Regardless of your reasons for failing to file a Report of Foreign Bank and Financial Accounts (FBAR) (FinCen Form114), tax compliance problems regarding foreign assets or accounts can lead to harsh tax penalties or referral for criminal tax prosecution. Under the Banking Secrecy Act, individuals and entities who are US taxpayers and who hold signature authority over or an interest in foreign financial accounts must disclose the existence of that account by electronically filing FBAR (FinCEN Form 114). This obligation arises when, at any time during the relevant tax year, the balance of a foreign account or the aggregate balances of all foreign accounts exceeds $10,000.
Penalties for unfiled FBARs are harsh regardless of your reasons for non-compliance. A non-willful violation can result in a fine of $10,000 per unreported account, per tax year. The Internal revenue Service defines willfulness broadly and a willful violation could result in a penalty of the greater of $100,000 or 50% of the account value to be imposed per tax year where the account went unreported (with a 5 year FBAR statute a 250% penalty is theoretically possible). If other violations of the Internal Revenue Code, Banking Secrecy Act, or other relevant tax laws and regulations compound with your FBAR liability, additional penalties may apply or your matter may be referred to the Internal Revenue Service Criminal Investigation Division for criminal tax investigation and prosecution.
The array of ever-changing tax laws regarding foreign asset and account reporting requirements is often a source of confusion among US-based taxpayers and expatriates. Generally speaking, individuals or entities with a US tax obligation who hold an interest in or signature authority over foreign accounts must disclose the account, in part, by disclosing the existence of the account or asset on their individual 1040 by checking the yes box in Part III, line 7a, on Schedule B. Depending on the type and the balance of the account, the taxpayer may also be required to file Form 8983. Finally, the taxpayer must also comply with FBAR requirements, as set forth above, as required by the Banking Secrecy Act.
However, there are numerous taxpayers who are unaware of their obligations, or those who may have misunderstood the extent and nature of those obligations created by the question on their 1040 that reads, “At any time during 2014, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?” The taxpayer may have erroneously checked “no” to this question despite having relevant foreign accounts or assets. Others may have neglected to file their FBAR, outright. Others may have committed some combination of these violations. A taxpayer who authenticated their tax return by signing it, but failed to make required disclosures, has possibly committed perjury among other potential tax violations or crimes.
While some may struggle to conceptualize how one can be mistaken as to whether they hold a foreign account or the aggregate value of said accounts, consider United States v. Hom. Mr. Hom held two accounts with online poker services and one with a payment service company. The companies that managed the three accounts were all based in foreign jurisdictions. The court found that the online poker accounts and the payment services accounts could all be considered commercial banks because they functioned as a commercial bank would. That is, Mr. Hom could store or transfer money, at will, with or through each of these accounts. Further, even though the facts of the case suggested that Mr. Hom’s funds could have actually been stored in the United States, that possibility was irrelevant because these accounts were digital constructs controlled by foreign financial institutions.
Intergovernmental agreements (IGAs) between the US government, foreign governments, and foreign financial institutions typically involve the sharing of account information with the Internal Revenue Service (IRS). These information-sharing agreements have proliferated, largely, due to the Foreign Account Tax Compliance Act (FATCA) which was passed into law in 2010. Since then, international agreements have upended banking secrecy laws for Americans in many nations. In fact, more than 100 nations have either signed an IGA or have agreed to the terms of an IGA, in substance.
Furthermore, foreign financial institutions have, in some cases, made individual agreements with the US government. For instance, a recent December 2014 deal between the US Department of Justice and Israel’s Bank Leumi Group had the bank admit that it conspired to assist US taxpayers file false tax returns that concealed income and assets in foreign accounts. Under terms of the agreement the bank will provide the names of more than 1,500 US account-holders who have failed to disclose their accounts to the US government. Additionally, the bank will pay more than $400 million in penalties.
It is important to note that Israel is not traditionally considered a tax haven and this is the first time that an Israeli bank has admitted to conduct of this type. Further, the US taxpayers who are being revealed to the US government are extremely likely to face harsh civil, and potentially, criminal tax consequences for their undisclosed foreign accounts.
A version of the IRS’ Offshore Voluntary Disclosure Program (OVDP) may offer a viable means to correct FBAR compliance issues. However, before entering into one of the OVDP variants, consultation with an experienced Tax Attorney and CPA, like David W. Klasing, is essential because different versions of the program come with different advantages and risks. To schedule a reduced rate tax consultation regarding your FBAR concerns, call The Tax Law Offices of David W. Klasing at 800-681-1295.