The tax attorneys at Nardone Law Group in Columbus, Ohio are continuously monitoring the latest developments and updates in the Internal Revenue Service’s efforts to uncover taxpayers with undisclosed foreign accounts, assets, or entities. One option available to taxpayers who want to come forward and report a previously undisclosed foreign account, is the IRS’ Offshore Voluntary Disclosure Program. As part of the Offshore Voluntary Disclosure Program, taxpayers have to address their failure to file the commonly referred to: FBAR form.
Background on FBAR Form
Federal tax law requires taxpayers with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing a Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1), commonly referred to as the “FBAR.” Taxpayers fulfill U.S. tax reporting obligations, relating to foreign financial accounts, by both disclosing the account on the taxpayer’s income tax return and by filing the FBAR. Failure to comply with the FBAR filing requirements can result in civil and criminal penalties, which, as illustrated in the case below, can be quite severe depending on the circumstances. First, we will provide a brief overview of the FBAR filing requirements, followed by discussion of a recent case that demonstrated the potential penalties facing non-compliant taxpayers.
FBAR Filing Requirements
U.S. taxpayers who have a financial interest in, or signature authority over, a foreign financial account must file the FBAR if the aggregate value of the account exceeds $10,000 at any time during the calendar year. The FBAR for any particular calendar year is to be filed on or before June 30 of the following year. Additionally, the taxpayer must also disclose the foreign financial account on Schedule B of the taxpayer’s individual income tax return.
A “financial account” includes any securities, brokerage, savings, demand, checking, deposit, or other account maintained within 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, including correspondent accounts. To better understand why it is so important to comply with the FBAR requirements, it’s helpful to understand the potential penalties.
Potential FBAR Penalties
The determination of whether a taxpayer has an obligation to file the FBAR is crucial, because a failure to properly do so can have significant consequences. For instance, failure to file the FBAR can result in severe civil, and sometimes criminal, penalties. For non-willful violations of the FBAR filing requirements, the IRS will impose a civil penalty of $10,000 per violation. For willful violations, the maximum civil penalty is the greater of $100,000 or 50% of the balance in an unreported foreign financial account, per year, for up to six years. Additionally, the criminal penalty for a willful FBAR violation is a fine of up to $250,000 and/or imprisonment of up to five years, depending on the circumstances.
NLG Comment: For violations to be considered “willful,” the government must prove the failure to file was a voluntary, conscious, and intentional act. This can include a conscious effort by a taxpayer to avoid learning about the FBAR reporting and recordkeeping requirements.
Although these penalties are not imposed upon taxpayers very frequently, you can see that they have the potential to be significant. The following recent case demonstrates just how severe the FBAR penalties can be.
FBAR Penalties in Action
In June 2013, the U.S. government filed a complaint against Carl R. Zwerner for his alleged failure to timely report his interest in a foreign financial account. [See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (S.D. Florida, June 11, 2013)]. Zwerner, an 87-year-old U.S. citizen, had a financial interest in a Swiss bank from 2004 to 2007, the balance of which exceeded $10,000 at all times. Zwerner attempted to voluntarily come into compliance through the filing of amended returns and original FBARs, but was subsequently subjected to an IRS audit. The government assessed civil FBAR penalties against Zwerner in the amount of 50% of the highest account balance at the time of the violations for each year, aggregating to the total amount of $3,488,609.33. At trial, the jury returned a verdict finding Zwerner “willful” as to the years 2004, 2005, and 2006, and thus liable for $2,241,809 in FBAR penalties. This is quite a severe penalty, considering the apparent high balance of Zwerner’s account was $1,691,054 during the relevant time period.
The Zwerner verdict is a significant win for the government in its efforts to encourage taxpayers with undisclosed foreign financial interests to come into compliance with reporting and filing requirements. As you can see, the IRS has a broad scope to assess penalties when the failure to disclose a foreign financial account is deemed willful. Time will tell whether the government begins a pattern of assessing substantial FBAR penalties similar to Zwerner. One thing is certain: waiting to come into compliance is not a feasible option for taxpayers.
How Nardone Law Group Can Help
The tax attorneys at Nardone Law Group routinely represent businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. The Offshore Voluntary Disclosure Program and FBAR are a prime example of how taxpayers can come into compliance relating to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorney’s today. One day can mean the difference between the benefits of voluntary disclosure and the severe penalties one can incur from a willful violation. Nardone Law Group has vast experience representing clients before the IRS. Our tax attorneys will thoroughly review your case to determine what options and alternatives are available.