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Partial foreign account disclosure tied to willfulness

The willful failure to file FBARs (Report of Foreign Bank and Financial Account) increases the associated civil penalties. The exact definition of willful was at the heart of a recent Tax Court case.

Is the standard for willfulness a “voluntary, intentional violation of a known legal duty?” This is what the taxpayer urged. The court did not resolve the issue, but was of the opinion that the trend could be toward treating reckless actions as enough to satisfy the willful violation requirement.

What happened?

Each case is unique and this one is no different. The taxpayer opened a Swiss bank account while travelling for business in the 1970s. He deposited $100. At some point, he opened another account. 

Through the early 2000s, the taxpayer never told his accountant about these accounts. Each Swiss account had balances over the $10,000 FBAR disclosure threshold. But after his accountant died in 2007, he asked a new accountant about disclosing assets he had in a Swiss account. In 2007, he filed a FBAR for an account with about $240,000. But he didn’t report the larger of the two accounts that held close to $2.3 million.

The next year, he consolidated the accounts and then transferred the assets to a bank in the US.

In 2010, the taxpayer sought to address the failure to file the FBARs and amended his 2007 tax return and included an amended FBAR that disclosed both accounts. Later in the year, he sought to enter the IRS Offshore Voluntary Disclosure Program. It wasn’t clear whether he was advised to opt out or if his application was rejected.

The IRS imposed a willful failure to file penalty of $975,789 against the taxpayer in 2013. The taxpayer sued the government for illegal extraction. The Tax Court became involved to resolve discrepancies in the facts over whether the taxpayer acted willfully.

The lesson

While the court has yet to resolve whether the taxpayer will be liable for the willful civil penalty, this case illustrates why it’s important to act on any undisclosed foreign accounts yourself before the IRS does.

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