When it comes to taxes, do not make any assumptions. Just because you are ill informed, do not understand tax complexities, or you make an honest mistake, you are not off the hook with the Internal Revenue Service (IRS). Actually, it is quite the opposite. In a recent Forbes article, contributor Robert Wood discusses difference between willful and non-willful taxpayer actions.
“The tax law draws a line between non-willful and willful, and huge penalties or even prosecution can hang in the balance. A good example is offshore accounts. A new IRS Streamlined amnesty program for offshore accounts applies to non-willful activity. But IRS says if you were willful you should go into the IRS program called OVDP instead,” writes Wood. What is the difference? A lot! The OVDP requires eight amended tax returns and eight FBARs. You pay taxes, interest and a 20% penalty on what you owe. To top it off, you pay a penalty of 27.5% of the 8-year high point in your offshore account. For some named ‘bad’ banks, you pay 50% unless you beat August 4, 2014.”
Unlike OVDP, the Streamlined programs are simple. For example, you file 3 tax returns, 6 FBARs, and owe taxes and interest, and there are no penalties. “Even better, instead of paying 27.5% of your offshore account, you pay 5% of that highest balance. If you live abroad, you don’t even pay that 5%,” writes Wood. “Is it any wonder that Americans are flocking to the Streamlined program? Maybe not, but the IRS is watching. And warning that ‘willful’ doesn’t mean what you think it means. Willfulness is bad for tax return reporting and for FBARs too.”
If you want to take part in the Streamlined program, you have to prove you were not willful. While this sounds simple, the IRS has the right to look into your case further, and they may interpret willfulness differently than you do. This misinterpretation in the eyes of the IRS on your part could land you with some hefty fines or even jail time.
“According to the IRS, the test is whether there was a voluntary, intentional violation of a known legal duty. Willfulness is shown by your knowledge of reporting requirements and your conscious choice not to comply. Willfulness means you acted with knowledge that your conduct was unlawful-a voluntary, intentional, violation of a known legal duty,” writes Wood.
Willfulness is subject to both civil and criminal prosecution, even though you did not have ill intentions. If you do not know the filing rules, you decided not to be forth coming about your accounts, there is a strong chance this will be considered a willful violation in the eyes of the justice system and the IRS.
“The mere fact you checked the wrong box, or no box, on a Schedule B shouldn’t itself be sufficient to make an FBAR violation willful. The IRS says it needs to establish that you had knowledge of a duty to file FBARs. If you did, you knew it was illegal not to file one,” says Wood.
Just because you may not have heard about FBARs does not mean you are in the clear. How you conduct yourself is very important and, of course, all of your actions will be reviewed closely in the case that the IRS may become suspicious. According to the IRS, if you have foreign accounts, it is your responsibility to read government tax forms so you understand and adhere to the rules.