Anyone who has read this blog knows we think that the penalties for unreported offshore accounts are simply too high. In fact, they are outrageous. The willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) or not disclose an offshore account can mean 5 years in prison and civil penalties which are the higher of $100,000 or 50% of the historical highest balance for each unreported account.
As a practicing FBAR attorney, I understand that people who intentionally cheat the government should be punished.
The problem with unreported FBARs is that the penalties aren’t tied to the amount of unpaid taxes. Unlike all other IRS civil penalties, the 50% percent FBAR penalty is based on the value of the account.
Let’s look at an example. John Doe has $50,000 in a Swiss account. The account pays 1% interest or $500 which John did not declare on his return. How much is the penalty? It is somewhere between $25,000 (half the account value) and $100,000!
In addition to the method of calculation, the penalty laws fail to properly differentiate between taxpayers who are deliberately violating the law and those who made a mistake. Although the higher penalties are reserved for “willful” violations, the IRS is allowed to use circumstantial evidence in determining what constitutes “willful”. In our experience, the IRS often makes mistakes. Mistakes that favor the government.
With this as a backdrop, we were surprised this week when Republican Senator John McCain of Arizona and Democrat Carl Levin of Michigan sent a letter to the Justice Department suggesting that Justice officials have not been aggressive enough in pursuing certain offshore evasion cases.
The two Senators want to see the Justice Department be more aggressive in extraditing foreign nationals (usually bankers) back to the United States to stand trial for “aiding and abetting” tax evasion.
Although the government should prosecute those who deliberately don’t pay taxes, we think the money it will cost to bring foreigners to the United States to stand trial here can be better spent educating taxpayers about their foreign reporting responsibilities. Both the GAO and the IRS’ own internal watchdog agency have given the IRS poor marks for its outreach and education efforts.
Although foreign bankers have largely been spared prosecution, a record number of Americans have been prosecuted over the last 5 years for unfilled FBARs. Given the government’s aggressive position on unreported offshore accounts, those who find themselves in that category should immediately consult with a trained FBAR attorney.
Post by Brian Mahany, Esq.