A Closer Look Into FBAR Late Payment And Interest Penalties Through The Zwerner Settlement – What Were The Penaties And Interest? - How Were They Computed?

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While much about the Zwerner case (U.S. v. Zwerner, Case No. 13-22082-CIV, So. Dist. Fl.) has been discussed regarding the FBAR penalties, there has not been much attention paid to the 6% late payment penalty and interest applicable to FBAR penalties which are not paid timely. The late payment and interest would arise in cases where the FBAR penalty is assessed but not timely paid. They do not arise in OVDP settlements as the FBAR penalty is paid without interest and late penalties under the terms of the OVDPs. Since these additional penalties are not insignificant, it is important to consider them in analyzing FBAR penalty cases.

Background. Zwerner was widely publicized. It was noteworthy because the government asserted that Zwerner should pay the maximum 50% FBAR penalty for each of three years in which he failed to willfully file FBARs. Imposition of the penalty for each of three years results in an aggregate penalty of approximately 150% the high balance in the account over the three years. In contrast to the multi-year imposition of the FBAR penalty asserted in Zwerner, the offshore voluntary disclosures programs (OVDPs) have imposed an offshore penalty for a single year.

On June 9, 2014, approximately two weeks following the verdict finding that Zwerner’s failure to file the FBARs was wilful, he and the U.S. reached a settlement. They agreed that the FBAR penalty of 50% would apply to two of the three years but not to all three years, and they agreed that the late payment penalty and interest would apply to each of those two years.

The Zwerner Settlement.

A. Stipulated Settlement. The stipulated settlement reads in part as follows:

“Under the terms of the settlement, by September 2, 2014, Zwerner is to fully pay the United States the 50% FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively. Once that payment is made, the parties will stipulate to dismiss this action with prejudice.”

B. FBAR and Late Payment Penalty and Interest . Below are shown the FBAR, late payment and interest penalties. The penalties and interest amounted to almost $300,000, as follows:

YEAR

FBAR PENALTY

LATE PAYMENT

INTEREST

DATE ASSESSED

2004

723,762

128,017

21,336

6/21/11

2005

745,209

125,685

20,948

8/10/11

TOTAL

1,268,971

253,702

42,284

 

1. Late Payment Penalty. The late payment penalty is “not to exceed” six (6%) percent per year penalty computed from the date of the assessment of the FBAR penalty, computed pursuant to 31 U.S.C. 3717(e)(2), and 31 C.F.R. § 901.9(d). In Zwerner, the penalty appears to have been computed at 6%. Based upon my review, the late payment penalty appears to be computed at 6% (rather than at a lower rate as permitted by statute), in cases where it is not otherwise compromised.

2. Interest for Late Payment. The interest due in Zwerner was computed at one (1%) percent per annum from the date of the assessment pursuant 31 U.S.C. §3717(b) and 31 CFR §901.9. The interest rate is based upon the current value of Treasury funds at the time of the demand for payment, and is computed pursuant to U.S. Department of the Treasury’s (Treasury) Current Value of Funds Rate (CVFR), published annually by the Secretary of the Treasury in the Federal Register and http://fms.treas.gov/cvfr/index.html. The current rate is 1.0%.

3. The Date of the Delinquency. The date of the “delinquency” starts the running of the interest and penalties and begins on the date the FBAR penalty assessment is mailed unless payment of the penalty is made within 30 days thereafter. As more specifically explained in the Internal Revenue Manual, the late payment penalty and interest are computed as follows:

IRM 4.26.17.4.3 (05-05-2008)

“Closing the FBAR Case with Penalties

6.E. No interest accrues on FBAR penalties prior to assessment, therefore only the penalty amount would be owed if full payment is made in a pre-assessment case or if payment is made within 30 days after the date a notice of the penalty amount due is first mailed to the filer. Under 31 U.S.C. § 3717(b), interest begins to accrue on the date the FBAR notice of penalty assessment is mailed but no interest is owed on payments received within thirty days from the date a notice of the penalty amount due is first mailed to the filer. In addition to interest, a six percent delinquency penalty applies to amounts remaining unpaid ninety days from the date a notice of the penalty amount due is first mailed to the filer. The applicable interest rate is found at http://fms.treas.gov/cvfr/index.html . This rate is updated at least annually but may be updated quarterly if certain criteria, identified in § 3717(a) (2), are met.”

Conclusion.

In cases where the FBAR penalty is paid “up front,” as with OVDP settlements, late payment penalties and interest won’t be relevant. However, if FBAR penalties are paid more than 30 days after assessment, or remain unpaid while the FBAR penalties are being contested, as in Zwerner, the late payment penalty and interest can be significant and should be considered.

 

Topics:  FBAR, Interest Payments, Penalties, Settlement

Published In: Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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