There's been a lot of mention in the news lately about foreign financial accounts and efforts by the U.S. government to crackdown on would-be tax evaders. Gone are the days when individuals could easily open a foreign Swiss account and just happen to forget that account existed come tax time. Today, the IRS has developed strict guidelines with regard to what types of foreign assets and financial accounts must be declared and subsequently taxed. Which makes this type of tax evasion nearly impossible.
Of course, like most IRS tax matters, the guidelines dictating how U.S. holders of foreign accounts and assets must go about complying with federal regulations are confusing and complicated. Given this, it stands to reason that some individuals will fail to file the correct forms or follow IRS procedures.
It's often surprisingly easy to make mistakes and errors when filing one's taxes. This is especially true the more complex an individual's financial structuring and assets. However, in cases where an individual with foreign assets fails to declare or pay taxes on those assets, the IRS isn’t likely to buy a defense based on pure ignorance.
Individuals who fail to comply with the IRS's foreign accounts and assets regulations would be wise to take steps to remedy their mistakes. The first step is to declare whether a tax error was willful or non-willful. In this case willful means that an individual knowingly took steps to avoid declaring assets and paying taxes. It goes without saying that the fines and penalties associated with willful tax violations are more punitive. It also goes without saying that, because of this, most individuals opt to declare their tax violations were innocent mistakes or non-willful in nature.
While again, given the complexity of tax regulations, plain ignorance seems like a probable defense; in most cases it doesn't pass the IRS's sniff test. Individuals who have foreign accounts and assets are expected to become informed about new IRS regulations and requirements. Individuals, who claim their tax violations were non-willful when in fact they were willful, may face criminal charges and be in the need of legal representation.
Source: FindLaw.com, “Income Tax: Fraud vs. Negligence,” 2015
