[Post updated April 2020. Some of the information about the offshore disclosure programs is dated. This post is offered for informational purposes and historical reference but does contain current information about recent court cases on the Report of Foreign Bank and Financial Accounts – FBAR – and the Eighth Amendment’s prohibition on excessive fines and penalties. We represent IRS whistleblowers and do not represent taxpayers seeking assistance with the IRS.]
Many taxpayers with unreported offshore accounts wondered what would happen if they chose not to enter any of the IRS’ tax amnesty programS. That’s a great question considering the IRS uses the threat of severe penalties to gain compliance with the offshore reporting rules.
Beginning in 2008, the IRS commenced an aggressive campaign to get taxpayers to report their offshore financial holdings. The Service used a carrot and stick approach. The “stick” is outrageously high penalties for taxpayer who don’t properly report. Unlike most IRS penalties, the foreign reporting penalties are based on the value of the unreported asset and not on the tax owed.
For example, let’s say you had a $1 million Swiss bank account that generated $20,000 in interest. Typical tax penalties would be based on the $20,000 in unreported income. The FBAR penalties are based on the highest historical balance in the account.
The carrot to get taxpayers to comply were various amnesty programs. If you self reported, the IRS offered to lower those penalties.
The most recent amnesty program was called the Offshore Voluntary Disclosure Program (sometimes called “OVDI” or “OVDP”), allows those with unreported foreign bank and brokerage accounts to pay a 27.5% penalty based on the highest balance of the unreported accounts during the last 8 years. That means if you have an account worth $800,000 today and $1 million in 2009, the IRS would extract a $275,000 penalty.
Although the IRS recovered billions in unreported taxes, many offshore account holders chose to roll the dice. Not wanting to give holdouts a better deal, the IRS began increasing the amnesty penalties.
Because even the amnesty penalties were huge, many taxpayers didn’t participate.
Why would anyone agree to the huge amnesty civil penalty? The answer is simple. Failure to disclose an offshore account can be a felony if intentional and carries civil penalties of up to 50% of the highest balance for each year the account was unreported or $100,000 per year, whichever is higher. That means if you have owned a $500,000 account for the last 4 years the penalty could be $1 million – an amount twice the value of the account! If you don’t believe us, that example comes from the IRS’ own FAQs on their OVDI website.
Most people who approach the voluntary disclosure program feel like they are between a rock and a hard place. Lose all your money and potentially go to prison versus paying a huge 27.5% penalty. Remember, the penalty is based on the value of the account. Most U.S. taxpayers with offshore accounts have already paid tax on the money they earned. Unless the money is from drug dealing or other illegal activities, the money has already been taxed once.
There is hope, however. The penalties most often quoted are for willful violations. Yes, there are some business people that intentionally try to hide money from the IRS or a spouse. Most violators, however, simply didn’t know about the law. The typical amnesty applicant is a dual national, an American living overseas, a foreign born American or a person sending money “home” to family in India, Mexico or China.
The IRS’ website does not draw a distinction between these groups. That causes many people who have truly made an honest mistake to needlessly panic.
Recently there has been a growing thought that the courts could strike down the FBAR* penalties law as a violation of the Eighth Amendment to the U.S. Constitution. The Eight Amendment, adopted in 1791, says that “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” While most people think of criminal and death penalty cases, there is a growing body of law surrounding the “excessive fines” language. [*An FBAR is a Report of Foreign Bank and Financial Account, the form that U.S. taxpayers must use to report foreign financial accounts yearly.]
In 1998, the U.S. Supreme Court ruled it was unconstitutional to fine a person $357,144 for failing to report cash in excess of $10,000 being removed from the country. Removing cash is not illegal just like opening a foreign account isn’t illegal. The law requires you to report both transactions, however.
In striking down the fine, the court found it was “grossly disproportionate” to the violation. This comes from the Eighth Amendment of our Constitution which says, “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
Until recently there was little guidance from the courts. The IRS has recognized the dangers in enforcing the 50% – per – year penalties for innocent violations, however. The Internal Revenue Manual used by IRS employees notes that the penalties established by Congress are the maximum amounts that can be imposed. Revenue agents are instructed to consider warning letters or lower penalties except in the most egregious cases.
