One of the most common questions for offshore disclosure tax attorneys is what factors determine willfulness and non-willfulness in regards to the non-reporting of these accounts. This can be a highly subjective area of the law. If you need help determining willfulness for offshore disclosures in Washington DC, reach out to our office.
Non-willful conduct is usually due to negligence, inadvertence, a mistake, or conduct that is a result of a good-faith misunderstanding of the requirements of law. That is the definition on the IRS website – however, the Internal Revenue Code itself does not define non-willfulness. The determination of non-willfulness is critical for streamlined offshore procedure as well as all other programs or procedures.
For taxpayers who are deemed non-willful, they get the benefit of significantly reduced penalties. For domestic streamlined disclosure, there is a 5% offshore penalty, which is based upon the highest aggregate account balance in one of the six years of the delinquent FBARs that are filed as part of streamline. Those penalties are much lower than the regular international penalties. For those who utilize the streamlined foreign procedure, there is no 5% penalty.
To prove non-willfulness, a person will have to write a detailed narrative explaining why their non-compliance was accidental or a good-faith misinterpretation. This narrative is one of the most important pieces of analysis that goes into determining whether that taxpayer was willful or non-willful.
Willful blindness refers to recklessness, which is when an individual acts in a way that shields them from confirming if they have committed wrongdoing – these actions can seem so deliberate that it nearly looks as if the individual was aiming for plausible deniability. The IRS can show willful blindness in a variety of ways, including if the taxpayer made a conscious effort to avoid learning about the reporting requirements. Willful blindness qualifies as willful conduct.
While a non-willful person is technically allowed to join the traditionary voluntary disclosure program, it is not in their best interest because it comes with a 75% civil fraud penalty, in addition to all of the other international penalties. Under this program, it would take a lot more accounting work and tax preparation, and would require six years of amended tax returns compared to just three under the streamlined procedure. Voluntary disclosure also requires a lot of examination, which can be a lengthy and complicated process to go through.
A large part of determining willfulness for offshore disclosures in DC is how much of the taxpayer’s obligation they were made aware of. Employers are not generally responsible for informing employees about applicable U.S. tax law. The laws are complicated as it is, and it becomes even more complicated when there are other countries and languages involved. As a result, if the person works overseas, there would be no duty for their foreign employer to advise them on U.S. tax law.
Even U.S. employers provide only a minimal amount of advising on tax matters, such as the W-4 form, which they sign when they first join the company and allows the employer to withhold taxes. The employer also files forms like W-2s or 1099 with the IRS. Beyond these basic applications, they have no duty to discuss any offshore reporting. Depending on the situation, the actions or inactions of an employer could potentially play a part in the narrative regarding non-willfulness.
Call us today for a consultation if you have unreported overseas assets that you are trying to bring to the attention of the IRS. The determination of willfulness for offshore disclosures in Washington DC can dictate which programs you are allowed to use to come into compliance and which penalties might be applied.