Followers of the IRS cases against Americans with undeclared foreign assets have been waiting in anticipation for the federal courts to set the scope of the term ‘willfulness’ as it applies to the imposition of civil penalties to file the Report of Foreign Bank and Financial Accounts or FBAR.  Some guidance has now been provided under United States v. Williams.

The lower court in the Williams case held that defendant had not acted “willfully” in failing to file his FBAR and the opinion was thought to illustrate how difficult it could be for the IRS to prove “willfulness” for failure to file an FBAR.

But the 4^th Circuit found that Mr. Williams made a conscious effort to avoid learning about reporting requirements and that his conduct constituted willful blindness to the FBAR requirement.

The facts of Williams are of course specific to the case and involve a taxpayer who pled guilty to tax evasion, since he concealed not just his ownership of foreign accounts, but also the income generated in these accounts.  Nonetheless, most commentators stress that the 4^th Circuit’s decision gives IRS additional strength in asserting “willfulness” in failure to file FBAR cases.

Willfulness matters because under Treasury Department rules, US taxpayers must make an annual disclosure of their foreign bank accounts if the total in those accounts exceeds $10,000.  Non-willful failure to file can lead to a penalty of $10,000 per account, per year; but willful failure to disclose can result in fines of $100,000 or 50% of the value of the accounts.

Nonetheless, the outcome of Williams should not discourage non-compliant taxpayers from coming forward voluntarily.  Each individual’s circumstances are specific to his or her case, and the IRS has recently provided guidance on “reasonable cause” for failing to properly report foreign income and foreign assets.

Taxpayers seeking compliance help should thus consult their attorneys or tax accountants to better ascertain their individual risks and to seek advice on the relevant issues to solving their compliance needs.

The “head in the sand” approach is no longer viable…