Earlier this year, former Trump aide Paul Manafort was indicted with co-defendant Rick Gates on 12 counts of assorted offenses, most of which involve alleged willful failures to report foreign accounts in Seychelles, St. Vincent and the Grenadines, and Cyprus. Federal prosecutors allege that Manafort, in addition to committing other crimes, repeatedly “falsely responded” to his tax preparer when asked about filing a Report of Foreign Bank and Financial Accounts, otherwise known as FBAR. In light of the investigation – in particular, the consequences Manafort may face if convicted – it seems wise for taxpayers with global income to revisit basic FBAR reporting requirements and, for directors and officers of foreign corporations, related disclosure requirements involving Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).
Reporting Foreign Accounts: FBAR (FinCEN Form 114) Criteria
The full indictment against Manafort can be read online through the Department of Justice (DOJ). From a tax law perspective, one of the indictment’s most significant passages is noted on page 21, from which the following quote is excerpted:
“For instance, on October 4, 2011, Manafort’s tax preparer asked Manafort in writing: ‘At any time during 2010, did you [or your wife or children] have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?’ On the same day, Manafort falsely responded ‘No.’ Manafort responded the same way as recently as October 3, 2016, when Manafort’s tax preparer again emailed the question in connection with the preparation of Manafort’s tax return: ‘Foreign bank accounts etc.?’ Manafort responded on or about the same day: ‘None.’”
Though it may not be immediately obvious, this excerpt has important implications for many of the U.S. taxpayers who currently maintain foreign bank or financial accounts. To explain why, let us break the excerpt into segments.
First: why would the tax preparer ask whether Manafort or his immediate family members “have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” The answer is that this is part of the criteria used by the Internal Revenue Service (IRS) to determine who must file an FBAR, otherwise known as FinCEN Form 114. Critically, the other criteria are that:
- The account holder is a U.S. person.
- The value of the account, or aggregate value if multiple accounts, exceeded $10,000 at any time during the tax year.
Next, why is it significant that Manafort “falsely responded ‘No’”? The answer is that, if the government’s allegations are true, it would mean Manafort failed to disclose the accounts in question, a serious Tax Code violation which can lead not only to civil penalties, but also criminal charges in certain cases where the taxpayer is suspected of acting intentionally, as Manafort is alleged to have done.
Willful failure to file an FBAR can result in even harsher consequences than the already substantial fines imposed for accidental (“negligent”) failures to file. This is true not only in terms of the enhanced civil penalties – the greater of $100,000 or 50% of the account balance, compared to the $10,000 maximum civil penalty for non-willful violations – but, even more concerningly for the taxpayer, the criminal consequences. In accordance with 31 U.S.C. § 5322(a), pertaining to criminal FBAR penalties, a taxpayer convicted of failure to file “shall be fined not more than $250,000, or imprisoned for not more than five years, or both.” If the FBAR violation occurs “while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period,” the maximum fine doubles to $500,000 while the maximum prison sentence doubles to 10 years under 31 U.S.C. § 5322(b).
Who is Required to File Form 5471?
On its first page, the indictment alleges that Manafort “laundered… money [from work in Ukraine] through scores of United States and foreign corporations, partnerships, and bank accounts.” If this allegation is true, Manafort should, in addition to filing an FBAR, have also filed Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations), which is used to report the ownership of foreign corporations to the IRS.
To quote an IRS overview, Form 5471 is used by “U.S. citizens and U.S. residents,” including individual taxpayers and domestic trusts, corporations, and partnerships, “who are officers, directors, or shareholders in certain foreign corporations.” Form 5471 should be attached to the taxpayer’s federal income tax return – or, where applicable, the exempt organization’s or partnership’s return – and filed by the return’s normal due date. On a related and important note, the 2018 tax filing deadline has been pushed back to April 17 from its traditional position on April 15, giving taxpayers additional time to prepare this season.
Like failing to file an FBAR, failing to file Form 5471 exposes the taxpayer to grave consequences: specifically, a penalty of up to $10,000 per violation, in addition to a continuation penalty of up to $50,000. For additional information on Form 5471 and associated penalties, taxpayers are encouraged to read our previous article on the disclosure of ownership in foreign corporations.
International FBAR Attorneys for Business Owners and Foreign Corporations
Failure to file an FBAR, file Form 5471, or satisfy other requirements pertaining to foreign accounts, such as filing Form 8938 (Statement of Specified Foreign Financial Assets), can result in civil and/or criminal penalties. As the indictment against Manafort and Gates should make amply clear, it is urgent for at-risk taxpayers to move quickly to lessen potential damage. Certain taxpayers can avoid prosecution, while reducing monetary penalties, by participating in the Offshore Voluntary Disclosure Program (OVDP) – but not if an audit or investigation has already been initiated.
If you have any uncertainties as to your compliance with foreign income reporting requirements, no matter how minor, you are urged to review the situation with the accounting and tax professionals at the Tax Law Office of David W. Klasing. Our dedicated and zealous team of international tax attorneys, IRS tax audit lawyers, and tax crime defense attorneys has decades of experience assisting business entities and individual taxpayers with financial accounts and assets held all over the world, including Ecuador, Luxembourg, Mexico, Switzerland, and dozens of other nations. For a reduced-rate consultation with an experienced tax attorney, CPA, or EA, contact the Tax Law Office of David W. Klasing online, or call right away at (800) 681-1295.
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Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
Here is a link to our practice video on warning signs than an audit has gone criminal.
What is an eggshell tax audit?
https://www.youtube.com/watch?v=saJLVlER-iM
What is an effective tax defense in an IRS eggshell tax audit?
https://www.youtube.com/watch?v=7qixPqWTtvA
So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
