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FINCen Regulations Under Pre-2004 Law DO NOT Limit the Maximum Willful Penalty Prescribed Under the 2004 Statutory Amendment

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    If you have been following FBAR cases in the news recently, you may be wondering what the decisions mean practically going forward. How will these decisions impact your exposure to penalties for failures to disclose foreign assets or accounts? Hopefully, this latest decision will help to shed some light on a complicated area of tax law.

    The 2nd Circuit most recently determined that a district court was correct to assess a penalty for 50% of the value of unreported offshore assets at the time of the violation. This penalty is permitted by a 2004 amendment to the FBAR reporting statute, which trumps the old 1987 Treasury Department’s sentencing guideline. This decision is yet another in a long line of federal court holdings that bolster the government’s ability to come after willful FBAR violators.

    Don’t let yourself fall into the trap of getting comfortable about your taxes and financial disclosures. The government is ramping up investigative and prosecutorial efforts, so if you haven’t been charged by now, that doesn’t mean that the government won’t be at your door tomorrow. Our dual licensed International Tax Attorneys and CPAs can help examine your offshore business and investment holdings to uncover any instance where you may have fallen out of disclosure and cure it before it comes back to harm you in the future. To learn about our services, call the Tax Law Offices of David W. Klasing at (800) 681-1295.

    2nd Circuit: FBAR Willful Penalty is Valid Despite FINCen’s Failure to Update Regulations to Match

    In a recent federal appellate case, United States v. Kahn, the 2nd Circuit determined that the FBAR willful penalty amendments were valid. The issues are not based on particularly current developments. The amendments in question, which increased the maximum amount of penalty for a willful failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”), were passed in 2004. So, why is this at issue?

    The crux of the case is that, despite the amendments to the penalty being passed in 2004, the federal government’s Financial Crimes Enforcement Network (or FinCEN for short) had not updated the relevant Treasury Department regulation that had limited the maximum penalties available since 1987.

    Pre-2004, the Treasury regulation (31 C.F.R. § 1010.820(g)(2)) permitted the government to impose penalties for willful FBAR violations of up to $100,000 per account. But in 2004, the government amended the actual criminal statute (31 U.S.C. § 5321) to allow a maximum penalty of 50% of the aggregate balance in the accounts at the time of the willful violation.

    In 2009, the estate of Harold Kahn was assessed a willful failure penalty by the district court under FBAR requirements after the co-executors willfully failed to file for two foreign bank accounts. The two accounts held a total of $8,529,456 at the time of the failure. The district court assessed penalties in the amount of $4,264,728 plus interest, the maximum penalty available under the 2004 amendment.

    On appeal, Kahn’s estate argued that the 1987 Treasury Department regulation superseded the 2004 statutory amendment, making the penalty assessed for their violation excessive. The 2nd Circuit did not find their argument compelling. Judge Amalya Kearse cites precedent in the opinion to support the contention that, “[R]egardless of Treasury’s failure to have the 1987 Regulation deleted from the post-2004 Code of Federal regulations, ‘[a] regulation which does not’ implement ‘the will of Congress as expressed by the statute… is a mere nullity.’” In other words, when the 2004 amendment was passed, Congress intended their action to alter the pre-existing limit, and so that is what it should do.

    2nd Circuit Decision in Kahn Enforces Trend of Solidifying Willful FBAR Violation Penalties

    The Kahn decision comes as no surprise to those like us who follow legal developments in financial reporting law. Federal courts have been busy substantiating and enforcing FBAR penalty power in a variety of situations. Kahn is not even the first case where a person contested their FBAR penalty based on the Treasury’s 1987 guidance. Recently, courts also have shot down arguments that the penalties were so large as to be unconstitutional under the 8th Amendment. Banks and their subsidiaries who enable FBAR violations have also drawn the ire of the Department of Justice.

    Any investor who has offshore holdings and may be subject to FBAR requirements would be prudent to consider that the government is not going to be backing off of this issue any time soon. If you are not sure whether you meet the requirements for FBAR disclosures, you should speak to one of the dual-licensed International Tax Attorneys and CPAs at The Tax Law Offices of David W. Klasing.

    How Can I Protect Myself from Maximum FBAR Willful Penalties?

    There is a bright side in all of this commotion over costly violations. The penalties in Kahn represent the maximum penalties available for willful FBAR violations. Courts do not have to enforce a 50% penalty in every instance where they determine a willful violation. Therefore, the taxpayer has the ability to limit their exposure to these types of penalties.

    The first step you can take is to educate yourself on the FBAR requirements. Speak to a Tax Attorney and CPA today about whether you will be responsible for disclosing foreign assets and how to do so. Remember, the government views a taxpayer’s blind negligence of their disclosure requirements as willfulness for the purposes of determining penalties, so if you stick your head in the sand, that does not mean that you are safe.

    If you feel that you may have already missed an FBAR disclosure deadline when you were responsible for submitting information on foreign assets, you can take action to limit the damage that this mistake can cause. One such action is a voluntary disclosure, which may substantially reduce the penalties that you may face as a result of an honest disclosure error or missed deadline. However, the voluntary disclosure process is complicated and can work against you if handled incorrectly, so never attempt it without the help of seasoned tax attorneys and CPAs like those at the Tax Law Offices of David W. Klasing.

    We Can Help You Avoid Maximum FBAR Penalties from 2004 Amendment

    The stakes are too high for you to leave yourself exposed to the federal government. For help with protecting your bottom line from massive FBAR penalties, call the Tax Law Offices of David W. Klasing at (800) 681-1295.

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