Taxpayers who fail to consider and comply with offshore financial account reporting standards can face extremely serious consequences. However, in at least some cases, wealthy taxpayers decide to take the risk that their accounts will remain secret and undiscovered. Unfortunately for taxpayers who come to rely on keeping one or more accounts secret from the IRS and government, it has never been more difficult to do so.
This is because the U.S. government has taken many steps to crack down on unreported offshore accounts. Aside from the passage of Foreign Account Tax Compliance Act (FATCA), the United States government has signed international governmental agreements to allow tax information sharing with more than 100 different nations. Thus, taxpayers generally cannot rely on a lack of communication or bank secrecy laws to keep accounts secret from the IRS and U.S. government. Discovery of secret foreign accounts is often only an investigation or an audit away.
And yet, some taxpayers continue to avoid offshore reporting obligations. In time, a court’s patience can be exhausted and the taxpayer may face sanctions without ever reaching the merits of the case.
In a recent proceeding in the Southern District of New York, a court ordered that Respondent E, a taxpayer with foreign bank accounts, had violated the terms of a 2010 subpoena and subsequent 2013 compulsion order.
The proceedings in question were motivated by a October 4, 2010, subpoena that sought “[a]ny and all records created, obtained, and or maintained from October 5, 2005, to the present that are in [Respondent’s] care, custody, or control relating to foreign bank accounts in which she maintained a financial interest.” Subsequent to the 2013 compulsion order, the taxpayer finally produced just 2 documents.
However, in December 2015, the U.S. government obtained documents from the government of Lichtenstein concerning this taxpayer’s accounts. These foreign tax documents revealed that the taxpayer was concealing her ownership of accounts through a foreign sham entity. From these foreign documents and through other sources, auditors determined that the taxpayer failed to report and concealed at least three accounts containing millions of dollars. These accounts included a Credit Suisse account held jointly with her husband, an HSBC account in France, and a financial account in the name of a foundation in Lichtenstein.
Due to these alleged reporting failures and steps taken to conceal these accounts, was charged with obstructing and impeding the due administration of the internal revenue laws, and subscribing to a false and fraudulent U.S. individual income tax return. The government also sought an order for sanctions to be imposed at a rate of $5,000 a day until the taxpayer turned over the relevant bank and financial documents.
In its assessment of the government’s motion for sanctions against the taxpayer, the court adhered to a three-prong analysis. The court considered the character and magnitude of the threatened harm of continued contempt weighed against the probability that the proposed sanctions would be effective. Additionally, the court considered the financial impact of the sanctions on the taxpayer.
Here, the taxpayer’s arguments regarding why the sanctions were inappropriate centered around two main points. First, the taxpayer argued sanctions were inappropriate because of a particularly cramped definition regarding what constituted records in her “care, custody, or control.” In this case, the taxpayer improperly focused on physical control of the records rather than the correct standard which considers legal control. Furthermore, the taxpayer failed to consider that the Lichtenstein documents established an association and relationship between the taxpayer and the foreign financial accounts. As such, the taxpayer had the legal authority and practical ability to obtain and produce these records.
The taxpayer also argued that, in light of the indictment against her, she could not comply with the terms of the 2010 subpoena because it would amount to improperly aiding the government in its preparation for a criminal trial. In this context, the court was not receptive to this argument first noting that a grand jury’s wide-ranging investigative power “does not end when it indicts a defendant.” Rather, the taxpayer would need to rebut the presumption that such activities were in the regular course of grand jury proceedings and show some evidence of irregularity. The taxpayer failed to produce any evidence of this type.
Due to the foregoing, the court determined that the taxpayer had not produced all relevant records in violation of the subpoena and order to compel. While the court found that the potential for harm due to continued noncompliance was significant, it did find that a sanction of $5,000 a day was excessive. The court believed that sanctions in the amount of $1,000 was sufficient to compel the taxpayer to produce the required documents.
It is essential to note that the court has not yet addressed the merits of the case in this matter. Therefore, the taxpayer can still face additional penalties and fines due to her underlying conduct regarding failing to report offshore accounts. Thus, the situation and consequences faced may still get worse for this taxpayer before there is light at the end of the tunnel.
However, the consequences of FBAR non-compliance do not have to reach this stage. When taxpayers attempt to conceal or cover-up past tax noncompliance, they often compound their liability and make the situation worse. Taxpayers who consult with a FBAR lawyer and consider their full range of options may be able to mitigate the consequences of their noncompliance through Offshore Voluntary Disclosure Program (OVDP) or Streamlined Disclosure.
The Tax Attorneys , CPAs, CFAs and EAs of the Tax Law Offices of David W. Klasing can help you correct foreign disclosure issues before facing an audit or criminal tax charges. To schedule a confidential and reduced rate initial consultation, please call 800-681-1295 or schedule online today.