For over a dozen years, the Internal Revenue Service and the Department of Justice have targeted the use of offshore accounts to evade U.S. income taxes. In testimony before Congress last month, IRS Commissioner Charles P. Rettig made it clear that this crackdown on offshore tax evasion will continue unabated.
Taxpayers who willfully fail to disclose their offshore accounts on complete and accurate Reports of Foreign Bank and Financial Accounts (FBARs) are subject to criminal investigation and prosecution. However, as this column has previously chronicled, taxpayers who willfully violate their reporting requirements, but are fortunate enough to avoid prosecution, are still subject to civil penalties of up to 50% of the value of their undisclosed accounts. See Jeremy H. Temkin, Civil FBAR Penalty Litigation: No Reprieve for Taxpayers, N.Y.L.J. (March 18, 2021) and The Next Frontier: Civil Penalties for Undisclosed Offshore Accounts, N.Y.L.J. (Jan. 18, 2018). But not every FBAR violation is the product of willful conduct. Rather, some taxpayers fail to comply with their reporting obligations, not knowingly or recklessly but out of negligence or as the result of a good faith mistake.