Earlier this month, we brought you a first-look at a new set of Foreign Bank Account Reporting guidelines that were created in an attempt to bring consistency to the FBAR penalty system. In short, the new procedures set out caps for both willful and non-willful penalties and include guidance that includes the same caps when the illegal conduct spanned over many tax years.
Brief Overview of the New IRS FBAR Guidelines
For a taxpayer who is determined to have willfully failed to disclose a foreign bank account that has a balance of $10,000 or more, the IRS may, according to the guidelines, assess a penalty that is spread out among the years of noncompliance but must not exceed 50% of the highest balance of the account. For those taxpayers who violated the FBAR laws without their conduct rising to level of “willful”, the penalty for each year may not exceed $10,000 and if the IRS agent evaluating the case recommends, the taxpayer may be assessed only a single fine that is not in excess of $10,000 that encompasses activity of several tax years of noncompliance.
High Possibility of Excessive Penalties
Before the new guidelines were published, it was technically possible for a taxpayer to be assessed penalties that greatly exceeded the total value of the overseas bank account that went undisclosed. According to the law as it is written, a taxpayer may be assessed a penalty of up to 50% of the high-balance of the overseas account for each year that the account goes willfully undisclosed. Therefore, if a taxpayer’s account went undeclared for three years, it was possible for a penalty of 150% (50% times three years) to be assessed.
The Constitutional Argument
It was initially unclear what may have motivated the IRS to release the published guidance on the assessment of FBAR penalties but it now appears that the goal of the guidelines has been identified.
Taxpayer Carl R. Zwerner held a foreign bank account that went undisclosed during the 2004, 2005, 2006, and 2007 tax years. After a lengthy legal battle, a federal jury found that his noncompliance was willful for tax years 2004, 2005, and 2006. Furthermore, the jury determined that a 150% penalty (like the hypothetical above) was appropriate. It was after the jury decision was handed down that the IRS and Department of Justice became concerned with one of Zwerner’s defenses: that the FBAR penalty and its possibilities violate the 8th Amendment to the United States Constitution. The 8th Amendment prevents the government from levying any excessive fines and Zwerner’s legal team certainly believed that 150% of the balance of an account was excessive, considering that Zwerner’s only fault was not notifying the IRS of its existence.
Before an appellate forum heard the case, Zwerner and the government settled for less than half of what the IRS was originally seeking. This action evidences the government’s want derail any attempt to classify their actions as unconstitutional, a label that would taint nearly all of their current enforcement actions for FBAR-related offenses.
How the New Guidelines Effect the OVDP and Criminal Prosecutions
With the news of the new procedure circulating, many taxpayers that haven’t yet disclosed their foreign accounts may question whether the Offshore Voluntary Disclosure Program or OVDP is right for them. With the new self-imposed cap on penalties, is it really worth coming forward voluntarily as opposed to taking a chance with the revised penalties? The answer to that question is not as simple as it may sound. First, there are several factors that must be considered before a taxpayer can confidently enter the OVDP. The program is not for everyone and only an experienced OVDP tax attorney can walk a taxpayer through the process with ease and certainty.
Furthermore, if a taxpayer chooses not to participate in the OVDP or drop out of it if already participating, they run the risk of going to prison. Although the proposed guidelines help ensure that draconian penalties are not levied against a taxpayer for several years of offenses, there is nothing stopping the Department of Justice from seeking the maximum prison sentences for FBAR violators. The OVDP is the only way that a taxpayer can ensure that they will not be criminally prosecuted. but only an experienced tax attorney can give an unsure taxpayer the assurance that they are making the right move for themselves and their family by entering the OVDP.
Contact an Experienced Tax Attorney Today
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have years of experience assisting taxpayers come into compliance with FBAR laws while minimizing or eliminating civil and criminal consequences. When the IRS comes to court to pursue potentially huge penalties and frightening criminal charges against you, they will have experienced attorneys in their corner; let us be the zealous advocate in your corners. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
