by Brian Mahany
A New Jersey woman pleaded guilty to a federal felony charge of failing to report an offshore Swiss bank account. Luckily for her, the court imposed no prison and instead sentenced her to probation. Unfortunately, the IRS ws not so kind. Although she only owed $12,000 in tax from the account, the IRS assessed her $379,688 in penalties!
How can the penalties be so high? Keep reading to find out.
Lucille Jackson was caught with an unreported Swiss bank account. Even though her father opened the account the account, prosecutors claimed that Jackson knew of the account and knew it was in her name. In 2005, she failed to report both the existence of the account and some interest and dividends from the account. Ultimately the IRS decided $12,000 was due in taxes on the unreported income.
As regular readers of this blog know, the penalties imposed on unreported accounts are based on the highest historical balance in the account, not how much income was derived from the account. Normally, penalties are calculated based on the unreported income. Thus a $1000 tax obligation would ordinarily yield higher penalties than say a $100 tax bill.
With an unreported offshore account, the IRS will seek to take 50% of the highest balance in that account even if there was no income generated by the account or if the income was reported but the source not properly disclosed. Uncle Sam permits foreign accounts but wants to know where they are. In this case, the undisclosed account once had a balance of approximately $800,000. Half that balance equals the penalty!
Jackson probably avoided jail simply because she neither opened nor funded the account. Still, the judge was quite clear in his message. According to published reports, U.S. District Judge Dennis Cavanaugh said, “I have very little sympathy for those who look to beat the system and not pay their fair share of taxes.”
Her father was to have been sentenced yesterday for his role in his daughter’s mess. The clerk’s office has not yet released any information about his sentence or if he was sentenced, however. The maximum he faces for his role is 5 years of prison.
The take home from this prosecution is that the feds will zealously prosecute anyone with an unreported foreign account. In Lucille Jackson’s case, there is no allegation she opened the account or funded it. This means that parents who open foreign accounts for their children could be jeopardizing themselves and their kids.
In order to prosecute the account holder, prosecutors must prove that the account holder knew of the acount. Having a foreign account in your name that you do not know of will not get you locked up.
Presently there is a last chance IRS tax amnesty (offshore voluntary disclosure initiative) that runs through August. Come forward now and avoid prison and loss of half your account. To participate in the amnesty, one must amend returns to identify the account, file the appropriate Reports of Foreign Bank and Financial Activity (FBAR form) and come up with 8 years of bank or investment account statements, among other things. Its a time consuming process and one in which you should have legal help. Don’t wait!
If you have an unreported offshore account, consult with a tax attorney as soon as possible. The IRS continues to prosecute taxpayers with undisclosed foreign accounts even while the amnesty is going on.
About the author. Brian Mahany is a lawyer and partner at Mahany & Ertl, LLC. He and his Wisconsin and Michigan based tax lawyers have helped taxpayers from Maine to California. They assist taxpayers with a wide range of tax problems including unreported income. Brian can be reached at (414) 704-6731 (direct) or by email at
Mahany & Ertl, LLC – Milwaukee, Wisconsin; Detroit, Michigan & Portland, Maine.