Taxpayers in the United States are required to file annual reports with the government if their foreign accounts exceed $10,000 at any time in a calendar year. Failure to file this report, known as an FBAR, can result in civil penalties, either willful or non-willful. The distinction between willful and non-willful conduct is not always clear, with willful conduct including intentional acts or objective recklessness. Non-willful conduct, on the other hand, may include negligence, inadvertence, mistake, or a good-faith misunderstanding of the law.
Taxpayers are potentially liable for reduced penalties if their conduct is deemed non-willful. However, there is little formal guidance on the definition of non-willful, leaving taxpayers and tax professionals to interpret this distinction through federal court decisions. Recent federal court cases out of New York have shed some light on how courts analyze various facts to determine liability for willful FBAR penalties. The courts have considered factors such as the taxpayer’s awareness of the filing obligation, the involvement of tax professionals, and the proportion of foreign accounts to overall wealth.
In a case involving a married couple in U.S. v. Reyes, the court found the taxpayers liable for willful FBAR penalties due to their failure to disclose their foreign accounts to their long-time tax preparer, among other factors. In contrast, another federal court in New York found that the government failed to meet its burden of proving willfulness in U.S. v. Schik, where the taxpayer had a plausible explanation for his unawareness of the FBAR reporting obligation and lacked formal education. These cases highlight the importance of specific facts and circumstances in determining liability for willful FBAR penalties.
The contrasting decisions in Reyes and Schik underscore the complexity of distinguishing between objective recklessness and negligence in FBAR cases. While both taxpayers did not review their tax returns, the court found the taxpayer in Reyes willful, while the court in Schik found genuine issues of material fact regarding willfulness. This demonstrates the importance of individual circumstances, such as reliance on tax professionals, education level, and prior knowledge of the FBAR reporting requirement.
As the IRS continues targeting taxpayers for FBAR violations, it is essential for taxpayers to understand the factors that courts consider when determining liability for willful FBAR penalties. The ambiguity between recklessness and negligence in FBAR cases reinforces the need for clarity and consistency in defining these terms. The insights provided by federal court decisions like Reyes and Schik offer valuable guidance to taxpayers and tax professionals navigating the complexities of FBAR compliance and penalties. Moving forward, taxpayers can expect more court decisions that will shape the interpretation of willful and non-willful conduct in FBAR cases.
