by Brian Mahany
Most of the court cases and appeals decisions coming from the IRS have not been good news for taxpayers. Two cases regarding FBAR penalties for unreported foreign financial accounts are no exception.
Failing to report offshore financial accounts (that includes bank accounts, CD’s, brokerage accounts and even some foreign insurance products with an investment component) is a crime. If your failure to file was merely inadvertent (a mistake), expect penalties of $10,000 per year. If, however, the IRS believes the violation was intentional or knowing the penalties can include 5 years in prison and civil penalties of 50% of the highest account value or $100,000 per account per year!
That’s quite a difference and it all centers on whether one’s conduct was “willful.” So how does the IRS define that term?
The IRS has taken the position that if you checked the “no” box on schedule B of your tax return but had foreign accounts, your actions were intentional. There is a question in Schedule B of the annual income tax return that asks if you have an interest or have signatory authority of foreign financial accounts.
Last month a federal court in Utah ruled that “a taxpayer’s signature on a return is sufficient proof of a taxpayer’s knowledge of the instructions contained in the tax return form…” Those instructions, of course, say that by signing the return you have examined the return and to the best of your knowledge everything on the return is accurate.
The Utah case (United States v. McBride) is a criminal case but earlier this year a federal appeals court reached a similar result in civil FBAR penalty case. There the court said that, “a taxpayer who sign a tax return will not be heard to claim innocence for not actually having read the return, as he or she is charged with constructive knowledge of its contents.” U.S. v. Williams (4th Cir. July 2012).
While many people rely on their accountants to prepare accurate returns, an accountant’s work is only as good as the information shared with him or her. Taxpayers still have a duty to carefully review their return before signing. If you incorrectly signed a tax return indicating that you had no interest in a foreign account, don’t be surprised if you are later facing huge civil penalties.
Unfortunately, we see many cases in which people either don’t understand their return, didn’t read the return prepared by their accountant or simply decided to not report their foreign bank or brokerage account. Some folks who are dual nationals or are green card holders don’t understand that sending money “home” to an account outside the United States constitutes a foreign account.
If you find yourself with an unreported foreign account, don’t wait until you are caught. The IRS routinely goes back 8 years meaning you could lose your entire account and then some. At 50% per year, a $200,000 account could yield an $800,000 penalty.
The IRS is currently running an amnesty program called the Offshore Voluntary Disclosure Program (or OVDI / OVDP for short). Penalties are greatly reduced and are only imposed for one year. For those with small accounts, U.S. taxpayers residing overseas, so called “accidental Americans” and those who have reported all the interest or income on their foreign accounts, more favorable programs may be available.
There is a hitch in all these programs – you must come forward before the IRS finds you or before your name is disclosed to the IRS by a foreign bank. (Beginning next year, foreign banks must disclose the identities of U.S. account holders.) The IRS operates on a “first contact” policy meaning that unless you contact the IRS first, its too late to apply for amnesty.
If you have questions about the OVDI program, have unreported accounts, missing FBARs or have foreign gift or foreign partnership questions, give us a call. Our tax lawyers have helped people all across the United States and the world with a wide range of foreign reporting questions. We are the CPAmerica organization of accounting firms preferred legal services provider for offshore reporting.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Services available worldwide.