Constructive Knowledge and FBAR Penalties: Does Merely Filing a Form 1040 Suffice to Establish “Willfulness?”

 




In fighting the battle against offshore tax avoidance, the U.S. government has raised some creative arguments to establish that a taxpayer “willfully” failed to disclose foreign accounts by filing FinCEN Forms 114 (“FBARs”). These include the concept of “constructive knowledge,” whereby the U.S. government contends that, because Schedule B (Interest and Ordinary Dividends) of Form 1040 (U.S. Individual Income Tax Return) specifically asks about foreign accounts, because Schedule B directs taxpayers to additional sources of information about foreign account duties, and because taxpayers must sign their Forms 1040 declaring that they have reviewed the entire Form 1040, including all Schedules and Statements attached, any FBAR violation must be “willful” and thus subject to the highest possible penalty. This notion sounded absurd to many in the tax community at the outset, but it has been embraced by several courts. Not all courts have accepted the position, though, giving hope to taxpayers that merely signing a Form 1040 will not be considered tantamount to a willful FBAR violation and the large penalties that come with it. This article examines the major cases that have analyzed the “constructive knowledge” position and what they mean to taxpayers.


About Hale E. Sheppard

HALE E. SHEPPARD, Esq. (B.S., M.A., J.D., LL.M., LL.M.T.) is a Shareholder in the Tax Controversy Section of Chamberlain Hrdlicka and Chair of the International Tax Group.

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