The two worst things that you could do if you did not take advantage of the FBAR voluntary disclosure program that ended October 15, 2009 is to attempt to bring your foreign funds back in cash without reporting the existence of the foreign account where required to or to make a quite rather than a loud disclosure.
After Andrew B. Silva received notification From HSBC that it would no longer house his account after HSBC identified his account as one that would possibly draw the wrath of the US government, as is happening with foreign banks all over the world in the wake of the UBS litigation and the voluntary disclosure program ended October 15, 2009, Silva attempted to send the money back through the mail in increments of less than $10,000 in an attempt to evade U.S. cash reporting rules. Unfortunately for Mr. Silva, U.S. law bars the structuring of a series of transactions designed to evade U.S. reporting requirements of amounts greater or equal to $10,000.
Silva, was prosecuted for conspiracy to defraud the U. S. Government when he was caught smuggling in close to $250,000 in cash payments to the U. S. and in the process he falsely reported to U. S. Customs Inspectors that he had not mailed U. S. currency from Switzerland to the United States. Silva currently faces the possibility of serving five years in prison on the conspiracy count and another five for the false statements made to U.S. Customs for his cash smuggling actions alone.
Some US taxpayers with previously undisclosed foreign accounts are attempting to avoid detection by amending their past years tax returns to include previously unreported foreign income generated by previously undisclosed foreign accounts without making a Voluntary Disclosure to the IRS of their previous noncompliance.
On May 8 2010, at the meeting of the American Bar Association Tax Section, an IRS representative discussed “quiet disclosures” concerning foreign bank accounts. A quite disclosure occurs where a taxpayer files amended tax returns for past years with making a required Voluntary Disclosure (loud disclosure). The IRS takes a dim view of quite disclosures related to foreign accounts and publicly stated that taxpayers who make a quiet disclosures will not be eligible for favorable terms including the avoidance of criminal prosecution available to taxpayers who make a formal or “noisy” disclosure which is made by knocking on the front door of the Criminal Investigations Division of the IRS and self reporting the taxpayer’s previous noncompliance.
While the IRS still has not advised what the penalties will be for people who come forward now with previously undisclosed foreign accounts as they did with the FBAR Voluntary Disclosure Program ended October 15, 2009. The IRS has been adamant that a quite disclosure carries with it no IRS concessions, reduced penalties and most importantly, no agreement that criminal prosecution related to a taxpayer’s noncompliance surrounding a foreign account will be avoided.
Additional problems created by a quiet disclosures is that the amended returns only address payment of back taxes and interest related to previously undisclosed income but not the penalties surrounding the reporting requirements for Foreign accounts required on U.S. Treasury Form TD F 90-22.1 (also known as a Foreign Bank Account Reporting – FBAR) which can run as high as 50% of the undisclosed foreign account balance.
Additionally the amended returns do not address what the IRS considers as a “badge of fraud” where a taxpayer consistently fails to “check the box” on 1040 Schedule B which would have indicated that the taxpayer had a foreign account on back tax returns thus effectively preventing discovery of the foreign account by the IRS in previous tax years. Purposely hiding the existence of a foreign account by not annually competing the TD F 90-22.1 and not checking to box on Schedule B of 1040 while committing income tax evasion to fund the undisclosed foreign accounts are criminal acts which can only be mitigated down to civil infractions by making a Voluntary Disclosure.
The two primary civil FBAR penalties are referred to as “non-willful” and “willful.” The non-willful penalty is up to $10,000 for each negligent violation of the FBAR filing or record-keeping requirements. It may be waived if the violation was “due to reasonable cause” and the amount of the transaction or the balance in the account at the tie of the transaction was properly reported. Willfully failing to file an FBAR can result in both criminal sanctions and civil penalties. As mentioned above, civil penalties can be assessed up to $100,000 or 50% of the high balance in an unreported foreign account per year for each year since October, 22, 2004 the FBAR was not filed—whichever is higher.
As further reasoning for making a loud voluntary disclosure rather than going quietly via amended returns, be aware that the IRS has stated publicly that it is examining amended tax returns reporting increases in income related to foreign bank accounts, to determine if criminal tax enforcement action is appropriate.
Additionally the IRS has stated that upon receipt of delinquent TD F 90-22.1′s the IRS will be checking to see if a Voluntary Disclosure is in place as part of processing the delinquent FBAR’s.