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FBAR penalties, part 2: When is noncompliance considered willful?

Let's resume our discussion about penalties for failure to properly report offshore assets.

In part one of the post, on December 20, we noted that a U.S. taxpayer who holds both U.S. and Swiss citizenship is suing the IRS, contending that his failure to report his Swiss bank account was not willful. He asserts that the penalty for failure to file a Report of Foreign Bank and Financial Accounts (FBAR or FinCen 114) should therefore be only $10,000, not half the balance in the account in question when the reporting violation occurred.

What is considered willful failure to file an FBAR? And what is considered reasonable cause for not filing?

On its website, the IRS gives several examples of possible FBAR penalties. Of course, penalties can be both civil and criminal. In this post, we are focusing our discussion on civil penalties for FBAR noncompliance.

It is important to be aware, however, tha failure to comply with offshore filing requirements can potentially trigger criminal tax evasion charges. That is why so many taxpayers have chosen to enter the Offshore Voluntary Disclosure Program. We will revisit the status of that program in an upcoming post.

Right now, let's try to get more clarity on the civil penalties that are in play for offshore noncompliance. Keep in mind that if the failure to make a timely filing was due to reasonable cause, there may not be any penalty at all. The IRS may choose to only issue a warning letter.

The IRS looks at several factors in determining whether FBAR noncompliance was willful. These factors include:

  • Reliance on a tax professional's advice
  • Evidence that the account was opened for legitimate reasons
  • Absence of efforts to conceal the account
  • Lack of a tax deficiency from the undisclosed account

None of these factors alone determines whether there was willful noncompliance with FBAR filing requirements. Offshore tax compliance is inherently complicated, and the issues are best faced with guidance from a skilled tax attorney.

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