For the past 10 years, the federal government has significantly stepped up its enforcement of Foreign Bank Account Reporting (FBAR) laws. Although federal rules requiring taxpayers to report the existence of a foreign bank account have been on the books for decades, they have only been stringently enforced in the past ten years, or so. Increased cooperation between the United States and other governments, coupled with the accessibility of electronic records has made it easier for the Department of Justice and IRS to crack down on those with undeclared foreign bank accounts.
A pattern of undeclared foreign bank, custodial or brokerage accounts, non-filed foreign information returns (i.e. 5471 5472) coupled with unreported taxable sources of income from offshore assets like investments, CDs, businesses, rental property and pensions or beneficial interests in foreign trusts are very likely to give rise to a criminal tax investigation is the government suspects the noncompliance is willful.
Federal FBAR laws require taxpayers to report the existence of an account at a foreign financial institution if the high-balance of the account reaches or exceeds $10,000 in the calendar year. Those who fail to file are subject to penalties, back taxes, and interest. Taxpayers who truly suffer are those who are proven to have willfully failed to comply with FBAR laws. Willful failure to comply with the foreign bank account reporting regime can result in penalties of up to 50% of the high-balance of the account for the given year and could also result in a period of incarceration in federal prison. Understandably, taxpayers should seek to avoid the assertion that they willfully violated FBAR laws. Our firm can help and has several options available to achieve this goal depending on the individual facts and circumstances of each case.
Although the government has not been specific about what exact actions constitute willfulness, case law coupled with the government’s litigating position over the past decade have given practitioners some helpful hints. In Kimble v. U.S. (U.S. Court of Federal Claims, No. 17-421 (December 27, 2018)), the government recently successfully argued that a taxpayer willfully failed to file under the FBAR regime when they checked that that they did not have an interest in a foreign bank account on Schedule B of their personal tax return, when they in fact had knowledge that they owned an interest in such account. It was not dispositive that the taxpayer was unaware of the FBAR filing obligations.
Additionally, the government is finding new ways to discover evidence that can be used against taxpayers in FBAR cases. Recently, the wife of an individual being investigated for potentially hiding money in undeclared offshore accounts was compelled by a federal grand jury to produce any records of foreign bank accounts owned by her husband. When she refused, she was found in contempt of court. In appealing the finding of contempt, the wife’s counsel argued that she enjoyed spousal testimonial privilege, a type of privilege that protects spouses from being compelled to provide adverse testimony against their partner. But in upholding the contempt ruling, a three-judge panel stated that being compelled to provide documents (if they exist) is not adverse testimony, itself (In re: Grand Jury Subpoena, Dated March 21, 2018, 18-50321). This ruling could open yet another door for the government to discover taxpayers that have not complied with FBAR laws.
The Internal Revenue Service previously offered a program known as the Offshore Voluntary Disclosure Program (OVDP), which offered non-compliant taxpayers with potential criminal tax exposure to mitigate civil penalties – in addition to amnesty from criminal tax & foreign information (FBAR) prosecution – in exchange for voluntarily reporting foreign income and supplying the required foreign information returns which were previously intentionally concealed from the IRS. On September 28, 2018, the IRS permanently closed the OVDP. On November 20, 2018, the IRS issued a memo describing new procedures for all subsequent voluntary disclosures, including both offshore voluntary disclosures and domestic voluntary disclosures, after September 28, 2018, the date of the OVDP’s closing. Note that these new procedures primarily affect taxpayers who are concerned about potential criminal tax and criminal foreign information reporting liability. Taxpayers making offshore voluntary disclosures seeking a pass on criminal prosecution subsequent to the close of the OVDP will now most likely at a minimum face a 50% FBAR penalty and a 75% fraud penalty on the tax year involving the highest amount of unreported foreign income during the new six years of amended returns requirement.
For others, it is likely sufficient to follow alternative procedures, such as delinquent FBAR & international information return submission procedures in the event that no foreign income was omitted, or the offshore or domestic streamlined voluntary disclosure procedures where no badges of fraud are present and the taxpayer lacked criminal intent. If you need to report undisclosed domestic or foreign income or file previously omitted foreign information returns, you should consult with an experienced criminal tax defense attorney, who can help you choose the right strategy to reenter compliance and reduce or eliminate your exposure to criminal tax prosecution and minimize and applicable additional tax, interest and penalties.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience assisting taxpayers with foreign bank accounts and foreign income that has not been disclosed/reported to the government. Whether you have simply failed to report your foreign bank account and are looking to get right with the government or the government is investigating you for willfully failing to complete an FBAR filing and related income tax evasion, our team of zealous advocates is ready to help you develop a strategy aimed at maintaining your physical and financial freedom. Do not let undeclared bank account or unreported foreign income keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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