Earlier this month, the Finnish government’s request for information in relation to tax crimes being investigated in Finland manifested themselves in a Texas federal court, where the Department of Justice asked a judge for leave to file “John Doe” summons. The use of “John Doe” summons should be particularly worrying to taxpayers that have not lived up to their reporting requirements with regard to foreign bank accounts.
Tax authorities in Finland have been investigating several instances of U.S. bank cards being used for purchases by Finnish residents. According to investigators in Finland, a few U.S. bank cards had been used with extremely high frequency, leading them to believe that there may be an underlying income reporting crime occurring. The Finnish government requested information from the issuers of the U.S. bank cards, as an attempt to discover the owner and other identifiable information about those who may be using them.
Finland’s request is rooted in the exchange of information provision in the U.S.-Finland tax treaty, a provision that is present in many treaties that the U.S. has entered into with nations around the world. The exchange of information provision establishes a mechanism whereby a treaty member can request assistance in gathering information from the other nation’s tax authority, even if there is not a crime suspected within the other nation. In this case, Finland nor the U.S. believe that a crime has been committed within the U.S., but the IRS is still obliged to assist.
In this case, the U.S. government petitioned a federal court for leave to serve “John Doe” summons. The IRS and the Department of Justice typically use a “John Doe” summons when there is a reasonable basis to believe that certain tax laws have been violated, but the government is not yet aware of the identities of those involved. Here, the IRS and Department of Justice reviewed the facts and determined that there was reasonable cause to believe that whomever was using the U.S. banking cards in Finland had broken Finish tax laws.
This case is not the first instance of either the use of “John Doe” summons or the invocation of a treaty’s exchange of information clause. Recently, a federal judge upheld the use of a “John Doe” summons in a case where the IRS and Department of Justice were attempting to access records from a large U.S. law firm that is accused of counseling clients to open foreign bank accounts without reporting their existence to the U.S. government, as required by the Foreign Bank Account Reporting (FBAR) laws.
The exchange of information that is present in this situation is not the only type of information exchange. The U.S. has entered into several Intergovernmental Agreements (IGA’s) that has established a protocol for the automatic exchange of information between countries. This includes certain information coming from banks, both domestic and foreign.
Current U.S. laws (including banking regulations) prevent the IRS from having automatic access to as much of a U.S. bank account holder’s information that a foreign country may have through its own banks, but there are still batches of information that can and are being sent automatically.
As we mentioned earlier in this story, federal law requires the annual reporting of a U.S. resident’s ownership or signature authority over a foreign bank account. Specifically, reporting is required if a U.S. resident’s foreign bank account balance exceeded $10,000 at any point during the reporting year. Consequences for noncompliance can include monetary penalties and even time in federal prison.
If the government determines that you have failed to comply with FBAR laws, they will then make a determination as to whether the noncompliance was willful or not. Even the penalties for non-willful noncompliance can be harsh, but the penalties for willful noncompliance have been called “draconian”. If the Department of Justice and IRS can establish that a taxpayer willfully violated their FBAR obligations, the taxpayer can be ordered to pay a penalty of up to 50 percent of the high-balance of the bank account for each year that the taxpayer was out of compliance. Additionally, the individual can be sentenced to up to 10 years in prison.
If you have a foreign bank account that has not been reported on an annual basis, it is in your best interest to contact an experienced FBAR tax attorney as soon as possible. The IRS had established voluntary disclosure programs in an attempt to persuade U.S. residents that had not been compliant to come forward to avoid jail time and steep penalties, but most of those programs have sunset. Nonetheless, there are still several programs and strategies that can be explored when you meet with your tax attorney. Your particular set of circumstances will determine the appropriate strategy to employ when coming into FBAR compliance.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience with representing U.S. residents that have not been FBAR compliant. With the exchange of information between nations working as intended, it is only a matter of time until your unreported bank account is discovered. Do not let a threat of a prison sentence for FBAR violations keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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