In 2017, Alice Kimble sued the United States claiming the IRS had collected excessive penalties. Alice owned two foreign bank accounts (France and Switzerland), one at HSBC and the other at UBS. According to her, the UBS account had been her fathers. Just before he died he added her to the account so that the money in the account would pass to her upon his death.
Alice admitted that she had failed to report the UBS account and file an FBAR after her father died. She said the violation was not willful, however.
The IRS said otherwise. They say because it was a “numbered account” and that all correspondence was intentionally held by the bank to avoid a paper trail, Alice’s actions were willful.
IRS Says FBAR Penalty is Not a Fine
In response to the IRS, Alice claimed that even if her conduct was willful, the penalty the IRS imposed was an excessive fine prohibited by the Eighth Amendment.
The IRS argued that the the Eighth Amendment did not prevent the IRS from imposing willful FBAR penalties. The government’s attorneys argued the Eighth Amendment shouldn’t apply at all, because the FBAR penalties weren’t fines in the constitutional sense.
Federal courts sometimes distinguish between criminal penalties and civil fines imposed for remedial purposes. Criminal fines are clearly regulated by the Eighth Amendment. But the Constitution is less clear with civil penalties such as the FBAR penalties levied on by the IRS.
Two days after Christmas on December 27, 2018, the United States Court of Federal Claims ruled that the IRS did not violate the Eight Amendment or abuse its discretion when assessing Alice the FBAR penalties. In reaching its decision, the court rejected two other recent cases that ruled that the IRS may not assess a penalty greater than $100,000 for a FBAR violations.
If you have an unreported foreign account, contact a lawyer or CPA experienced in foreign reporting requirements. Rolling the dice and hoping you don’t get caught comes with huge price tag.
IRS Whistleblower Reward Program
No matter what we say, thousands of taxpayers continue to hide their money from the IRS. It’s like playing a game of roulette. Thousands get caught each year but tens of thousands don’t. The IRS knows this and offers robust cash whistleblowers to help get people with inside information about these schemes to report these frauds.
The IRS pays awards between 15% and 30% of whatever taxes, interest and penalties are collected from the wrongdoer. To qualify for an award, the amount owed to the IRS must exceed $2 million. If the taxpayer is an individual, his or her gross income must exceed $200,000.
Typical offshore reporting schemes for which whistleblower rewards are available include:
- Opening or maintaining an unreported foreign bank account
- Failing to file an FBAR (Foreign Bank Account and Financial Acct.)
- Unreported foreign annuities
- Unreported captive insurance companies
- Improper use of foreign trusts, corporations or LLCs
- Improper use of International Business Companies (IBC)
- Unreported offshore brokerage or precious metal accounts
- Using sham / nominee / shell corporations with no legitimate business purpose
- Use of foreign loans or entities to hide or shield income
- Unreported offshore income
- Abusive foreign trust schemes
- Offshore tax evasion schemes
- Banks, trusts companies and others that help Americans evade taxes
Rewards are not only available for those who report taxpayers engaged in these schemes but also the banks, accountants, trust companies and lawyers that assist. Do you remember Alice Kimball’s unreported UBS account? The largest IRS whistleblower reward in history was paid to a former UBS banker that reported UBS for helping Americans hide their assets. That reward was $104,000,000.00!
If you have information about unreported foreign bank or brokerage accounts or know a bank or accountant who is assisting taxpayers in hiding their accounts from the IRS, give us a call. Our IRS whistleblower lawyers can help you earn a cash whistleblower reward. All inquiries are protected by the attorney client privilege and are kept in strict confidence. For more information, visit our FBAR tax fraud whistleblower reward information page. Ready to see if you qualify for a reward? Contact attorney Brian Mahany at or by phone at 202-800-9791.
All inquiries protected by the attorney – client privilege and kept confidential. Services provided worldwide.
Mahany Law – America’s Whistleblower Lawyers.