Are You Willful Or Ignorant About Taxes? (Hint, Ignorance Is Safer)

Tax time is just around the corner. It won’t be long before all those annoying Forms 1099, W-2 and K-1 start to show up. Sometimes, the forms dribble in reporting income even after you’ve filed your return. There may be some surprises too, where you think you were paid $1,000, but the 1099 says $100,000!

If your income is all there in black and white, you may not have many choices. Yet even simple reporting problems can lead to crippling mistakes that cost big. The more complex your affairs, the more you and your tax adviser must make judgment calls. But if you misstep, are you better off being honest and ignorant, or more clever and conniving?

Willfully evading federal income taxes is a felony. See 26 U.S.C. § 7203. “Willful” usually means voluntary or with intent. You are willful if you intentionally violate a legal duty of which you’re aware. Yet what IRS calls ‘willful’ can be tough to predict. And even if you’re ignorant, the IRS can say you are guilty of willful blindness–where you intentionally remain ignorant!


For example, there’s lots of talk about how to soften the blow of disclosing foreign bank accounts or other tax problems. U.S. citizens and permanent residents must report worldwide income. They must also disclose foreign bank accounts on FBARs. Penalties for failing to report income can be severe, and penalties for failing to file FBARs are even worse.

Some people may think they face worse treatment coming forward than by just clamming up and waiting to be contacted by the IRS. If they’re lucky, they figure, that might never happen. But that is a very dangerous game of chicken, even if occasionally someone wins. Consider United States v. J. Bryan Williams. Mr. Williams had checked the “no” box indicating (under penalties of perjury, mind you) that he did not have a foreign bank account. He also did not file FBARs.

Of course, it turned out he did have foreign accounts. Nevertheless, the court was not persuaded that Mr. Williams was trying to evade taxes. Some people manage to avoid the taint of willfulness in tax matters based on a genuine misunderstanding of the tax law. The misunderstanding can even be unreasonable as long as it’s genuine. See Cheek v. United States, 498 U.S. 192, 201 (1991).

Another way of not being willful: having a good-faith (even though unreasonable) belief that no tax was due. But often the “I didn’t know any better” argument just doesn’t work. Ignorance often really isn’t bliss. In a criminal tax case in Illinois, United States v. Kokenis, a jury found Chris Kokenis guilty of tax evasion. Asking for a new trial, Kokenis claimed the trial court had erred by excluding evidence of his good faith misunderstanding of the tax law.

via The Tax Lawyer


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s