You are required to file Schedule B with your IRS form 1040 each year if among other reasons, you had a financial interest in, or signature authority over a foreign financial account. On Schedule B Part III line 7a, the form specifically asks you to state whether or not you had a foreign account. The problem is, that for many taxpayers, the box is checked "no" when the correct answer should have been "yes."
Suddenly, a lot of foreign bank account holders are completely freaked-out about what to do because of this issue with Schedule B Part III line 7a! Will they be hit with willful FBAR penalties, and possibly criminal charges? Do they have to pay 27.5% to come clean? Should they try to hide, make some sort of 'soft-disclosure' or just pray that the IRS is disbanded before they are caught?
In this article, I will explain precisely why improperly checking the "no" box Schedule B Part III line 7a means very little at all.
Why is your Schedule B Part III line 7a checked "no"?
Did you know that the vast majority of professional and consumer tax software defaults the box to check "no?" That's right, in order for the box to be something other than "yes" somebody has to go out of their way to know the box is there and overwrite the default setting on this software. A lot of software has recently made changes so it does not default, but many tax preparers are still unfamiliar with Schedule B Part III line 7a.
It's not just taxpayers who make this mistake. National firms like H&R Block and even high-priced big accounting firms make this error. Oftentimes they know, or should know, their clients do have foreign bank accounts but still mistakenly check the box "no," and never tell them about the universal tax jurisdiction of the IRS. We have learned to assume that almost all of our OVDP clients have mistakenly checked "no" when the answer is "yes" on Schedule B Part III line 7a.
The good news is this mistake means very little when deciding whether someone should (1) opt-out of the Standard OVDP, or (2) use one of the new streamlined OVDPs. Checking this box "no" does not automatically mean you are willful. Checking "no" does not mean you have to to pay 27.5% (or 50%) penalty on the account value! Not at all. And do you know who else agrees with us? Oh. this little tax agency you may have heard of...
The IRS' guidance on taxpayers who make a mistake on Schedule B Part III Line 7a
Section 4.26.16 of the IRS Internal Revenue Manual discusses Report of Foreign Bank and Financial Accounts (FBAR/Form 114) penalties. Let's just go right to the money quote - this particular excerpt from IRM Sec. 220.127.116.11.4.5 on FBAR Penalty Willfulness:
"The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness."
Is that pretty clear? Do not let the fact that you made a mistake, or didn't know about Schedule B Part III Line 7a deter you from addressing your offshore problem.
Get legal advice on your non-willfulness (or willfulness)
In a recent Forbes article, written by Deborah Jacobs and Janet Novack, the two lament the lack of clear guidance as to whether or not someone is willful or non-willful:
"What is the catch? To qualify must certify that previous lapses resulted from 'non-willful' conduct, which the IRS vaguely defines as 'negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law'."
We happen to disagree a bit --- we don't think the law is all that vague, but that is because we live the law every day. Yet there is at least one other quote from their article with which we totally agree:
"So if there’s an unreported offshore account in your family, hire a lawyer with offshore chops. This isn’t a do-it-yourself project, what with the potential for criminal charges and/or confiscatory civil penalties–up to 50% of an account’s balance for each year of willful non-FBAR filing."
This is absolutely essential. It does matter who you hire to help you through this issue. We routinely take over cases where previous attorneys and CPAs were involved and our jaws drop at the level of incompetence, indifference and/or laziness. If you need assistance, contact us.