The Federal Tax Crimes blog recently published an article discussing a case in which the U.S. Court of Federal Claims, which hears various monetary claims – mostly “tax refund suits,” according to the Court’s website – held plaintiff Alice Kimble, a U.S. citizen who held a Swiss bank account with controversial institution UBS, liable for the full civil willful FBAR penalty: a fine substantially greater than its non-willful counterpart. As the blog pointed out, this particular ruling “seems to put at risk all taxpayers who on the Forms 1040 checked ‘No’ in the foreign account box on Schedule B,” as Kimble did. (That being said, Kimble also took additional actions – including failing to “review her individual income tax returns for accuracy for tax years 2003 through 2008,” according to the Court’s opinion and final order – that also contributed to the imposition of the penalty.) In this article, our FBAR tax attorneys discuss differences between willful and non-willful FBAR penalties, the foreign account reporting requirements associated with Schedule B and FBAR, and a related disclosure requirement that exists under FATCA, or the Foreign Account Tax Compliance Act.
What is the Willful FBAR Penalty? How is the Non-Willful Penalty Different?
There are “willful” and “non-willful” FBAR penalties, which are imposed depending on whether the taxpayer violated FBAR regulations deliberately (i.e. engaged in tax evasion or willful foreign information reporting omissions) or accidentally. As the very first page of the Court’s order explains, the IRS must generally show that a taxpayer displayed “reckless disregard” for foreign account reporting laws before a willful FBAR penalty can be imposed. Unfortunately for Kimble, prosecutors managed to meet this standard successfully, with court records noting (see page 15) the following:
“In sum, Plaintiff engaged in reckless disregard of the statutory duty to: file a FBAR; answer Question 7(a) accurately on her 2007 income tax return; and ask her accountant for advice on… reporting requirements or other… tax issues that might arise in connection with the UBS account. Gov’t Mot. at 25–28. Therefore, Plaintiff’s conduct was ‘willful.’ Gov’t Mot. at 8.”
If the circumstances indicate to the IRS that the taxpayer attempted to act properly, but made a sincere mistake – for instance, accidentally failing to report one particular type of asset while disclosing all others – a non-willful penalty of up to $10,000 per violation may be imposed. In stark contrast, the maximum willful penalty is 10 times higher at $100,000 or 50% of the unreported account’s highest balance over the 6-year FBAR statute of limitations period. Case law and the new offshore voluntary disclosure program also support the implication of the 50% penalty twice in egregious cases or where a taxpayer attempts to contest the result of an offshore voluntary disclosure (a 100% penalty).
Reporting Foreign Accounts on Schedule B (Form 1040), FBAR, and Form 8938
A few moments ago, we mentioned “Question 7(a)” on Schedule B (Interest and Ordinary Dividends), which must be attached to your federal personal income tax return. This line asks taxpayers the following: “At any time during [the applicable tax year], did you have a financial interest in or signature authority over a financial account… located in a foreign country?”
As the form proceeds to explain, taxpayers who answer “Yes” to this question may be required to file FinCEN Form 114, better known as the “FBAR” or Foreign Bank Account Report. (In the past, the FBAR was referred to as “Form TD F 90-22.1,” but this version of the form is no longer used.) FBAR filing requirements are triggered when the value of the aforementioned “financial account” (which could be a bank account, a brokerage account, or even a cryptocurrency wallet) surpasses $10,000, whether that reflects a single account or the combined value of multiple accounts.
If the account value is $50,000 or more, the taxpayer may also be required to file Form 8938 (Statement of Specified Foreign Financial Assets), depending on factors like filing status (e.g. single versus married filing jointly), and the date of the year on which the account value exceeded the pertinent thresholds (e.g. on the final date of the tax year versus on any date during the tax year). This filing requirement is often referred to as “FATCA” in reference to the law which governs it, the Foreign Account Tax Compliance Act.
Facing FBAR Penalties? Get IRS Tax Help from a FinCEN Form 114 Attorney
If you believe you may have foreign account reporting obligations, discuss your tax compliance questions thoroughly with a knowledgeable and experienced FinCEN Form 114 lawyer or CPA, like those at the Tax Law Office of David W. Klasing. If this is your first time filing an FBAR, our international tax lawyers can guide you through the process smoothly, minimizing potential losses and reducing the risk of delays or errors. Alternately, if you need to report foreign accounts that were not disclosed in the past, we can help you identify strategies to disclose the assets properly (especially where badges of fraud are in your fact pattern, while minimizing willful or non-willful penalties. Contact us online to schedule a reduced-rate consultation regarding your FBAR tax issue, or call us today at (800) 681-1295 to get started.
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