AS the June 30 deadline for filing a Report of Foreign Bank Account (FBAR) approaches the risks of non-compliance increase. A recent Petition to the U.S. Supreme Court illustrates the problem. The case, M.H. v. U.S arises from the use of a Grand Jury Subpoena to compel the taxpayer to produce records of foreign bank accounts. The taxpayer refused to produce the records citing the Fifth Amendment privilege against self-incrimination as the grounds. The District Court in California found the taxpayer in contempt for failing to comply with the court order. The order was based upon the finding that the Required Records Act applied and that the taxpayer should have maintained records for five years of foreign accounts. The contempt citation was appealed to the 9th Circuit which sustained the order of the the District Court. Other courts in the U.S. have held differently therefore, the matter could be heard by the U.S. Supreme Court.
There are currently over 4,400 active investigations of taxpayers for failing to comply with FBAR filing requirements. The FBAR statute makes it a felony not to timely file an FBAR and the statute also requires maintenance of specified account records.
The fact that there are 4,400 investigations may or may not be incentive to non-filing taxpayers, but that fact coupled with the disclosure agreements between the IRS and foreign financial institutions. Some of these agreements are in effect now, as part of settlements with the Justice Department, but under the Foreign Account Tax Compliance Act, (FATCA) virtually all foreign financial institutions will enter into such agreements. Many of such institutions are requiring certificates of compliance or closure of accounts held by U.S. taxpayers.
The IRS has made various statements about the effect of coming forward now and filing late FBAR’s under the OVDI, most of which encourage participation. Some recent statements indicate some potential use of “penalty warning letters” instead of FBAR penalties. What is clear however, is that the view of non-complaint taxpayers may face a dramatic shift to harsh, “willfulness” penalties for those taxpayers who do not come forward before discovery and that the use of Grand Jury subpoenas of both taxpayers and their advisers is not a theoretical risk, but a reality.