Willful Unreported FBAR Penalty Criminal Enforcement
FBAR Willful Criminal Penalty: Can Unreported FBAR lead to Criminal Enforcement by IRS? A common question we receive from clients is whether the failure to report foreign accounts to the IRS criminal. Generally (almost always) the answer is no.
The reason is because in order to provide criminality, the U.S government must show there was actual willfulness (not reckless disregard) and they must prove the crime Beyond a Reasonable Doubt.
Even if a Taxpayer is not found to be criminally willful, the civil willful penalties can be bad (but it does not include loss of freedom)
Willful Failure to File the FBAR
Let’s start out with an important fact: the non-willful failure to report the FBAR is never criminal. When a person is non-willful, it means they did not act with any intent. And, if they did not act with any intent, then there is no issue of criminal willfulness.
If on the other hand, a person did act willfully in failing to report their foreign accounts, they may become subject to extensive civil fines and penalties. These penalties can be staggering, but they can also be mitigated.
26 U.S.C. 5321
(C) Willful violations.
In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)
(i) shall be increased to the greater of— (I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and (ii)subparagraph (B)(ii) shall not apply.
*These values are indexed every few years for inflation.
Despite the staggering civil willful penalties, the IRS examiner does have some authority to reduce the penalty:
- The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner.
- IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons. Exhibit 4.26.16-1.
- For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.
- For violations occurring after October 22, 2004, the four threshold conditions are:
- The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.
- No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
- The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).
- IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.
First, was the Failure Really Willful?
Just because you are scared (which is a normal reaction) does not mean you are willful. And, just because you are not learning about the FBAR and did not immediately the next day go out an file the FBAR does not make you willful either. It is based on a Totality of Circumstances.
It is common for humans to think the worst of a situation. Likewise, it is common for Taxpayers to believe they are willful, when they really were not.
Can the IRS Prove it was Criminal?
When a person was willful, they may be subject to civil willful penalties and possibly criminal penalties, but the willfulness standard is not the same.
For civil willful penalties, the IRS must simply show the Taxpayer acted with reckless disregard or willful blindness. And, as of the current state of the law, the IRS must only prove this by preponderance of the evidence.
Were You Referred to the Special Agents?
For criminal FBAR penalties, the IRS first refers the case to the Special Agents.
The SA will conduct a more in-depth investigation to assess criminality. If the Special Agents believe you were criminal, they will refer the case to the Department of Justice.
It is rare to get a visit from Special Agents (they travel in two’s). if you receive an unexpected (or expected) visit from the Special Agents, do NOT speak to them directly.
Nothing ever good comes from a Taxpayer trying to talk themselves out of trouble with the IRS Special Agents.
Hire experienced counsel FIRST; remember, silence does not presume guilt.
Referred for Prosecution
If you referred for prosecution, you should retain an experienced criminal defense lawyer.
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