Willful Blindness-the Ostrich syndrome


Often taxpayer’s will claim that the did not know of their obligation to file a Report of Foreign Bank or Financial Account known as an FBAR. When pressed the fact pattern often begins with a statement like my tax advisor never asked about my foreign account or I was otherwise unaware that I had to disclose it. There is no penalty for having an offshore account. Penalties arise from not disclosing the account in an accurate and timely manner when required. The disclosure is now made on Form TD 90-22.1 which is a Bank Secrecy Act (BSA) form and Form 8938 which is an income tax disclosure form. Failure to file and accurately disclosure signature authority on an FBAR may result in penalties that range from a warning letter, to a non-willful penalty of $10,000 per year per account to a willful penalty of the greater of $100,000 or 50% of the highest account balance per year to criminal prosecution. The issue of willfulness is important to understand.

The Internal Revenue Manual takes the position that willfulness (at least as far as civil penalties are concerned) can be established by a showing of willful blindness. In the case of willful blindness, ‘willfulness’ may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements.

It is important to note that there have been three opportunities since 2009 for taxpayers to come forward and make a “voluntary disclosure”. The IRS and the Department of Justice (DOJ) are therefore scrutinizing claims of lack of knowledge of the reporting reporting requirements with skepticism. In fact the DOJ is now seeking tougher sentences for “willful” conduct by asking courts to not consider the actual take loss (which can be minimal) in imposing sentences for FBAR violations.

The underlying rationale for not coming forward can be economic or psychological, but the reason is unimportant. What is important is that taxpayer’s with undisclosed offshore accounts, even if they were closed within the last 3 years, come forward before being identified by their financial institution to the IRS or DOJ. The chance of avoiding a willful penalty is directly related to taxpayer conduct going forward, not just in hindsight.


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Sanford Millar
Law Offices of Sanford I. Millar

Experience and Qualifications: Over 30 years of experience in domestic and international tax... View Profile »

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