From the Tax Law Offices of David W. Klasing - When is the IRS Likely to View Your Failure to file Foreign Bank Account Reporting (FBAR) as Criminal Verus Merely Negligent

IRVINE, Calif., Jan. 29, 2025 /PRNewswire/ -- Many taxpayers believe that the difference between willful and non-willful FBAR tax violations is self-evident: you either intended to cheat or simply made a good-faith error. In reality, the IRS, the Department of Justice (DOJ), and federal courts apply a broader, more intense definition of willfulness—encompassing not just intentional misconduct but also "objective recklessness" and "willful blindness." Even garden-variety oversights that appear innocent may be misconstrued as deliberate attempts to dodge tax obligations, potentially triggering life-altering civil tax penalties or—if the government discerns intentional cheating—an exponentially worse criminal tax investigation & prosecution by the IRS Criminal Investigation Division (CID).

The Bank Secrecy Act and FBAR Basics
Under the Bank Secrecy Act, U.S. taxpayers must file an FBAR (FinCEN Form 114) if their foreign financial account balances exceed $10,000 in aggregate at any point during a calendar year. A failure to timely and accurately file FBARs can lead to:

• Non-Willful Civil Tax Penalties
  Capped at $10,000 per FBAR form per year (post-Bittner, adjusted for inflation) if the IRS concludes your conduct was merely negligent.
• Willful Civil Tax Penalties
  Potentially 50% of the highest account balance (or $100,000, whichever is greater) per year, often stacking across multiple years if the government concludes you intentionally or recklessly concealed foreign accounts. Each year, thousands of U.S. taxpayers who hold overseas assets or money in offshore banks or financial accounts are required to report these assets to the IRS in a form known as the Foreign Bank and Financial Account Report (FBAR). Failure to do so can result in severe civil and criminal penalties after a lengthy and invasive audit and or criminal tax investigation process by the IRS, where you will be required to reproduce years' worth of documents. Additionally, if your conduct in failing to file an FBAR was willful to avoid paying taxes, you could face criminal penalties, including jail time.
• Criminal Tax Exposure
  Rare but exponentially more intense if aggravating factors (e.g., deliberate fraud, money laundering, repeated false statements) prompt a criminal referral to IRS-CID. The IRS-CID boasts a 92%+ conviction rate in criminal tax cases it refers to DOJ, making early, strategic legal representation critical if you suspect your audit might escalate to a criminal matter.

Willfulness: More Than Just Intent
From Intentional Cheating to "Objective Recklessness"
In the eyes of the IRS, willfulness is not limited to deliberate acts of tax fraud. Even if you did not overtly intend to cheat on your FBAR filings, you can still face willful tax penalties if you "should have known" of your obligations—commonly called objective recklessness or willful blindness. This relaxed standard can ensnare taxpayers who:

• Ignore red flags suggesting they must disclose foreign bank accounts;
• Disregard repeated IRS notices about reporting requirements;
• Rely solely on a preparer without confirming that FBARs were filed correctly.

An example would be a taxpayer who was aware that FBAR filing might be necessary but deliberately chose not to clarify or investigate further. Under willful blindness, the government may treat such behavior exactly like intentional misconduct—raising the stakes to include possible criminal tax penalties.

Non-Willful Conduct: Negligence vs. Innocent Errors
By contrast, non-willful tax violations typically result from negligence, mistakes, or good-faith misunderstandings. The IRS has stated informally that non-willfulness may involve "negligence, inadvertence, or mistake or conduct that is the result of a good-faith misunderstanding." In borderline cases, however, the line between reckless and merely negligent behavior is perilously thin, and the government may escalate to criminal tax penalties if it suspects that the taxpayer has intentionally cheated on their tax returns.

Willful Blindness also applies here. A taxpayer who did not formally "know" about FBAR filing requirements but should have known—given their professional expertise, prior warnings, or explicit instructions on tax forms—can be viewed as willful. For instance, a CPA who fails to file required foreign account forms may not escape liability simply by claiming ignorance.

Courts have qualified how financial penalties are assessed for non-willful violators of FBAR filing requirements. FBAR non-willful penalties are now "per-form," not per-account. At the Tax Law Offices of David W. Klasing, our skilled dual-licensed tax attorneys and CPAs can help you file your FBARs properly in the first place to avoid trouble down the line. If you have already failed to file, we can work to bring you back into compliance, possibly through a voluntary or streamlined disclosure program.

Early compliance with FBAR requirements is paramount; filing accurate and complete forms from the start substantially reduces exposure to penalties. If you have already missed the filing deadline, you may still resolve your situation through programs like the IRS Voluntary Disclosure Program—designed for those who suspect a willful violation and seek to avoid criminal tax charges by accepting civil fines—or Streamlined Filing Compliance, which can lessen or even eliminate penalties for non-willful violators.

However, once the IRS detects potential signs of intentional cheating, FBAR cases can rapidly escalate into civil fraud or criminal tax foreign account audits & investigations. In such scenarios, a dual-licensed Criminal Tax Defense Attorney & CPA, such as those at the Tax Law Offices of David W. Klasing, can offer vital attorney-client privilege (in stark contrast to non-attorney preparers who lack such protections and may be forced to testify), conduct sophisticated legal and accounting evaluations to mitigate tax penalties and identify the most suitable compliance path, and draw on a proven track record to help prevent criminal tax referrals in high-stakes FBAR matters.

