The Offshore Voluntary Disclosure Program (OVDP) is not a given. You must apply to take part and then be accepted into the program.
The FBAR – electronically filed with the BSA on FinCen Form 114 – must be submitted for each year that overseas account assets total more than $10,000 in the aggregate. Penalties for failing to file are substantial, but increase for willful failures. What exactly constitutes willful behavior? A recent case provides some examples.
An OVDP application denial
In a California tax court case, U.S. v. Bohanec, a couple had owned a camera shop licensed to sell Leica cameras. A Swiss bank account was opened on their behalf and commissions were deposited into the account. Some international customers were asked to directly deposit money into this account.
The couple did not give UBS their home mailing address. They did not talk to an accountant, lawyer or banker about the account and never told anyone other than their children about its existence.
From the opening of the account until applying to take part in the OVDP in 2010, the couple never reported the account. At times, the balance was more than one million dollars. After a preliminary acceptance they filed back FBAR forms. However, they were ultimately rejected from the program.
Is reckless indifference the same as willful?
The question in the case centered on whether the 2007 failure to timely file a FBAR was willful. This was important for the calculating the penalty. Willful failure penalties are the greater of $100,000 or 50 percent of the balance for each year the account is not reported.
The court found the government met its preponderance of the evidence standard. The facts that the court cited included:
- The taxpayers did not provide UBS with their address and kept the hid account from everyone but their children
- They never asked an accountant, banker or attorney about reporting requirements
- Some statements that they made in their OVDP applications were not true. For instance, they claimed tax had been paid on commissions when it had not
The court found the couple recklessly indifferent to their duty to file. This was enough to support a conclusion that the failure to file the 2007 FBAR was willful.
This case provide guidance on the willful standard. It is also cautionary. Before filing for the OVDP, seek guidance from an experienced tax attorney.