What constitutes willful versus non-willful conduct in the eyes of the IRS? Why is this distinction important to the agency, especially regarding international disclosures and taxable events? We are often asked about how seriously the IRS takes “willful” conduct into account as it applies to an audit or tax-related investigation. The answer is: quite often.
What is Willful and What is Non-Willful
Willful conduct is associated with specific actions or omissions related to a taxpayer’s knowledge and purposeful avoidance of paying the taxes they owe or violating IRS regulations and US tax law. Have you purposefully left information off of a tax return, failed to disclose offshore accounts, investments, or assets, and/or consistently manipulated tax returns to reduce the amount owed or the payment of taxes altogether? The IRS considers this “willful” behavior that exposes a US taxpayer to additional taxes, penalties, fines, interest and even the potential of a criminal investigation and charges.
Non-willful conduct is associated with a US taxpayer’s actions or omissions that are done unintentionally or unknowingly. Non-willful conduct isn’t an attempt to defraud the government or avoid paying taxes. It is usually associated with a mistake here and there, negligence, or a lack of understanding of the taxpayer’s obligations and duties under US tax law.
Make no mistake about it. It is the legal duty of every US taxpayer to understand all tax-related requirements associated with their unique circumstances and to timely and accurately file truthful returns, by fully disclosing income, deductions and credits based upon worldwide income. Ignorance is not a defense, nor will it stand up in a discussion with the IRS about willful or non-willful conduct. This is especially true for those who have offshore bank and financial accounts, business interests, trusts, real estate, retirement accounts or other foreign assets or income.
Willful Versus Non-Willful Conduct in the Eyes of the IRS – A Question of Consequences
In essence, the question of willful versus non-willful conduct in the eyes of the IRS is always associated with the consequences of failing to make a full, accurate, and honest disclosure of information and tax returns to the IRS.
For example, the IRS receives extensive information associated with individual US taxpayers from banks, financial institutions, investment houses, cryptocurrency exchanges and sovereign tax agencies worldwide. The IRS recently disclosed it was applying Artificial Intelligence and state-of-the-art computer systems to evaluate this information and how that compares with the information provided to IRS by those US taxpayers on their tax returns, FBARs, and other required reporting.
When the information doesn’t match up, there will inevitably be an IRS audit. One of the primary issues associated with that audit will be the question of willful versus non-willful conduct in the eyes of the IRS.
The answer is straightforward: The IRS needs revenue, and when they can prove that a US taxpayer failed to report or inaccurately disclosed offshore income, assets or accounts over a period of years they have no reason to consider “non-willful” conduct as a reason or excuse.
In fact, the behavior of the taxpayer and the numbers provided by the taxpayer’s own financial institution will be enough to show a pattern of attempting to hide income and assets. From that point, it will be a negotiation with the IRS and the agency will hold all of the cards – including exposure to criminal tax fraud and/or tax evasion charges.
The key here is compliance. If you have not taken the necessary steps to be in full FBAR compliance, you should take action immediately. An experienced tax attorney can usually provide the full protection of attorney-client privilege as you work through the specifics of your unique situation. What are the options for you to come into compliance voluntarily, with the goal of achieving the best possible outcome for you based upon the facts at hand?
What is your appetite for risk? Are you prepared to endure the significant costs and associated exposures of an IRS audit or a criminal tax investigation? Are you willing to risk paying much more in substantial penalties and interest as well as fines and the actual taxes owed over a look-back period of several years? Are you willing to risk jail time? The answer to these questions should guide your next steps.
Is it time to make a full disclosure and come into compliance with the IRS?
