Not fulfilling your US tax obligation when you knew about the obligation but chose (for whatever reason) not to file is considered to be a willful violation. Not fulfilling your US tax obligation when you did not know about the obligation is considered to be non-willful and usually leads to lower or no penalties.
If a taxpayer entering the Streamlined procedure has tax noncompliance that was the result of “willful” conduct – what happens? The answer here depends on whether the “willfulness” fits within the meaning of the civil penalty definition, or the criminal penalty definition. Taxpayers with criminal issues lurking in their facts risk serious criminal penalties, including jail time. They should not be entering the Streamlined Procedure, which does not provide protection from criminal prosecution, but instead should be entering the “Offshore Voluntary Disclosure Program”. If the taxpayer’s conduct does not involve criminal issues, then the “willfulness” inquiry may involve exposure to possible civil penalties.
On June 18th, the IRS announced new “Streamlined” procedures implementing practical methods of achieving tax compliance for US persons about offshore accounts or assets that have not been reported properly. While the new “Streamlined” procedures may sound somewhat simple, I have cautioned readers to be very careful and to obtain sound advice about using these new “Streamlined” procedures.
To use the procedures, tax compliance must be the result of “non-willful” conduct. A Statement of Facts must be provided to the IRS explaining the reasons for any compliance failures.
According to the Streamlined Procedures, the IRS states that “Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” The IRS does not tell us in any detail what is meant by these terms or what they entail. Many factors can influence whether a finding of “non-willfulness” is the right label, and a single slip could change the result to “willful”.
While some cases may be black or white, and neatly fit the tax noncompliance into one category or the other, there are numerous cases with many shades of gray. For example, even the IRS concedes that if you had a foreign account but checked “NO” in the box on Part III of Schedule B asking if you had such a foreign account, this is not enough to say the conduct was “willful.” See, Internal Revenue Manual 18.104.22.168.5.3(07-01-2008) FBAR Willfulness Penalty – Willfulness.
A carefully prepared Statement of Non-Willfulness might explain this and pre-empt any further IRS questions. Other factors should be scrupulously examined – Did the taxpayer seek professional tax advice? Did he reveal the foreign assets to his advisor? What did he write in any tax organizers? What is the taxpayer’s profession and educational background, and so on.
We do know that as used in the civil penalty provisions, the term “willful” can mean that the act was the result of gross negligence, reckless disregard, or willful neglect. Whether a failure was “willful” is determined based on the facts and circumstances. It makes sense then, that for purposes of the Streamlined Procedures, “non-willful” behavior cannot be the result of gross negligence, reckless disregard, or willful neglect.
The Section 367 Regulations provide relief for certain failures to file the aforementioned GRA, so long at the failure was not “willful”. The Regulations provide that for this purpose, “willful” is to be “interpreted consistent with the meaning of that term in the context of other civil penalties, which would include a failure due to gross negligence, reckless disregard, or willful neglect.”
Examples are found on page 28 and from the examples we can glean some significant information:
Source: Forbes, Robert Wood