The IRS has recently released Program Manager Technical Advice, providing a definition of willfulness, along with the standard of proof for establishing willfulness for purposes of the reporting requirements for Foreign Bank and Financial Accounts (FBAR). In the memorandum, the IRS concluded that the standard for willfulness, as it relates to FBAR penalties, is the civil willfulness standard (as opposed to the more narrowly interpreted criminal standard), and “includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.”
U.S. persons must file the FBAR to disclose any foreign account with a balance in excess of $10,000 in which they have a financial interest. The penalty for failure to file an FBAR can have both civil and criminal repercussions and generally depends on whether the failure to file is non-willful or willful. A non-willful failure to file can result in a penalty of up to $10,000 for each failure. But in situations where the failure is willful, the maximum penalty is increased to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. This distinction in penalties makes the determination of willfulness one of heightened importance.
Since “willfulness” is not defined by the code or the regulations, it has been left to the courts to define, and the civil standard as applied in the memorandum is largely in line with several notable court decisions on the issue. For example, in United States v. Bohanec, the courts defined willfulness to include a, “reckless disregard of a statutory duty.” Similarly, in Bedrosian v. United States, the court held that willfulness included a “knowing or reckless” violation of the statute. In both cases, the court stated that the government’s burden of proof is the lower “preponderance of evidence” standard – which is also in line with the standard of proof the IRS has detailed in the memorandum.
The release of this Program Manager Technical Advice provides clear insight into the IRS’s position regarding the “willfulness” standard as it applies to FBAR failure to file penalties, and is largely in line with several notable cases on the issue. Given the severity of the failure to file penalty and the low evidentiary standard, U.S. persons with foreign accounts should consult with their advisors to ensure timely and complete compliance with the FBAR rules.
For more information regarding the FBAR willfulness standard, see our previous articles: