FBAR Violations Lead to Other Charges

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In a recent decision a Federal Appeals Court sustained the criminal conviction of a taxpayer for failing to file FBARs, filing false income tax returns and mail fraud and student loan fraud. The scheme was both complex and simple at the same time.

The taxpayer used a series of offshore and domestic structures to make investments. In all the taxpayer is reported to have earned $1.7 million and paid less than $400 in federal income tax. The court found that he was required to file FBARs and knowingly did not. It also concluded that by under reporting his income he enabled his children to qualify for federally insured student loan programs. As part of the under reporting scheme he did not report his offshore bank accounts as required on Schedule B of Form 1040. The importance of this case is that evidence of “specific intent” which is required to establish the elements of the criminal violations is inferred from the conduct taken as a whole. The intention was to not disclose the offshore accounts so as not to report the income and enable the filing of false student loan applications, was among the purposes of the scheme. The principal purpose was not to pay income tax.

This case has important ramifications for taxpayers who may have improperly applied for and received state and/or federal social welfare benefits, like Supplemental Security Income (“SSI”) or Medicaide. For some taxpayers who have undisclosed offshore accounts, like dual nationals or Permanent residents, and who have unreported income on those accounts the risk of not coming forward is clear. For those taxpayers the risk is that they will face prosecution for (a)willful failure to file FBARs, (b) willful failure to file income tax returns or filing false returns, (c) welfare fraud and (d) mail fraud. The issue for many of these taxpayers is how to come forward and what are the costs, including tax, interest, penalties on the tax and FBAR penalties.

Each case will present its own unique set of facts. Some will involve state and federal issues, in which case strategies need to be developed to deal with both sets of authorities. On the federal side taxpayer’s should consider combining an Offshore Voluntary Disclosure and a Domestic Voluntary Disclosure. Such an approach is permitted if done before the IRS begins an investigation. Some states have voluntary disclosure programs and most do not, so each states laws will need to be considered for taxpayer’s who have state and federal issues.

The current case is indicative of how what starts out as a failure to file an FBAR, which after all is a simple information return, can lead to dire consequences, including criminal prosecution, FBAR willfulness penalties of the greater of $100,000 or 50% of the highest annual account balance per year (for six years), income tax fraud penalties of 75% of the underpaid tax and penalties and restitution for improperly received social welfare benefits. For Green Card holders it can also men deportation. It is clearly a wiser choice to come forward than to wait and play hide and seek.