voluntary disclosure is not an automatic immunity program and does not guarantee that prosecution will never occur. Eligibility, timeliness, truthfulness, cooperation, and the particular facts matter.

Can Filing Delinquent FBARs Fix the Problem?

Filing delinquent FBARs may be part of a compliance strategy, but simply filing the forms does not automatically determine penalty treatment or resolve a willfulness issue.

Before making delinquent filings, the taxpayer should identify:

the years for which FBARs were required;
whether foreign income was omitted;
whether Forms 8938 or other international information returns were required;
whether the conduct was non-willful;
whether reasonable cause may exist;
whether Streamlined treatment is available; and
whether potentially willful conduct requires a different approach.

Attorney-Client Privilege and Offshore Compliance

When a taxpayer is concerned about potential willfulness, substantial civil penalties, or criminal exposure, legal advice can become particularly important.

International tax problems frequently require reconstruction of tax returns and foreign account history while simultaneously evaluating the legal implications of the taxpayer’s past conduct.

Colorado Legal approaches these matters as both a legal and tax compliance problem. Philip M. Falco is licensed as both an attorney and CPA.

Frequently Asked Questions

Does forgetting to file an FBAR mean the violation was non-willful?

Not necessarily. A genuine mistake may support non-willfulness, but the determination depends on all surrounding facts. The IRS can also assert civil willfulness based on reckless conduct or willful blindness.

Does checking the wrong box on Schedule B automatically prove willfulness?

No single fact necessarily determines willfulness. Schedule B can be important evidence, but the analysis can also involve how the return was prepared, what the taxpayer knew, what information was given to the preparer, prior filings, and other circumstances.

Can the IRS impose a willful FBAR penalty without proving criminal tax fraud?

Yes. Civil FBAR willfulness and criminal tax liability involve different legal standards and consequences. A civil willfulness determination does not require a criminal conviction.

Can reliance on an accountant establish non-willfulness?

Professional reliance can be relevant, but the facts matter. The analysis includes what information the taxpayer supplied, what advice was given, and whether the taxpayer had reason to understand that additional reporting might be required.

Should I use Streamlined if I am uncertain whether my conduct was willful?

A taxpayer should evaluate the facts before signing a Streamlined non-willfulness certification. Where facts create substantial concern about willfulness, the IRS Voluntary Disclosure Practice and other options should be considered before filing.

Official Resources

Discuss an FBAR Willfulness or Offshore Disclosure Matter

If you have unreported foreign accounts or are concerned about prior FBAR filings, the distinction between willful and non-willful conduct should be evaluated before selecting a correction procedure.

Philip M. Falco, Attorney & CPA
Denver, Colorado
(303) 626-7000

Schedule a Tax Attorney Consultation

This page provides general information and does not determine whether a particular FBAR violation is willful or non-willful. Willfulness and penalty exposure depend on the individual facts and applicable law.

5 Tips by Tax Lawyer Philip Falco:

Scan all of your receipts and email the questionable expenses to your CPA for review.
Keep a mileage log and provide the actual log to your CPA. Telling your CPA what your mileage was is not enough to avoid the IRC 6662(a) accuracy related penalty.
Work with a CPA who has integrity and who will be willing to “fall on the knife” if he gave you incorrect tax advice. Everyone makes mistakes, not everyone is willing to own up to them.
Categorize your expenses all year long. If you are not sure if something is a business expense, ask right away and properly categorize it. It is up to the taxpayer to show the IRS you properly categorized an expense. This seems simple but is subtly complex. The IRS will willingly categorize an expense as personal unless taxpayer shows otherwise.
Evidence is the name of the tax game. In the digital age, there is no excuse for not archiving old receipts. These documents can be critically important many years down the road. Keep them, especially those pertaining to rental real estate (purchase, improvements) and business expenses. Really any real estate evidence should be archived since an owner occupied real estate holding can be converted to a rental. If so, adjusted basis (ex depreciation) becomes very important.

Accuracy Related Penalty IRC 6662(a)

Section 6662(a) imposes an accuracy-related penalty equal to 20% of the underpayment to which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to, among other things, negligence or disregard of rules or regulations. Sec. 6662(b)(1). Underpayment of tax is typically attributable to negligence.

IRC Section 6662(c) provides that “[f]or purposes of section 6662, the term ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term ‘disregard’ includes any careless, reckless, or intentional disregard.”

Negligence also includes any failure to exercise ordinary and reasonable care in the preparation of a tax return or any failure to keep adequate books and records and to properly substantiate items. Sec. 1.6662-3(b)(1), Income Tax Regs.

Burden of Proof

Section 7491(c) provides that the Commissioner bears the “burden of production” with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his “burden of production”, however, the “burden of proof” remains with the taxpayer, including the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Exception: Reasonable Cause for Taxpayer’s Position

Section 6664(c)(1) provides that the penalty under section 6662(a) shall not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith with respect to that portion. See Higbee v. Commissioner, 116 T.C. at 448. The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners have the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Reasonable cause can be reliance on a CPA’s tax advice. However, For reliance to be reasonable, “the taxpayer must prove by a preponderance of the evidence that the taxpayer meets each requirement of the following three prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99.

As an example, if a taxpayer tells his CPA about mileage without also giving the CPA a mileage log, this has been held to be not sufficient, and the accuracy related penalty was imposed.

It is up to the taxpayer to show that he provided his CPA with sufficient documentation of a deduction.

Practical Effect: Your CPA will have to write a letter to the IRS, be interviewed by the IRS, or testify in Tax Court (or US District Court) to adequately present this approach.

Meticulous bookkeeping is critical for taxpayers in the 21st Century. Please feel free to ask us about our bookkeeping, accounting, and tax services.

Related IRS Penalty and Audit Resources

Accuracy-related penalties often depend on return positions, documentation, reasonable cause, professional advice, and what occurred during the IRS examination.

Tag Archives: Tax Penalty

Willful vs. Non-Willful FBAR Violations