Did You File Your FBAR Completely and Accurately? District Court Clarifies the Ambiguous IRS Willfulness Standard

In the early 1970s, an international business traveler opened a savings account at a Swiss bank to make it easier to make purchases abroad during his business trips.  Over the years, the businessman (“Taxpayer”) did not actively manage this account, although he did receive communication that was mailed to him by the bank and he held annual meetings with a bank representative. 

Taxpayer first told his accountant about his Swiss account in the 1990s.  Although the accountant informed him about the reporting requirements of disclosing offshore accounts, the accountant nonetheless advised Taxpayer to do nothing, which he complied.  When his accountant passed away, Taxpayer started working with a new accountant. 

The new accountant, for the first time, reported the Swiss bank on Taxpayer’s 2007 tax return.  That same year, Taxpayer filed a Report of Foreign Bank and Financial Accounts (“FBAR”) for the first time and reported one of his two Swiss accounts (the Swiss bank had created a second account by the time the 2007 FBAR was filed), which held assets of approximately $240,000.  The second account, which held assets of approximately $2 million, was not reported. 

A few months after filing the FBAR, Taxpayer was notified by the Swiss bank that he must transfer all of his assets to a different bank.  During this time, Taxpayer’s information was among the data that was turned over to the IRS by the Swiss bank. 

The IRS began auditing Taxpayer’s returns in April 2011, which ultimately led to a case before the United States District Court.  It is undisputable that Taxpayer failed to report the second account on his FBAR.  The key issue, however, is whether the failure was willful.  While a non-willful violation may result in a penalty of up to $10,000, a willful violation may lead to a penalty that is the greater of $100,000 or fifty percent of the balance in the account at the time of the violation.  Willful conduct also exposes a taxpayer to potential criminal prosecution.  Ultimately, the District Court in the case described above[1] held that Taxpayer was not willful in his failure to report one of his two Swiss accounts.

As more taxpayers travel the world and transact in different countries, their compliance with the IRS international tax rules and regulations become critical for a taxpayer’s peace of mind as well as for the pocketbook.  If you have any questions or concerns related to international tax compliance, it is never too late to talk to a tax attorney.  Happy travels.

[1] Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (E.D. Pa. Apr. 13, 2017).