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Willfulness and the disclosure of foreign account info

We’ve spoken many times on this blog about the complex reporting requirements that accompany ownership of foreign accounts. Beyond the complexity, it is extremely difficult for individual taxpayers to keep track of all of the rules pertaining to these accounts.

Worse, the penalties for not complying with requirements are tremendous. For example, when a Michigan taxpayer who holds offshore accounts does not comply with the Offshore Voluntary Disclosure Program, that individual may lose 50 percent of the value of their accounts, face penalties, and possibly even be subject to criminal investigation.

A federal court recently heard a matter involving the willful failure to file an FBAR (Report of Foreign Bank and Financial Account). The law holds that the willful failure to file such an FBAR will lead to an increase in accompanying civil penalties. Yet there is a great deal of confusion over what “willful” actually means.

In Bedrosian v. The United States of America, a taxpayer faced a tax penalty of $975,789 for a willful failure to file an FBAR. The taxpayer challenged the IRS ruling in court by maintaining that an accurate definition of willfulness would involve a “voluntary, intentional violation of a known legal duty.” For this reason, the taxpayer moved for summary judgment.

Not persuaded by the taxpayer’s argument, the court denied the taxpayers motion for summary judgment. And while the court did not provide an appropriate standard for the term “willful,” it did note that courts trended towards a definition “that would encompass reckless violations” of the rules.

It may be difficult for taxpayers to follow all of this legal reasoning. But most people can understand the significance of a penalty that approaches six figures. For this reason, having a seasoned tax attorney on your side can be invaluable.

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