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The United States government requires taxpayers to file a Report of Foreign Bank and Financial Accounts (FBAR) if they have foreign accounts that value at least $10,000 at any point during the tax year in question. A failure to report these accounts can lead to serious penalties.

Why are the penalties so serious?

The government has cracked down on a failure to report foreign accounts in an effort to address taxpayers who allegedly attempt to avoid their tax obligations by hiding assets overseas. If the agency is looking to build a case, it could pursue serious penalties.

The severity of the penalties often hinges on one specific question: was the error willful? If the Internal Revenue Service (IRS) can establish the error was intentional, the agency could pursue criminal charges and a conviction could lead to prison time.

How does the agency prove a “willful” violation?

The agency states willfulness could be a taxpayer’s conscious effort to avoid even learning about the requirement to file an FBAR. In fact, the agency states a taxpayer’s failure to follow up on the information about tax forms in these situations can be considered “willful blindness.”

In addition to simple ignorance, the agency could also gather evidence to support its claim. One piece of evidence the agency could use to build a case against you: your 1040. Form 1040 includes a question on Schedule B that specifically asks whether or not you have a foreign bank account. The agency could use a taxpayer’s answer as evidence to support the allegation of willfulness. The agency could use this information along with anything that appears an attempt to conceal the existence of such accounts to further support a claim the error was willful.

How should taxpayers respond?

Taxpayers who are in this situation are wise to seek legal counsel. Defenses to these allegations are available. Taxpayers can also take proactive action and discuss ways to come into compliance before facing allegations of criminal wrongdoing. An attorney experienced in tax matters involving offshore accounts can review your situation and discuss your options.