What Are the Sentencing Guidelines for Taxpayers Convicted of FBAR Violations?

If you have foreign assets or income, you may be required to file an FBAR (Report of Foreign Bank and Financial Accounts) disclosing the assets to the Internal Revenue Service (IRS). Specifically, FBAR filing requirements apply to taxpayers who have signature authority over, or financial interest in, a foreign bank or financial account which was valued at or above $10,000 at any point, however briefly, during the tax reporting year. This requirement extends to U.S. citizens, U.S. residents, and various types of business entities, including limited liability companies (LLCs), partnerships, and corporations. FBAR violations, which typically involve either failure to file an FBAR or failure to maintain associated financial records, can result in harsh penalties, particularly if the violation was “willful.” This article will discuss the federal government’s current FBAR sentencing guidelines.

FBAR Sentencing Guidelines and Penalties for Failure to File

A press release issued by the Department of Justice (DOJ) indicates that on October 26, 2017, Hyung Kwon Kim of Greenwich, Connecticut pleaded guilty to “failing to report funds he maintained in foreign bank accounts to the Department of Treasury” – in other words, failing to disclose foreign income by filing an FBAR. The press release noted that Kim maintained accounts with several foreign financial institutions (FFIs), including Zurich-based Swiss banks Credit Suisse and UBS. The aggregate value of these accounts was over $28 million, well beyond the $10,000 threshold for mandatory FBAR reporting.

Though Kim will not be sentenced until January 2018, he may be facing up to five years in prison, in addition to a civil penalty exceeding $14 million. The maximum civil penalty for a willful FBAR violation is either a flat fine of $100,000 or 50% of the account(s) in violation, whichever is greater, which explains how the how the $14 million penalty was calculated.

The Sentencing Guidelines for FBAR penalties may seem straightforward, but in fact, at least some of their provisions are updated each year. Some changes are rather minor, while others can have serious ramifications for taxpayers. In Kim’s case, the government changed its position on sentencing, with Kim’s plea deal providing the following:

“The Government contends that the applicable Guideline in this matter should be U.S.S.G. § 2S1.3(a)(2), § 2S1.1, and § 2S1.3(b)(2) because the defendant filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period. However, at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2Tl.1 and § 2TI.4 due to the cross reference in 2S1.3(c)(1).”

  • S.S.G. § 2S1.3(a)(2) – This section establishes a Base Offense Level of “6 plus the number of offense levels from the table in § 2B1.1 (Theft, Property Destruction, and Fraud) corresponding to the value of the funds, if subsection (a)(1) does not apply.” The more money involved, the higher the Base Offense Level, which increases in increments.
  • S.S.G. § 2S1.3(b) – This section establishes “Specific Offense Characteristics,” which are significant because they can impact how the Base Offense Level is determined. For example, U.S.S.G. § 2S1.3(b)(1) provides the following rule: “If (A) the defendant knew or believed that the funds were proceeds of unlawful activity, or were intended to promote unlawful activity; or (B) the offense involved bulk cash smuggling, increase by 2 levels.”

Conversely, the Base Offense Level can also be decreased. Under U.S.S.G. § 2S1.3(b)(3), “If (A) subsection (a)(2) applies and subsections (b)(1) and (b)(2) do not apply; (B) the defendant did not act with reckless disregard of the source of the funds; (C) the funds were the proceeds of lawful activity; and (D) the funds were to be used for a lawful purpose, decrease the offense level to level 6.”

  • S.S.G. § 2S1.3(b)(2) – This section calls for a Base Level Offense increase of two levels in cases where there is a “pattern of unlawful activity involving more than $100,000 in a 12-month period.” A “pattern of unlawful activity” is defined to mean at least two distinct events. As the plea agreement noted, Kim “filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period,” which in fact amounts to three occasions.

These occasions must take place within 12 months of each other, as opposed to taking place within 12 months of the offense of conviction, which makes it easier for prosecutors to demonstrate a pattern of unlawful activity.

  • S.S.G. § 2S1.3(c)(1) – Under this section (“Cross Reference”), “If the offense was committed for the purposes of violating the Internal Revenue laws, apply the most appropriate guideline from Chapter Two, Part T (Offenses Involving Taxation) if the resulting offense level is greater than that determined above.” This would occur in cases where a Specific Offense Characteristic brings the offense level down to a 6. At the time Kim pleaded guilty, the government cited this section to assert that “the applicable Guideline was U.S.S.G. § 2TI.1 and § 2TI.4.”

International Tax Attorneys for Expats Can Help You Report Foreign Income

Though FBAR Sentencing Guidelines fluctuate, the takeaway message does not: taxpayers who are found guilty of FBAR violations can expect to receive debilitating financial penalties. Even a non-willful violation can result in fines as high as $10,000, while a willful violation can cost the taxpayer years of freedom, a criminal record, and thousands or even millions of dollars. Moreover, additional FBAR civil penalties can be imposed for negligence (31 U.S. Code § 5321(a)(6)(A)) or a pattern of negligent activity (31 U.S. Code § 5321(a)(6)(B)). Further, as the IRS has noted, “A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation.”

If you have a bank account, trust, mutual fund, brokerage account, or other assets or income overseas, you should immediately consult the skilled international FBAR attorneys at the Tax Law Office of David W. Klasing to ensure that you are in compliance with the Internal Revenue Code. Equipped with more than 20 years of experience in international tax law and tax defense, our tax law attorneys can assist you with filing an FBAR, filing Form 8938 (Statement of Specified Foreign Financial Assets), filing Form 2225 (Foreign Earned Income), and satisfying other requirements for reporting foreign income. If you are already under investigation, our California tax crime attorneys can immediately begin preparing a robust defense strategy to mitigate your penalties and protect your best interests.

To book a reduced-rate consultation with our tax attorneys for expats and U.S. citizens abroad, contact us online or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.

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