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Federal Court Reject Defendants FBAR Regulation Arguments, Affirms $1 Million Penalty

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    A recent case that was decided in Connecticut illustrates how large penalties relating to the failure to disclose the existence of foreign bank accounts can become. In U.S. v. Garrity, the federal government imposed a civil penalty of nearly $1 million for failure to report the existence of a foreign bank account in Lichtenstein. The defendants made the argument that prior regulations relating to bank reporting were still in force even though Congress had increased the amount of the penalty decades later.

    Foreign Bank Account Reporting (FBAR) laws require that the ownership of, or signature authority over, foreign bank accounts be reported annually. Although a U.S. taxpayer is not required to pay any additional tax solely for having money deposited or invested in a foreign bank account or financial institution, Congress indicated that they would nonetheless like to know when Americans have substantial amounts of money overseas, as the United States imposes tax on its residents on a worldwide basis. Thus, if a U.S. tax resident earns investment income on a checking, savings, annuity, pension, insurance or brokerage account in a foreign county, he or she may be required to include such income on their U.S. tax return even where taxes were dutifully paid on that income offshore.

    The FBAR also helps the IRS identify taxpayers that may have offshore sources of taxable income from income generating assets and businesses that may be escaping U.S. taxation.  Offshore sources of wealth or savings are also very important to the IRS where income tax is owed on prior tax years in a collection scenario and it is a felony not to report them on a collection information statement.   FBARs can also flag where a gift or offshore inheritance was received but went unreported for 3520 purposes which could lead to a 25% to 35% penalty on the entire inheritance if it exceeded $100,000 U.S. and went unreported even where no transfer tax or inheritance tax would have been owed.

    Within the past 10 years, the federal government has ramped up their efforts to crack down on those who maintain foreign financial accounts that have not been disclosed as required by the FBAR laws. Although the penalty for a non-willful failure to comply with FBAR requirements can seem quite steep, the amount of the penalty for those the government alleges willfully failed to comply can be outright draconian (up to 100% of the offshore value of the foreign financial accounts) not to mention criminal prosecution for income tax evasion where offshore sources of income were not reported and prosecution for willful nonreporting of required foreign information.

    Understanding the History of FBAR Violation Penalties

    In 1986, when Congress first codified the penalty related to FBAR violations, it capped the willful violation civil penalty at $100,000. The Secretary of the Treasury then promulgated regulations that implemented such cap nearly word-for-word. In 2004, as a part of the American Jobs Creation Act of 2004, Congress dramatically increased the potential civil penalty for willfully failing to comply with FBAR laws.

    31 U.S.C. Section 5321 is the federal statute enacting in 2004 that authorizes the government to assess a civil FBAR penalty. The statute states that the penalty shall not exceed $10,000, except in the case of willful violations. In such a case, the cap of the penalty is $100,000 or 50 percent of the balance of the account at the time the violation of the reporting requirements occurs. Once the 2004 change to the FBAR willfulness penalty was signed into law, the Secretary of the Treasury did not promulgate additional regulations relating to the civil FBAR willfulness penalty. Additionally, case law has upheld up to a 100% willful non-disclosure penalty on the highest combined offshore FBAR balance over the six-year statute of limitations period.

    The defendants (acting on behalf of the original defendant’s estate) in a dispute about willful FBAR penalties recently unsuccessfully argued that because the Secretary of the Treasury did not promulgate regulations based on the new 2004 law, the limitations imposed by the regulations relating to the 1986 provisions of the civil willfulness penalty were still in force, preventing the imposition of a civil willfulness penalty in excess of $100,000. In ruling against the defendants, United States District Court Judge Michael Shea stated that there was nothing in the 2004 amendment to the rule that required the Secretary to issue regulations in order to effectuate the new cap on penalties. The defendants cited recent case law involving a court that ruled in accordance with an argument similar to theirs. But the federal judge, in this case, dismissed the prior case’s conclusions as being incorrect based on factual issues.

    Additionally, the defendants argued that the FBAR penalty was unconstitutional under the 8th Amendment to the U.S. Constitution which states that that punishments must be fair, cannot be cruel, and that fines that are extraordinarily large cannot be set. In ruling against the defendants on that argument, Judge Shea stated that the defendants had not established that the penalty was large enough, considering all of the facts and circumstances of the case at hand, that it should be considered excessive.

    If you have a foreign bank account that has gone unreported, it is in your best interest to contact an experienced FBAR attorney. As mentioned above, the government has increased their enforcement of FBAR laws and has entered into various information sharing agreements with countries around the world. Such agreements have given the U.S. a clear look into the financial institutions in foreign countries where Americans are known to be holding offshore funds. If the government determines that a willful failure to fill an FBAR has occurred, a civil penalty of up to half of the balance of the account at the time of the violation (or $100,000, whichever is higher) can be assessed. Additionally, the government can commence criminal FBAR charges against an individual, which can result in additional fines and carry a lengthy prison sentence.

    The tax and accounting professionals at the Tax Law Offices of David W. Klasing have represented many taxpayers who are have had foreign bank account reporting-related issues. An experienced FBAR attorney can assist in the development of a plan of action that will take into account your specific set of circumstances. We have extensive experience with obtaining a pass on criminal tax and information reporting prosecution where willful tax evasion coupled with willful foreign information non-reporting has occurred through the replacement for the Offshore Voluntary Disclosure Program that ended in September of 2018. We also have extensive experience where negligence rather than willful behavior caused the foreign income and information noncompliance through the exponentially more affordable Expat and Domestic Streamlined Voluntary Disclosure programs.

    The decision of which program to enter should only be made with experienced international criminal tax defense counsel as all other forms of tax advisors (CTEC Certified, EAs and CPAs) do not have attorney client privilege and can be forced to testify against you even where they assure you, they will keep your secrets, especially where they prepared the original returns that will be amended!

    Our team of zealous advocates will be there every step of the way and will place your physical freedom and financial wellbeing as our top priority. Do not let the threat of civil or criminal FBAR penalties and the potential to be charged with income tax evasion keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate initial consultation.

    Note: If you are currently under audit and have undisclosed foreign financial accounts coupled with unreported sources of offshore income you are at dire risk of criminal prosecution.  If this is your fact pattern, contact us immediately and do not discuss your exposure with your current representative who could easily be forced to become government witness number one against you.

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