By Nicholas Eusanio, Esq., LL.M
The tax attorneys at Nardone Law Group in Columbus, Ohio routinely advise taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program and the importance of coming forward to report previously undisclosed foreign financial accounts to the IRS. Under certain circumstances, federal tax law requires a U.S. taxpayer with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”). Despite the FBAR filing requirement, the IRS has noticed a significant trend in taxpayers using foreign bank accounts while failing to comply with federal tax reporting and payment obligations related to those foreign financial accounts. In response, the IRS has recently increased efforts to identify and pursue these noncompliant taxpayers.
NLG Comment: For more information on the IRS’ current actions to uncover taxpayers that use foreign financial accounts to avoid federal tax reporting obligations, such as filing the FBAR, please see our prior articles regarding the IRS’ use of John Doe Summonses related to Correspondent Accounts.
Accordingly, the tax attorneys at Nardone Law Group want to: (i) inform taxpayers about the requirement to disclose foreign financial accounts to the IRS on the FBAR; (ii) explain the benefit of the IRS Offshore Voluntary Disclosure Program for taxpayers who have failed to disclose their foreign financial accounts to the IRS; and (iii) highlight a recent criminal case illustrating the IRS’ efforts to pursue taxpayers who fail to file the FBAR and who conceal their foreign financial accounts.
FBAR Filing Requirement: Disclosing a Foreign Financial Account Interest
A U.S. citizen with a financial interest in a foreign financial account must file the FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Such a taxpayer must also disclose any such foreign financial account on Schedule B of the taxpayer’s individual income tax return. A “financial account” includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained within a financial institution or other person performing the services of a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. A “foreign financial account” is a financial account located outside the United States, but also includes correspondent accounts.
Importantly, there are significant civil and criminal penalties associated with failure to file the FBAR. The IRS will impose a civil penalty of $10,000 per violation for a non-willful violation, or 50% of the amount in the foreign financial account at the time of the violation—not to exceed $100,000—per violation for a willful violation of the FBAR filing requirement. In addition, the criminal penalty for willful FBAR violations is a fine of up to $250,000, imprisonment of up to five years, or both. Moreover, if a taxpayer willfully violates the FBAR filing requirement while violating another federal law or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, the above noted maximum criminal penalties double to $500,000 and 10 years of incarceration.
Taxpayers Benefit from the Offshore Voluntary Disclosure Program
Fortunately for noncompliant taxpayers—such as those who have failed to file the FBAR disclosing foreign financial accounts—the IRS Offshore Voluntary Disclosure Program provides an option to avoid involuntary IRS enforcement action. The IRS Offshore Voluntary Disclosure Program allows taxpayers who have failed to file the FBAR to come forward voluntarily to disclose their foreign financial accounts to the IRS. The Offshore Voluntary Disclosure Program enables a taxpayer to potentially reduce otherwise significant penalties and interest that could apply, as well as limit the risk of criminal investigation and prosecution related to failure to report foreign financial accounts. Nonetheless, many taxpayers do not understand the requirement to disclose their foreign financial accounts to the IRS on the FBAR, and do not seek advice from a tax lawyer about the benefits of the Offshore Voluntary Disclosure Program. Additionally, some taxpayers try to make a “quiet disclosure” of their previously unreported foreign financial accounts. Unfortunately, as explained in the following section, such taxpayer misunderstandings and failures can lead to criminal prosecution and conviction.
NLG Comment: For more information on “quiet disclosures” and the associated pitfalls, see our prior article about the IRS Chasing Down Quiet Disclosures.
Criminal Failure to File the FBAR Disclosing Foreign Financial Accounts
The recent decision in United States v. Stephen Kerr, et al., 112 AFTR 2d 2013-XXXX illustrates that, where appropriate, the IRS is heavily pursuing criminal prosecution against taxpayers that fail to report foreign financial accounts on the FBAR. In the Kerr case, the IRS successfully convinced a jury to convict the defendant taxpayers with federal tax crimes linked to their failure to disclose hidden Swiss bank accounts. In fact, the jury specifically convicted one defendant on two counts of failing to file the FBAR to disclose his interest in foreign financial accounts. That defendant subsequently filed a special motion attempting to—among other things—persuade the court that the IRS did not prove he had a legal duty to file the FBAR. But, the court denied that defendant’s motion, finding that the duty to file the FBAR reporting his foreign financial accounts is clearly established by federal regulations. Thus, the Kerr case is a strong reminder to taxpayers that failing to comply with federal tax reporting and payment requirements—including the obligation to file the FBAR disclosing foreign financial accounts—can easily result in criminal investigation and prosecution. So, it is very important for any taxpayer with a foreign financial account, foreign income, or foreign assets to consult with an experienced tax attorney about potential federal tax reporting and payment obligations—such as the FBAR—and the benefit of the IRS’ Offshore Voluntary Disclosure Program.
Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program and federal tax requirements for reporting foreign financial accounts, foreign income, and foreign assets. If you have unreported foreign income, or an undisclosed foreign account, asset or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.