A few days we ago we wrote about the expected guilty plea by Beanie Baby creator Ty Warner. The feds charged Warner with tax evasion. Prosecutors say he failed to report offshore Swiss accounts and file required FBAR forms. U.S. taxpayers must annually report their offshore financial assets if at any point in the year those assets exceeded an aggregate value of $10,000.
As part of the reported plea deal, Warner faces 5 years in prison. What got readers attention, however, is the reported fines and penalties he must pay. News reports say that Warner will pay the IRS approximately $53,000,000.00!
That figure prompted several readers to inquire. Are the penalties really that high? (YES). Is this amount what Warner owes in tax? (NO). FBAR penalties are the highest in the IRS’s arsenal. Unfortunately for Warner, there was no misprint in our original post.
How can the penalties be so high?
The highest balance in Warner’s account over the last several years was $93 million. FBAR penalties are up to the greater of $100,000 or 50% of the highest account balance. (The IRS looks back up to 8 years). Although the IRS can impose the penalty for each year the account was unreported, the normal penalty is just based on the highest year. 50% of 93 million is $46.5 million.
Added to that are any unpaid taxes. The IRS says that his $93 million account generated $3.1 million in foreign income. Add in the taxes on that income and yearly penalties and interest and it becomes easy to see how even one missing FBAR can result in tens of millions of penalties. As is often the case, the FBAR penalties are many times greater than the tax generated by the income. In Warner’s case, he is paying $53 million on just $885,000 of unreported income in 2002.
Unfortunately, this is not a special case and the IRS routinely applies these same massive penalties to others with missing FBARs.
The take home, of course, is to not take missing FBARs and unreported Swiss accounts lightly. Had Warner reported the income from his foreign accounts, his penalty would likely be zero. (The IRS frequently will forgive missing FBARs if the tax on the foreign source income was paid.) Even if Warner did not timely pay tax on the income, he would have been a good amnesty candidate. That program would have lowered his penalties to $20 to $25 million. More importantly, he wouldn’t be facing 5 years in prison. (Taxpayers accepted into the IRS’ Offshore Voluntary Disclosure Program – OVDP- get a “Get-Out-of-Jail Free” pass.)
To qualify for a reduction in penalties and the FBAR amnesty program, taxpayers must come into compliance before they are contacted by the IRS. This so called “first contact” policy is a strong inducement to motivate fence sitters to make the right decision. Wait too long and amnesty is permanently off the table.
If you need more information and want to talk to an experienced IRS attorney, we offer no cost consultations. Our FBAR lawyers have helped dozens of taxpayers across the United States and worldwide. All inquiries are protected by the attorney – client privilege too. For more information, contact attorney Bethany Canfield at 414-223-0464 or by email at . You may also contact the author at (414) 704-6731 or by email at .
Post by Brian Mahany, Esq.