The 50% FBAR Penalty, Are you at Risk?

by Sanford Millar
Contact

June 30 is the deadline for U.S. taxpayers, (including resident aliens) to timely report foreign financial accounts for the year ending 2012. The report form (TD 90-22.1) known as an FBAR is due if a U.S. taxpayer has control over an offshore financial account (such as a bank or brokerage account) that had an account balance of $10,000 or more at any time during the calendar year. Failure to file and for the IRS to receive an FBAR by June 30 may result in penalties which range from a warning letter (for reasonable cause) to $10,000 per year per account for “non-willful” violations (late but otherwise accurate filing not excused for reasonable cause), to the greater of $100,000 or 50% of the account balance per year per account for “willful” failure to file (knowing and intentional or willfully blind conduct) to criminal prosecution. There is an increasing likelihood that the IRS will seek the “willful” civil penalties for taxpayer’s who have failed to file FBAR for years prior to 2012 and who have failed to come forward and enter the Offshore Voluntary Disclosure Program (“OVDP”). The reasons why are as follows:

First, since 2009 there have been three (3) formal opportunities for U.S. taxpayers to come forward. There was the 2009, 2011 and now the 2012 programs. Second, offshore banks have been sending out letters to U.S. based account holders requesting that they attest to compliance with FBAR reporting and closing some accounts for non-compliance. The due diligence provisions Foreign Account Tax Compliance Act (FATCA) are now in effect and offshore banks with U.S. correspondent banking agreements are scouring their records for U.S. account holders. These banks are requesting consent from U.S. account holders to disclose information about the U.S. account holder to the IRS. Third, The Justice Department has brought actions against several offshore banks, Switzerland, Luxembourg, and Israel to compel disclosure of information about U.S. account holders. Finally, beginning with 2011 Form 1040 has specific questions on Schedule B about whether the taxpayer filed an FBAR. Yet, in spite of all of the information many U.S. taxpayers, including those who are resident aliens have refused to come forward. Some of the reasons for not coming forward are fear based, and some based upon risk/reward estimates. In each case the outcome if caught is so terrible, that it is had to imagine why anyone would refuse to come forward. However, some U.S taxpayer’s like the following examples are gamblers.

Example 1: Taxpayers are resident aliens who claim to have inherited funds in excess of $100,000 somewhat recently. The funds were kept in an offshore account and not reported for either income tax or FBAR purposes. Here are the potential results. First, a Report of Foreign Gift or Bequest was due for income tax purposes. While no estate or gift tax was due the failure to file Form 3520 when due can result in a civil penalty of between 25% -35% of the amount of the bequest, (for simply not filing). If the taxpayers filed an FBAR and Form 3520 timely there would be no penalties at all and no tax due Second, the taxpayer’s now face a civil FBAR penalty of the greater of 50% or $100,000 of the highest account balance per year. If, however, they enter the offshore voluntary disclosure program the maximum combined civil penalty is 27.5% of the highest single year account balance. While the civil penalty is costly, the “ostrich” approach is likely to be catastrophic.

Example 2: Taxpayer has an offshore corporation which is used to provide inflated or false invoices so that the taxpayer can move money offshore and deduct the payment. The taxpayer owns the company directly or indirectly (such as through a trust or nominee) but has full control over the bank accounts. The taxpayer did not File FBAR’s or attach a Controlled Foreign Corporation return (Form 5471) to his Form 1040. In this case the taxpayer faces potential criminal prosecution for both income tax evasion and willful failure to file FBAR’s. The risk of prosecution and the penalties for tax evasion (75% of evaded tax) and FBAR willfulness penalties can be avoided if the taxpayer makes a timely offshore voluntary disclosure. The cost benefit surely tilts in favor of disclosure.

Example 3: Taxpayer is considering applying for an EB-5 Visa (investor Visa). Before entering the program the taxpayer should obtain a legal opinion on how to properly comply with disclosure requirements for holdings in financial accounts and other interests. The failure to properly comply with FBAR and income tax reporting rules can be grounds for revocation of the visa. Once the EB-5 or any other visa that results in permanent resident status is issued, the FBAR and other compliance rules and penalties apply.

The decision to come forward and pay out substantial sums or not come forward and face worse outcomes may seem to present an irreconcilable choice. However, the third choice, doing nothing, or worse, furthering the efforts to hide, may lead to terrible outcomes. Human behavior being what it is, some will choose to gamble, for those who do, I wish you the best of luck.

 

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.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

Written by:

Sanford Millar
Contact
more
less

Law Offices of Sanford I. Millar on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.