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Dual U.S.-Swiss Citizen Likely to Face FBAR Penalty After ‘Highly Speculative’ Appeal is Dismissed

Dual U.S.-Swiss Citizen Likely to Face FBAR Penalty After ‘Highly Speculative’ Appeal is Dismissed

U.S. citizens and U.S. taxpayers have an obligation to file taxes, pay taxes, and complete and submit certain foreign informational reports regardless of their country of residency. That is, regardless of whether a U.S. taxpayer is living in California or Calcutta, he or she has an obligation to file and pay income tax on worldwide income and file an array of foreign information returns. While the taxpayer’s country of residence may affect the exact nature of the filing and whether tax minimization opportunities under a tax treaty are available, U.S. tax obligations cannot be avoided by a change of country of residency alone.

This duty to comply with one’s U.S. income tax and foreign information obligations continues to exist even while living outside of the country and specifically extends to the duty to file Report of Foreign Bank Accounts (FBAR). U.S. taxpayers are generally obligated to file FBAR at any time their covered foreign account balances aggregates to greater than $10,000. The failure to file FBAR can be punished with harsh civil monetary penalties. These penalties can apply even when the noncompliance was 100% accidental.

Dual Citizen Faces $1.4 Million in FBAR Penalties

Bernard Gubser is a dual citizen and a native of Switzerland. At some point, he became a naturalized U.S. citizen. Unfortunately, Mr. Gubser appears to have failed to consider the full range of tax consequences that U.S. citizenship would bring. For one, Mr. Gubser did not take any action regarding a Swiss account with an account balance of roughly $2.7 million.

Mr. Gubser said that he relied on the advice of his longtime accountant and was therefore not aware of the FBAR obligation during the 2008 tax year or while preparing his tax returns for the same tax year. Gubser claims that he only learned about the obligation to file an FBAR in 2010.

While penalties for FBAR mistakes start at $10,000, penalties can escalate far beyond this number. When agents and prosecutors believe that the compliance failure was willful — an intentional or voluntary disregard of a known legal duty — then even harsher penalties can be sought. When a taxpayer engages in a willful violation of FBAR, the penalty can consume the greater of $100,000 or 50% of the balance in the account at the time of the violation (IRM §4.26.16.4.5.1).

Where the foreign investment income related to a foreign account is omitted from a U.S. tax filing and simultaneously, the FBAR is not filed and the box on schedule B indicating the country the foreign account is in is ignored, it is understandable the government could believe the FBAR non-disclosure was willful to facilitate income tax evasion.

The IRS and DOJ have yet to seek a criminal tax conviction against Gubser. However, the IRS has threatened to seek a willful FBAR violation against the taxpayer. The 50 percent penalty would have resulted in a fine of roughly $1.4 million against Gubser. Furthermore, Gubser claims that in a meeting with attorneys from the IRS office of appeals, the attorneys indicated that they could prove the FBAR violation under a preponderance standard but not under a clear and convincing standard. Thus, Gubser claimed that he faced an imminent harm.

Following dismissal at the district court level due to the “highly speculative” nature of the lawsuit, Gubser appealed. On appeal, the 5th Circuit Court unanimously affirmed this ruling. The circuit court found, for essentially the same reasons as the district court, that the matter should be dismissed due to standing issues. Thus, Gubser still faces the potential of a significant FBAR penalty.

Could Gubser Have Leveraged a Voluntary Disclosure through OVDP to Fix his FBAR Error?

At least some have speculated that Gubser could have avoided this ordeal simply by leveraging the Offshore Voluntary Disclosure Program. However, in 2010 when Gubser learned about the issue, the OVDP program was limited to the 2009 incarnation of Offshore Voluntary Disclosure Initiative (OVDI). The current OVDP and Streamlined Disclosure programs were not yet available. OVDI was a one-track program that did not distinguish between willful and accidental violations. Thus, Gubser would have faced procedures and penalties like those levied as part of the standard OVDP program, but far more than what would be paid for non-willful conduct under the streamlined program.

However, voluntary disclosure programs have been redesigned since 2010. Currently, taxpayers who committed non-willful violations of the duty to file FBAR can qualify for Streamlined Disclosure. Under the streamlined disclosure program, taxpayers are subject to less stringent disclosure procedures and significantly reduced penalties. In fact, if the taxpayer is living abroad, there is no offshore penalty. Taxpayers facing similar FBAR concerns should take advantage of the currently available disclosure programs to avoid facing a situation similar to the one faced by Mr. Gubser.

Work with Tax Lawyers to Fix FBAR Errors

If you have made errors regarding filing FBARs or other offshore disclosures, and or omitted the taxable income related to the foreign accounts, income generating assets or businesses on your U.S. tax returns, this is not a problem that will simply go away or get better with time. The Tax Attorneys, CPAs and EAs of the Tax Law Offices of David W. Klasing take a strategic approach to all foreign account disclosure issues. We can help taxpayers living in the United States or abroad correct tax or information reporting mistakes and come back into compliance with the U.S. Tax Code. To schedule a confidential reduced rate consultation, please call our Los Angeles or Irvine law offices at 800-681-1295.

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