How does the IRS define willfulness in unreported or under-reported offshore income? What actions help determine whether a U.S. taxpayer's actions amount to "willful or non-willful" conduct? Why should U.S. taxpayers be concerned whether the IRS perceives their actions as willful?

If you have accounts with any Foreign Financial Institutions (FFIs) such as offshore bank or investment accounts or cryptocurrency exchanges you should be aware of your responsibility to file the FinCEN Form 114 - Foreign Bank Account Report or FBAR if the accumulated total of these accounts exceeds $10,000 at any time in the tax year. The IRS has a separate Form 8938 - the "Statement of Specified Foreign Financial Assets," with its own reporting thresholds and requirements. U.S. taxpayers are legally required to understand their responsibilities and disclose the existence and nature of all offshore accounts based on these thresholds.

Unfortunately, many U.S. taxpayers have yet to comply with FBAR reporting requirements and fully disclose all income worldwide. For the past several years, it has been possible for taxpayers to "slip through the cracks" with unreported or under-reported offshore income. Many falsely believed they were "too small" for the IRS to find or that tools such as cryptocurrency could be used to mask activities or hide offshore income.

Those days are simply over. Perhaps the U.S. taxpayer is unaware that their activities are not only being reported; these accounts and transactions are directly associated with their Tax Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number). The IRS has state-of-the-art computer systems and Artificial Intelligence (A.I.) applications that make it much easier to sift through the vast trove of electronic information pouring into the agency from FFIs, exchanges and sovereign tax authorities, and compare it to the information provided on a U.S. tax return.

If your offshore account information comes in from any international source (including your own foreign financial institution or exchange) and A.I. finds it is unreported or under-reported, your returns are flagged for investigation and/or audit.

Once the IRS has identified you for investigation or audit, options such as a quiet disclosure or streamlined filing are no longer available. One question will determine the extent of your penalties, fines and risks, as well as criminal exposure: Were your actions willful or non-willful?

Unfortunately, the IRS has yet to define "willfulness" as it pertains to the actions or inactions of U.S. taxpayers. However, the IRS has provided the following definition of non-willful conduct:

"Non-willful conduct is conduct that is due to inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."

The IRS defines "Negligence" as "any failure to make a reasonable attempt to comply with (IRS) provisions." The IRS has further established that non-willful conduct does not apply to taxpayers who exercise "careless, reckless, or intentional disregard" for U.S. tax laws and reporting requirements.

A recent lawsuit on behalf of a U.S. taxpayer asserted a legal standard for "willful" conduct that the U.S. Tax Court rejected. In this case, the U.S. taxpayer asserted that the government "must apply the same standard for the civil penalty as it does in the criminal context." The taxpayer asserted case law indicating the IRS had a burden to prove his actions "amounted to a voluntary, intentional violation of a known legal duty in order to assess a willful penalty."

The Court flatly rejected this argument, and the IRS has assessed penalties and interest well in excess of $1,000,000 in his case.

How does the IRS define willfulness when a taxpayer attempts to come into FBAR compliance or correct unreported or under-reported income through a quiet disclosure or the IRS' Streamlined Procedures? Willful conduct involves negligence, carelessness, reckless behavior, or intentional disregard for U.S. tax laws and reporting requirements. It is easy to see there is very little room for a reasoned defense or excuse in these cases if the unreported or under-reported income exists in more than one tax year.

Ask yourself the following questions:

• Are the issues at hand due to a single miscalculation or mistake, or have your actions been repeated across multiple tax filing years?
• Have you made any "reasonable attempt" or taken substantive steps or action to correct inaccuracies or comply with your responsibilities as a U.S. taxpayer under the law?
• Do you honestly still believe the IRS doesn't have the capability to quickly analyze offshore reporting data streaming into the agency from FFIs around the world and tie it back to your individual or business tax returns?

Failure to comply with the FBAR reporting requirement and fully disclose all income worldwide is financially devastating: 50% of the highest accumulated balance of all accounts at the time of the violation (regardless of the present account balance) or $100,000 per incidence, whichever is higher, as well as exposure to criminal prosecution and resulting jail time for tax evasion.

Non-willful violations still carry a penalty of as much as $12,500 per violation. These amounts do not reflect the required payment of taxes on previously unreported or under-reported income and associated penalties and interest.

How does the IRS define willfulness, and what risks do you face as a U.S. taxpayer with unreported or under-reported worldwide income?

Once the IRS identifies you for an investigation or audit, your options become limited. Is it time for a consultation with an experienced tax attorney? Ask about the protections of the attorney-client privilege and how this important right protects your ability to have a comprehensive discussion regarding your unique circumstances, the risks you face, and available options to reduce or eliminate those risks and come into compliance.