The penalties for failing to report a foreign account (FBAR penalties) are some of the highest penalties in the IRS’ arsenal. In many cases, those penalties are up to the greater of $100,000 or 50% of the highest account balance, per account. Traditionally the IRS has looked back over the last 8 years and levied the 50% on the highest historical balance but in a recent case from Miami, the IRS’ decision to impose the 50% FBAR penalty for 3 consecutive years was upheld.
To understand the full magnitude of this decision, an example is necessary. Say you work hard and after 10 or so years, you manage to save up $200,000. You intend to use that money for retirement and because you are not very confident of the safety of the U.S. banking system, you decided to park your money in a Swiss account. Interest rates are still very low worldwide but over the last few years the account generated about $2000 per year in interest. Unfortunately, since that money was earned in Switzerland and since Swiss banks don’t issue 1099’s, you failed to report it on your US return.
Assuming you are in a 35% tax bracket, you owe the IRS roughly $2200 in interest and penalties. Stupid mistake but mistakes happen.
End of story? No. As a result of the decision in United States v. Zwerner last week, the IRS can impose a $300,000 penalty (50% of the high balance for 3 years)! But wait, that is far more than the tax, far more money than the account holds, far more money than you have and it represents all of your retirement money! And all because you forgot to file an FBAR form
Last year I received an email from a reader claiming that we were engaged in shock journalism and were needlessly alarming taxpayers. Not true. it’s cases like this that remind everyone of just how serious the IRS and Justice Department is on ferreting out unreported accounts.
There is some silver lining in the story… before you fire off emails lets look at the facts surrounding Zwerner.
FBAR Reporting Requirement & FBAR Penalty
Carl Zwerner lives in Miami and maintained accounts at ABN AMRO Bank in Switzerland. Although he had the account for years, he never reported it. U.S. taxpayers (that includes dual nationals and green card holders) must annually report foreign financial accounts if the aggregate balance of those accounts exceeds $10,000. Even if the balance of all your accounts exceeds the $10,000 threshold for just 1 day, all the accounts become reportable.
Assuming the threshold is met, foreign accounts are reported both on Schedule B of one’s income tax return and on an FBAR, Foreign Bank Account Report. It is the failure to file the FBAR that triggers the huge penalties.
Because the failure to file an FBAR penalty is so high, many Americans simply choose the quiet disclosure route once they discover they should have been reporting for many years. The IRS has said, however, that quiet disclosures don’t prevent the imposition of penalties. Worse, by filing a quiet disclosure, you give the IRS a road map to how much money you have offshore and where.
A quiet disclosure occurs when a taxpayer simply completes missing FBARs and files them with the IRS. (This year, FBARs are filed electronically.) The IRS prefers that people with missing FBARs participate in their FBAR amnesty program called the Offshore Voluntary Disclosure Program (or “OVDI” as it is sometimes called.) That program, however, generally carries penalties of 27.5%.
To avoid the harsh 27.5% OVDI penalty, many taxpayers simply file their missing returns and hope the problem goes away.
Last year we reported on the Zwerner case at the time it was filed. We believed then, as we do now, that the IRS and Justice Department brought the case partially in response to a federal GAO report that said many Americans were going the quiet disclosure route to avoid amnesty and its own harsh penalties.
Carl Zwerner is 87 years old. At the time of his disclosure, he was not under investigation nor audit. Ultimately, a federal jury determined that Zwerner owed $2,241,809 in penalties on an account that only held $1,691,054. Prior to the FBAR penalty case going to trial, a U.S. Tax Court judge cleared Zwerner of an onerous 75% fraud penalty.
The irony of this case? Had Zwerner committed a crime, the IRS probably would have only assessed him an $850,000 penalty.
Who is to blame?
It’s not the jury’s fault. They are obligated to follow the law.
Is the IRS out of control? Obviously, we think that the IRS abused its discretion. The mission of the IRS is to foster voluntary compliance. We want people to come forward and admit mistakes. No one would ever come forward if they thought they would be treated more harshly for coming forward and doing the right thing.
The IRS wants to send a message that quiet disclosures are not the way to come into compliance. Unfortunately for Carl Zwerner, that message came with an outrageous price tag.
Much of the problem begins with Congress. the FBAR penalty law is their creation. The solution to the problem, of course, is for Congress to fix the outrageous penalties associated with a foreign account. While some people use foreign accounts to intentionally hide money and commit tax evasion, most do so as a matter of convenience. Dual nationals, American expats living abroad, businesses with foreign affiliates or employees and green card holders who work here but send money home to their families are common examples.
There is a silver lining to this story. For most taxpayers that can demonstrate that their actions were not willful, a voluntary disclosure can eliminate all or most FBAR penalties. Amnesty carries a 27.5% penalty in most instances but for those who opt out and later go the traditional voluntary disclosure route, those penalties can be reduced to a warning letter or $10,000. The key, of course, is to show that your actions were not willful.
Only an experienced FBAR lawyer can help you weigh the risks and facts particular to your case. Whatever you do, however, don’t simply file the back returns and hope nothing will happen.
For more information contact one of experienced FBAR lawyers today. Attorney Bethany Canfield can be reached at or by telephone at (414) 223-0464. All inquiries are kept in complete confidence and protected by the attorney client privilege.