FBAR Penalties (2015): Taxpayer Willfulness & Required Records Exception

For US taxpayers with Foreign Bank Accounts valued over $10k, a Fincen Form 114 must be electronically filed by June 30 each year. The penalties for failure to file are both civil and criminal and may include:

1) Failure to Report Foreign Bank and Financial Accounts (Form 1040/Schedule B, Part III, 7 (a)) which may be perjury and render the Form 1040 tax return incomplete so the Statute of Limitations is suspended and does not commence until the tax return is completed correctly.

In addition the 3 year statute for civil tax audits may be extended to 6 years if there is significant under-reported income. The criminal tax statute is 6 years. The failure to file Fincen Form 114 (FBAR) if considered a willful violation under 31 USC 5322(b), 31 CFR 103.59 penalty is up to 10 years in jail for each violation with civil penalties of the greater of $100k or 50% of the highest account balance per year for up to 6 years (this penalty applies for each year).

2) Additional criminal penalties include: Willful Evasion of Tax (IRC 7201; 5 years in jail, $100k fine/individuals, $500 fine/corporations), Obstruct/Impede Tax Collection (IRC 7212; 3 years in jail), File False Tax Return ( IRC 7206(1) 3 years in jail; fine $250k).

If the failure to file was due to a conspiracy (i.e.. others were involved) and additional 5 years in jail for conspiracy to commit tax evasion (18 USC 371).

Taxpayers in this predicament often “blame their CPA and/or other advisors”. Under Treasury Dept Circular 230, a tax practitioner who knows that a client has not complied with the tax laws or made an error or omission is obligated to “promptly advise the client of the fact of non-compliance, error or omission, and the “consequences” under the Internal Revenue Code and Treasury Regulations.

Unless the CPA, or other advisor was retained by the taxpayer’s attorney (on behalf of the taxpayer under the Kovel privilege) to prepare the tax return, the CPA may be called to appear before a grand jury or interviewed by the IRS in an audit. Any statement made by the CPA must be truthful and accurate or it may be construed as obstruction to impede tax collection and subject the CPA to a 3 year felony (or the taxpayer if they are not truthful and accurate).

So, what is a taxpayer to do if they filed tax returns and failed to report the Foreign Bank Accounts under their Form 1040, or filed Fincen Form 114? Their best IRS audit position is to amend their tax returns to accurately and truthfully reflect all foreign accounts and income from foreign accounts.

Herein lies the dilemma: if they do not amend the tax returns and report all foreign accounts/income they face multiple civil and criminal penalties which can be both exorbitant and require lengthy jail terms. If they file amended tax returns but do not have a reasonable cause exception for the original returns being erroneously prepared and filed both they and the CPA (who prepared the original tax returns) face criminal penalties for filing false tax returns, willful evasion of tax, conspiracy to commit tax evasion plus the FBAR civil and criminal penalties, since the amended tax returns are prima facie evidence that the original tax returns as prepared and filed were erroneous. If they follow conventional wisdom and enter the IRS Offshore Voluntary Disclosure Program they face steep penalties, waive their statute of limitations defenses, their constitutional protections to avoid self-incrimination (5th amendment), unreasonable searches and seizures (4th amendment), excessive fines and penalties (8th amendment). In addition if they are not accepted in the OVDP after submitting detailed information about their prior noncompliance the evidence they submit may be used against them for criminal prosecution by the US Dept. of Justice (as happened to billionaire “Beanie babies” founder, Ty Warner, and most recently to Conn. Industrialist, George Landegger), or they can be accepted in the OVDP and then thrown out and the evidence they submitted could be used against them (see Israel’s Bank Leumi case).

The only solution that works is a trade secret tax strategy I have developed and successfully used for clients which is the filing of amended tax returns, with a full disclosure of all relevant facts, a stated reasonable cause exception and a request for a waiver of penalties. The recent 9th Circuit case M.H.v.U.S. (cited by Sanford I. Millar in his 4/24/15 article “Warning Offshore Account Holders May Have no Fifth Amendment Privilege“) further complicates the taxpayer issues.

In this case, the 9th Circuit, upheld the District Court which concluded that Taxpayer had to produce records of offshore (foreign) bank accounts under the required records doctrine. The Court held that the required records doctrine was regulatory in purpose, the production of the documents and testimony was not subject to 5th amendment privileges against self-incrimination. The US DOJ is now citing 31 USC 5322(a) which holds that “pursuant to 31 CFR Sec. 103.32, all US holders of foreign bank accounts are required to retain certain records regarding those accounts for a period of 5 years.

WILLFUL FAILURE TO RETAIN THE ACCOUNTS MAY BE CRIMINALLY PROSECUTED. The US DOJ is now having grand juries issue subpoenas for records and then compel testimony about the records.

If the taxpayer has ownership or control of these foreign accounts, and does not disclose the account or the income from the account they may be entitled to assert reasonable reliance on a CPA/other tax advisor( for their failure to disclose the account/income) as a defense to penalties but their “reasonable reliance” is not a bar to compelled document production under the “required records exception” nor does it bar their appearance before the grand jury. CPAs other tax advisors may be called to testify and must truthfully answer questions, reveal whether under Circular 230 Sec. 1021 they advised the client of their non-compliance (and consequences), which places the taxpayer in great jeopardy i.e. willfulness (or the CPA may be charged with obstruction of tax collection i.e.. a 3 year felony).

Taxpayers with undeclared foreign accounts who refuse to comply would face willfulness and the civil/criminal penalties FBAR (greater of $100k or 50% of the highest account balance per year, for up to 6 years i.e.. up to 300% of the account balance), plus tax, interest, and a 75% civil fraud penalty on the tax on the unreported foreign income.

The solution is to “clean it up” or “face the music.”

Tags: ,

Trackbacks/Pingbacks

  1. FBAR Penalties (2015): Taxpayer Willfulness &am... - 04. May, 2015

    […] For US taxpayers with Foreign Bank Accounts valued over $10k, a Fincen Form 114 must be electronically filed by June 30 each year.  […]