Latest Case Shows Foreign Bank Account Reporting Penalties Can Be Severe
A number of recent cases decided around the country show that foreign bank account reporting (FBAR) penalties are no laughing matter and can quickly escalate depending on the circumstances.
In the latest court case, the total fine upheld by the court was $456,509, an astonishing amount considering it relates simply to the non-filing of an informational form.
In this blog, we review the FBAR requirement, the general penalty scheme, and the latest FBAR case decided against the taxpayer.
FOREIGN BANK ACCOUNT REPORTING – A QUICK BACKGROUND
The Bank Secrecy Act (BSA) requires that a US person file a Report of Foreign Bank and Financial Accounts (FBAR) if the maximum values of the foreign financial accounts of such person exceed $10,000 in the aggregate at any time during the calendar year.
The FBAR form (known more formally as FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The FBAR due date is April 15th, with an automatic extension of 6 months.
FOREIGN BANK ACCOUNT REPORTING – PENALTIES ARE STEEP
A “non-willful”’ failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year, subject to inflation.
A “willful” failure to file may be subject to “enhanced” FBAR penalties equal to the greater of $100,000, subject to inflation, or 50% of the balance in each unreported account.
In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of willful conduct.
DEFINING THE TERM “WILLFUL”
Currently, the Internal Revenue Code and Treasury regulations do not provide direct guidance for distinguishing willful versus non-willful FBAR filing violations.
Courts, however, have recently weighed in on this issue. The Third Circuit recently held, for instance, that a defendant willfully violates the reporting requirement when he either knowingly or recklessly fails to file an FBAR. Further, willful blindness – as where a defendant consciously chooses to avoid learning about reporting – is also a form of recklessness.
THE LATEST CASE ON FOREIGN BANK ACCOUNT REPORTING
Last month, the United States District Court for the Southern District of Texas ruled in favor of the IRS in its imposition of the willful FBAR penalty. The case stands out because of the giant $456,509 fine, and because it delineates in detail the elements that courts will look to in deciding whether to uphold foreign bank account reporting penalties.
The defendant in the case was Mr. Edward Flume, a U.S. citizen who has lived and worked in Mexico since 1990. Flume entered into a range of enterprises and investments in Mexico, including the development of residential real estate in Guadalajara and San Miguel de Allende. In 1999, Flume and his wife became clients of Leonard Purcell’s preparation firm based in Mexico.
To manage his real estate projects, Flume incorporated Wilshire Holdings, Inc. in the Bahamas in 2000 and then reincorporated the company in Belize. In 2005, Flume opened an account at Swiss UBS in Wilshire’s name. Flume and his wife were the only people with signature authority over the account, and together they owned all of Wilshire’s stock. Upon opening the account, Flume signed a waiver of the right to invest in U.S. securities, a choice that the IRS has suggested indicated a desire to hide the account from the IRS.
The Flumes maintained a personal credit card linked to the UBS account and, beginning in 2008, transferred large amounts of money from the UBS account to their personal Banco Monex account. Flume testified at trial that he opened the UBS account without the knowledge or assistance of his tax preparers, although he stated that he “probably” told them about the account after it was opened. Despite having a legal obligation to do so, Flume failed to report his financial interest in the UBS account to the IRS in both 2007 and 2008.
By mid-2008, Flume had become aware that the IRS was investigating UBS’s involvement in tax evasion on behalf of its American clients. First, he directed the transfer of funds a number of times, but eventually to the United States, most of which he subsequently transferred to himself as well. In 2010, UBS ended its longtime nondisclosure practice and agreed to comply with an IRS summons by releasing the names of its American clients—among them Edward Flume—to the IRS. In June of 2010, Flume filed delinquent FBARs but, according to the IRS, underrepresented the value of the account. Moreover, despite being eligible, Flume did not apply to participate in the IRS’s Offshore Voluntary Disclosure program.
The IRS then imposed penalties for the failure to file FBAR foreign bank account reporting forms in 2007 and 2008. The 2007 penalty represented half of the balance rounded to the nearest dollar of Flume’s UBS account on June 30, 2008 (the FBAR due date). On June 30, 2009—the date Flume’s 2008 FBAR became due—the UBS account had a zero balance because Flume had already transferred out all his funds. Because the IRS determined he had acted willfully, however, he remained subject to a $100,000 penalty. The case was then brought to court over the issue of willful FBAR penalties.
At trial, Flume’s tax preparers testified that Flume never disclosed the Swiss UBS account to them. They stated they had never seen Wilshire’s general ledgers listing the UBS account balance. They further testified that they sent all their clients, including Flume, a form letter each year reminding them of their obligation to report all foreign bank accounts and financial interests. Since Flume never asked them to prepare an FBAR for him (which would have incurred an additional fee), they assumed he wished to fill the forms out himself, as many of their other clients did.
The Court made the following findings in siding against Flume:
1. Flume’s testimony was not credible. Numerous contradictions within his testimony raised serious doubts about his veracity.
2. In light of Flume’s bad testimony, Flume’s financial structure reflected a sophisticated tax-evasion scheme.
3. The tax preparer’s testimony that they sent Flume an annual reminder of the foreign account reporting requirements was credible.
4. The fact that Flume disclosed his Mexican account on Schedule B of his tax returns suggests that he was aware of the foreign bank account reporting requirement and made a conscious choice not to disclose his Swiss account.
5. Flume did not file any FBARs until right after UBS agreed to turn over its American clients’ records to the IRS.
6. Flume’s testimony at trial clearly established that he acted with extreme recklessness by failing to review his tax returns before signing them.
FAILING TO FILE THE FBAR IS A SERIOUS MATTER
For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you for good.
By Joshua Ashman, CPA & Nathan Mintz, Esq.