Avoiding Criminal Tax Investigation and Prosecution Where You Have a History of Committing Offshore Tax and Information Reporting Fraud and are not Currently Under Audit or Criminal Tax Investigation.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

Real-World Clarity (or Confusion): Reyes and Schik
Two recent federal court decisions underscore how subtle details can push an FBAR case from mere negligence to willful conduct—and thus set the stage for steep civil tax penalties or even a criminal tax referral.

U.S. v. Reyes (E.D.N.Y. 2024)
In Reyes, a married couple intentionally shielded 75–90% of their wealth in a Swiss account, instructing the bank not to mail statements to the U.S. or invest in U.S. securities (which would have triggered extra reporting). They also withheld any mention of these accounts from their longtime tax preparer. Despite claiming they never reviewed their returns and had received faulty third-party advice, the court ruled they acted at least recklessly, sustaining willful FBAR penalties on summary judgment.

• Key Takeaways
• Actively concealing statements and avoiding U.S. involvement suggests willfulness or reckless disregard.
• Failing to inform a professional preparer about significant offshore wealth is extremely high-risk.
• Merely stating, "I didn't review my returns" provides minimal defense if your overall conduct appears designed to hide foreign assets.

U.S. v. Schik (S.D.N.Y. 2022)
By contrast, in Schik, another taxpayer who did not review his returns also faced allegations of willfulness. Unlike Reyes, however, the tax preparer never asked about foreign accounts via an organizer or questionnaire, and the taxpayer had limited formal education. These differences persuaded the court that there was a genuine issue of material fact about whether his behavior was genuinely non-willful negligence rather than reckless or intentional wrongdoing, thus denying summary judgment for willfulness.

• Key Takeaways
• Merely failing to review returns might not be willful if accompanied by credible evidence of minimal sophistication and a non-proactive preparer.
• Courts weigh issues like education, direct queries (or lack thereof), and the taxpayer's overall capacity to understand foreign reporting.
• If you demonstrate good-faith reliance on a professional who never asked about foreign assets, a court could view your conduct as negligence rather than willfulness.

Bittner and the Scope of Non-Willful Penalties
Although the Supreme Court's Bittner decision limits non-willful penalties to one penalty per FBAR form per year (rather than per account), it provides no shield for taxpayers deemed willful. If the government concludes your conduct was intentional or reckless, they may apply a 50% penalty on your most significant account balance per year, possibly destroying your entire net worth or leading to criminal tax proceedings if other aggravating elements exist.

Contact the Tax Law Offices of David W. Klasing Today if You are Worried About Willful or Non-Willful Conduct with the IRS and Foreign Bank Reporting

If you are anxious that the IRS might categorize your foreign bank reporting as willful—or even if you suspect you have a solid non-willful defense—turn to the Tax Law Offices of David W. Klasing at (800) 681-1295 or schedule a reduced-rate initial consultation online. Our office stands out for its dual-licensed Criminal Tax Defense Attorneys & CPAs, an elite combination of legal advocacy and forensic accounting skills that few firms can offer. Unlike non-attorney preparers who can be subpoenaed to testify against you, we uphold attorney-client privilege, ensuring your sensitive information remains secure. We have earned an A+ rating from the Better Business Bureau and a 10.0 Avvo rating, reflecting our unwavering commitment to premier civil and criminal tax representation.

With decades of experience navigating both routine and high-stakes FBAR cases, we routinely protect clients from crippling civil tax fines and the looming threat of criminal tax investigations. Whether your concern involves clarifying genuine non-willfulness, confronting allegations of intentional cheating, or managing a high-risk "eggshell" or "reverse eggshell" audit, our team employs sophisticated legal strategy and deep accounting insight to construct a robust defense. We excel at guiding taxpayers through Voluntary Disclosure or Streamlined Filing Compliance, aiming to minimize or avoid draconian tax penalties and stave off a criminal tax referral. Indeed, despite handling numerous audits that could have spiraled into prosecutions, we have never had an audit client criminally prosecuted—a testament to our tenacious yet ethically sound representation.

Time is of the essence once the IRS suspects willfulness or "willful blindness." Investigators, armed with the government's formidable 90%+ conviction rate in criminal tax cases, will not hesitate to pursue you if they perceive intentional wrongdoing. By engaging the Tax Law Offices of David W. Klasing at the earliest sign of trouble, you position yourself for the most vigorous possible defense. We offer flexible consultations at our satellite offices—including face-to-face meetings facilitated by David W. Klasing's ability to pilot our firm's Cirrus SR22—so you can receive top-tier representation wherever you are, with no added travel costs. Don't leave your financial future or personal liberty to chance; contact us immediately and let our decades of proven success in FBAR and criminal tax matters bring you the peace of mind you deserve. For a reduced-rate initial consultation, contact us online here or call (888) 310-3543 today.

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

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