Many who have potential errors in their foreign financial account reporting history may feel that they have plenty of time to rectify those issues and avoid the massive penalties that would otherwise result.That is not always the case, however, as made clear by a recent Third Circuit decision.
The Court rejected an appeal from willful FBAR penalties on the grounds that the appellant made payments on other fines and penalties well after the deadline for filing the FBAR had expired.While there may be steps that you can take to reduce the consequences of a filing mistake, these steps must be taken carefully.
You should never attempt to navigate this process without the help of an experienced Dual Licensed International Tax Attorney and CPA like those at the Tax Law Offices of David W. Klasing.Reach out to schedule a reduced rate case evaluation by calling our offices today at (800) 681-1295.
In a recent decision, the Third Circuit Court of Appeals dampened any hopes that late attempts to rectify certain filing errors on foreign assets could save the filer from the draconian penalties that can apply. In U.S. v. Collins, 36 F.4th 487 (3d Cir. 2022), the Court determined that even admittedly good-faith corrective action is not enough to counteract willful FBAR penalty assessment.
Collins was a dual citizen of the United States and Canada.Prior to coming back to the United States in 1994, he had been employed as a professor in various foreign countries.Because he was located overseas, Collins established foreign bank accounts to deposit his employment earnings.
When Collins returned to the United States, he maintained his foreign bank accounts. From time to time, he had his foreign pension earnings deposited into those foreign accounts, some of which held mutual fund investments.By 2007, Collins’s foreign accounts exceeded $800,000.
The amount in assets that Collins held overseas met the threshold for requiring him to file a Report of Foreign Bank and Financial Accounts (or FBAR).Prosecutors argued at trial that, although Collins was aware of his legal obligation to file FBARs on these foreign accounts, he failed to do so.
Disclosure and Withdrawal
After missing the applicable deadlines on his FBAR filings, Collins sought the forgiveness of the government through the Overseas Voluntary Disclosure Program.The OVDP, which is no longer effective, was a program by which taxpayers who had failed to comply with filing requirements for foreign assets in past years could amend their past filings in exchange for a dramatically reduced penalty.
But after Collins entered the OVDP, he had second thoughts. More specifically, his accountant prepared amended tax returns for 2002 through 2009 and determined that Collins was actually entitled to modest refunds because he had large capital losses in 2002. Because Collins believed that he did not owe any additional federal income tax, Collins chose to withdraw from the OVDP entirely.
His withdrawal, however, resulted in an IRS examination.During the examination, the IRS learned that Collins had failed to report additional income tax on his amended tax returns associated with his investments in foreign mutual funds.Because of the PFIC rules, Collins learned that he actually owed additional PFIC taxes of $71,324 for 2005, 2006, and 2007, plus penalties.
After the examination concluded, Collins paid the PFIC taxes and penalties.In addition to the PFIC taxes and penalties, the IRS sought to impose willful FBAR penalties against Collins due to his failure to timely file an FBAR in 2007 and 2008.
Although the IRS could have imposed willful FBAR penalties of 50% of the account balance for both 2007 and 2008, the IRS used its own mitigation guidance to reduce the willful FBAR penalties to approximately $300,000. When Collins refused to pay the willful FBAR penalties, the government sued him in federal court.
The district court agreed with the government that Collins was liable for willful FBAR penalties of $300,000.Collins appealed the decision to the Third Circuit Court of Appeals.
Collins made several arguments on appeal.Of these, the most significant was Collins’ argument that his ultimate payment of the fines and penalties should have been considered evidence of non-willfulness, or at least enough to reduce the weight of these penalties.
The Third Circuit disagreed, relying on precedent which rejects the idea that eventual cooperation could negate willfulness in a tax case. (seeU.S. v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996)). According to the opinion, “The penalties imposed under the Bank Secrecy Act stem from Collins’ failure to disclose foreign assets, not his failure to pay overdue tax.A subjective belief that he owed no tax is, at best, tangential to the core inquiry of a §5314 violation – whether a taxpayer ‘clearly ought to have known’ of his obligation to report his interest in foreign financial accounts.”
In other words, it simply was not enough for Collins to show that he took corrective actions after the FBAR filing deadline had passed.The Third Circuit affirmed the lower court’s holding, leaving Collins on the hook for well over $300,000.
Takeaways from the Collins Case
Among the Third Circuit’s many focuses, in this case, was the concept of time and how noncompliant taxpayers have so little of it to fix whatever mistakes they may have made in their filings (or failures to do so).
With this in mind, we find it imperative that those with questions about their reporting obligations act quickly and get the help that they need to avoid any unfortunate outcomes such as this one.The process for working out issues before they snowball starts with getting the help of a Dual Licensed International Tax Attorney and CPA to help you identify and solve issues in a timely manner.
To get immediate and critical help with your tax issues, reach out to the seasoned Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing.Schedule a reduced rate evaluation by calling us at (800) 681-1295 today.