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Massachusetts Man Fined Over $1M, Sentenced to Prison After Concealing Foreign Bank Account from IRS

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    On October 5, 2017, 50-year-old Michael Fitzgerald of Longmeadow, Massachusetts pleaded guilty in Springfield federal court to one count of willfully concealing a foreign bank account from the Internal Revenue Service (IRS). The contents of the account, which was held with a financial institution located in Ireland, were valued at more than $2 million. At a sentencing hearing on February 9, 2018, U.S. District Court Judge Mark G. Mastroianni imposed a slew of hefty penalties, sentencing Fitzgerald to (1) six months of incarceration in federal prison, (2) six months of “home confinement” (i.e. house arrest), (3) three months of “community confinement” (defined by the United States Sentencing Commission as “residence in a community treatment center, halfway house or similar facility”), (4) two years of supervised release (which is similar to probation), and (5) perhaps most devastatingly, a fine of $1,115,320. But which tax requirements, exactly, did Fitzgerald violate to incur such penalties? And how can other taxpayers with foreign bank accounts avoid a similar fate?

    Willfully Hiding a Foreign Account is a Felony Tax Offense

    As most taxpayers are already aware, U.S. persons are typically required to report their income to the IRS. This is accomplished by timely filing a federal personal income tax return, such as a Form 1040, Form 1040A, or Form 1040EZ, with some exceptions for individuals whose income falls below certain financial thresholds. For example, unmarried taxpayers who are under the age of 65 need not file a 2017 tax return unless their income meets or exceeds $10,400.

    What fewer taxpayers realize – and with good reason, considering that the U.S. is only one of two countries in the world, the other being Eritrea, to impose the following rule – is that they are also required to report foreign income. To quote the IRS, “This includes income from foreign trusts, and foreign bank and securities accounts.”

    This requirement derives from the Bank Secrecy Act (BSA) of 1970, the purpose of which is evident in the law’s other, lesser-known title: The Currency and Foreign Transactions Reporting Act (CFTRA). Under the BSA (or CFTRA), it is mandatory for certain taxpayers – Fitzgerald among them, for reasons our international tax attorneys will explain momentarily – to comply with a tax requirement known as FBAR, which is alternately referred to as the “Report of Foreign Bank and Financial Accounts” or “Foreign Bank Account Reporting.” The FBAR is an electronic tax form (FinCEN Report 114) that can only be filed through the FinCEN website, which uses the BSA E-Filing System to process FBAR submissions.

    Fitzgerald should have reported his Irish bank account by filing an accurate and timely FBAR, because he met both of the criteria for FBAR compliance:

    1. He controlled foreign bank accounts. Depending on the value of the account(s), FBAR requirements may be triggered if the taxpayer has either (1) a financial interest in, or (2) signature authority over, such account(s).
    2. His accounts were valued at approximately $2 million. Foreign financial accounts must be disclosed if their value exceeds $10,000 at any point during the tax year. Critically, if the taxpayer has multiple accounts, the IRS considers their aggregate value, rather than the value of each individual account.

    Because Fitzgerald satisfied both of these criteria, he was subject to FBAR filing requirements. Nonetheless, he took deliberate actions to conceal the account and avoid compliance, which is what is meant by acting “willfully.” Had Fitzgerald acted “negligently” – which means, in a nutshell, making accidental tax errors, typically due to the sheer complexity of the Internal Revenue Code – he still would have been penalized, but the consequences would have been less severe: for instance, he would not have been imprisoned. For a more detailed explanation of what constitutes willfulness from an IRS perspective, our FBAR tax attorneys would refer interested readers to our previous discussion of the willfulness standard when failing to file FBARs. (Following the link in the introductory paragraph of this article will also lead readers to an in-depth explanation.)

    According to a Department of Justice (DOJ) press release detailing Fitzgerald’s case, “The charge provides for a sentence of no greater than five years in prison, three years of supervised release, and a $250,000 fine” – so why was he ordered to pay a fine over four times higher? The answer is lies in current FBAR penalties for willful violations, which generally allow tax courts to impose a fine of up to 50% of the account balance. Because Fitzgerald’s undisclosed accounts were worth approximately $2.3 million, the 50% penalty allowed him to be fined approximately $1.1 million. (According to the same press release, “From at least 2005 through 2012, Fitzgerald, the owner and operator of a local roofing company, held bank accounts with the Bank of Ireland in the Isle of Man. In 2012, those bank accounts held a combined balance,” or aggregate value, “of over $2.3 million.”)

    International Criminal Tax Defense Lawyers Handling FBAR Violations

    Thanks to intergovernmental agreements, expansive banking regulations, and increasingly sensitive computer software, attempts to conceal foreign financial accounts are likely to end in legal and financial disaster, to say nothing of the catastrophic career damage that threatens noncompliant tax attorneys, CPAs, and other financial professionals. In fact, through the recent establishment of new criminal investigation initiatives like the Nationally Coordinated Investigations Unit (NCIU) and International Tax Enforcement Group (ITEG), the IRS is actively making increased surveillance of foreign account holders an immediate priority. Put simply, the government is in the midst of an aggressive international crackdown on offshore tax evasion.

    Do not repeat Fitzgerald’s mistakes. Instead, get reliable guidance (and greater peace of mind) by hiring an experienced tax attorney to help you file an FBAR while navigating the federal government’s other requirements for reporting worldwide income and foreign accounts. Whether you or your spouse’s account is located in the United Kingdom, Switzerland, Saudi Arabia, or any other nation, careful compliance is essential to mitigating or avoiding penalties. For a reduced-rate consultation about FBAR reporting or other international tax issues, such as the Foreign Account Tax Compliance Act (FATCA), taxes for expats, or the Offshore Voluntary Disclosure Program (OVDP), contact our criminal tax defense attorneys online, or call the Tax Law Office of David W. Klasing at (800) 681-1295.

    Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

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