The Bank Secrecy Act imposes penalties for failure to disclose overseas accounts with balances of more than $10,000 during any day during the tax year– draconian penalties if failure to disclose is found to be willful
What Is the FBAR Filing Requirement?
We have previously reported about the FBAR (Report of Foreign Bank and Financial Accounts) filing requirement and some case studies in our June 15, 2020, January 22, 2019 and April 26, 2016 postings. If you are unfamiliar with the FBAR filing requirements, we recommend that you read the aforementioned posts. Today, we wish to discuss just how costly these penalties for willful failure to disclose can be.
Penalty for Willful Failure to Disclose
The IRS can impose a penalty of up to the greater of $100,000 or 50% if the balance in each undisclosed account at the time of the violation. For taxpayers with multiple accounts and multiple years of willful violations, the maximum willful penalty can be crippling.
Case of United States v Schwarzbaum
Mr. Schwarzbaum had multiple bank accounts: two in Costa Rica and eleven in Switzerland. His CPA, who provided him with incorrect advice, prepared his 2006 return which only listed one of the Costa Rican accounts. Schwarzbaum self-prepared his 2007 return and again only listed one foreign account. He made no FBAR filing in 2008. In 2009, he self-prepared his returns and filed a FBAR that listed his two Costa Rican accounts and one Swiss account. He didn’t file FBARs for his accounts in Switzerland before 2011. In 2011, the taxpayer joined the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). As part of his participation, he signed an extension of the statute of limitations period to assess and collect taxes and penalties related to his 2006 through 2009 returns.
Schwarzbaum then opted out of the OVDI and underwent full examinations of his returns. After the examinations, the IRS decided to assert willful FBAR penalties against him. The FBAR penalties for tax years 2006 through 2009 were assessed in September 2016. The taxpayer argued that the FBAR penalty assessments were time-barred by the statute of limitations. The IRS counter-argued that the taxpayer had voluntarily signed a consent to extend the limitations period to assess and collect taxes related to his 2006 through 2009 returns. The district court held that the taxpayer’s argument that the FBAR penalties were time-barred was meritless as he failed to point to any legal authority to support his argument that the agreement he signed was invalid.
The court found willful violations for tax years 2007 – 2009, not for 2006. The court also picked up on IRS errors in making the assessment computations against Schwarzbaum. Specifically, the court found that the IRS had used maximum account balances self-reported by Schwarzbaum and not the applicable violation dates for the penalty base—i.e., the latter of which should be the amount in the foreign accounts as of the FBAR filing date of June 30. On this basis, the district court found that the penalties were unlawful under the Administrative Procedure Act (the “APA”). The court then imposed new FBAR penalties against Schwarzbaum totaling $12,907,952.
The IRS contended that the willful FBAR penalties should be reduced to $12,555,813, or the amount that the IRS had already assessed against Schwarzbaum for 2007, 2008, and 2009.
Computation of Penalty
The statutory maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. The time of [an FBAR] violation is June 30, the annual FBAR filing deadline. Indeed, the government concedes that the IRS mistakenly calculated Schwarzbaum’s statutory maximum penalties using his foreign accounts’ highest annual balances rather than their June 30 balances. Because the IRS miscalculated Schwarzbaum’s penalties, a remand is in order to allow the IRS to fix the mistake.
Tax Tip #1
Read our prior posts on FBAR as the reporting requirements cover more than just foreign bank accounts.
Tax Tip #2
Don’t tip your big toe in the water to test what the IRS knows about your foreign reportable accounts. The IRS has agreements with most, if not all, foreign governments to report the holdings of U.S. taxpayers to the IRS. As you can see from the Schwarzbaum case, the penalties are very severe. Talk to your tax professional about your foreign accounts (including those held in joint name with another person for the convenience of that person). Most tax professionals have a tax organizer that will ask you about your foreign account holdings. Answer all questions about foreign accounts completely and honestly.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.