Taxpayers are required to disclose their ownership interests in foreign bank and financial accounts by filing a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). 31 U.S.C. §5321 allows the U.S. to impose a penalty for willful failure to report of 50% of the maximum balance of the account (or $100,000, if greater).
If a taxpayer does not report in multiple years, this 50% per year penalty can equal or exceed the amount that is in the account. It is this threat of multi-year penalties that often motivates nonreporting taxpayers to enter the Offshore Voluntary Disclosure Initiative (OVDI) programs, since the programs offer only one penalty, at a much lower rate.
As a practical matter, assertions of a multi-year 50% penalty are few and far between. However, in June 2013 the U.S. filed suit in the Southern District of Florida asserting 4 years of a 50% penalty against Carl Zwerner. Thus, Mr. Zwerner is at risk of having to pay over $3.48 million in penalties for an account that appears not to have had more then $1.5 million in it during the years of nonreporting. While Mr. Zwerner did not initially pay income taxes on the income of the subject accounts, he later did so via the filing of amended returns.
The Treasury Department may be setting itself up to lose the persuasive threat of the 50% penalty by litigating this case. The Eighth Amendment prohibits “excessive fines.” If a court determines that the penalty is excessive, the penalty will be unconstitutional and unenforceable. Further, other significant penalties relating only to “information reporting” may likewise be at risk of challenge if the FBAR penalty is successfully challenged. In U.S. v. Bajakajian, 524 U.S. 321 (1998), the U.S. Supreme Court struck down a $357,144 penalty against Mr. Bajakajian who failed to report the currency he had in his luggage that he was transporting outside of the U.S. The statute authorized the U.S. to seek the forfeiture of all of the unreported property. The Court determined the penalty was excessive under the Eighth Amendment for a reporting violation, and affirmed the District Court which had imposed a total penalty of $20,000.
United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013)