Reporting Foreign Accounts in the Age of Transparency - Part 3
Up until this point, the configuration of the Form has been somewhat cumbersome, and as such the IRS has sought to streamline its configuration. Now, provided that the names and Social Security Numbers of joint owners who are husband and wife are fully disclosed on the FBAR, and the spouses also co-habit, then the IRS will accept one filing for both spouses. Previously, a consolidated filing by both spouses was not permitted.
However, what one hand giveth, the other taketh away, in a sense.
Filers of the Form are also now required to declare the maximum value of an account during the year. This is defined to be the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the maximum account value to declare s the largest amount of currency or non-monetary assets in the account at any time during the year. Any foreign currency amount is required to be converted to US dollars by using the official exchange rate at the end of the calendar year.
The most sobering - if not downright numbing - aspect of the FBAR has to be the package of penalties that await those that choose to ignore its existence by failing to file the Form.
Post October 22, 2004, the penalty for a non-willful failure to file the FBAR has been up to $10,000 per violation. The penalty for a non-willful violation, however, is generally not imposed if the violation is due to reasonable cause.
For a willful violation of the FBAR reporting requirement, however, the penalty is a fine equal to the greater of $100,000 or 50% of the amount of the transaction or of the balance of the account at the time of the offense!
The deliberate failure to file the Form with intent to defraud, and which is successfully prosecuted in a criminal action, carries much more draconian penalties.
- Failure to File Penalty - up to $250,000 and/or up to 5 years in prison for any person "willfully violating" the requirements to file.
- Fraud Penalty - up to $500,000 and/or up to 10 years in prison for any person "willfully violating" the requirements to file "as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period".
- False Information Penalty - fine or up to 5 years in prison for any person providing false, misleading, fictitious, or fraudulent statements on TD F 90-22.1; or up to 8 years in prison if the false information involves domestic or foreign terrorism.
It is fair to say that the IRS and other agencies have significant enforcement tools at their disposal!
Civil penalties can be assessed anytime up to six years after the date of the violation pursuant to the Statute of Limitations under the Bank Secrecy Act. The Statute of Limitations on penalties can also run up to six years. Records of accounts required to be reported on an FBAR must generally be retained for a period of five years. Failure to maintain required records may result in civil penalties, criminal penalties, or both, although in certain circumstances the negotiation of penalties may be possible.
Indeed, the penalties do not end there. Let's not forget Schedule B on the Form 1040 income tax return filing regarding the declaration as to whether one has foreign accounts. The Justice Department apparently lists a deliberately incorrect response of "no" to this question in its Criminal Tax Manual as a basis for a prosecution. Indeed, the government has prosecuted individuals in such cases.
A taxpayer's omission from his return of taxable interest dividends, or capital gains earned on a foreign account is also a separate offense under the Internal Revenue Code if the government can prove a tax deficiency and deliberate tax evasion.
Okay. None of this makes pleasant reading, but some of these reporting requirements have been around a while but yet not rigorously enforced. Does this really all add up to more than a "paper tiger"?
The answer is that the big cat is starting to flex some muscle! The media, over the last year, has broken a number of celebrated stories concerning the intent of the U.S. government to make examples of violators of these hitherto "sleeping" provisions. Further, the Justice Department apparently also has two new senior appointees who specialize in FBARs and tax evasion. The Service is reportedly also training examiners outside the international practice area to target offshore tax evasion issues.
The IRS is also not alone in its endeavor. The recent cases in the newspapers came about in part due to international collaboration. The IRS is also part of a wider initiative domestically due to the nature of this issue. Ultimate enforcement of the FBAR provisions rests with the Financial Crimes Enforcement Network (FINCEN). The IRS is authorized to make a recommendation, house all the forms and recommend a penalty but it is actually the Treasury which collects the money and determines the course of action.