In a rather swift and harsh judgment, the Ninth Circuit Court of Appeals affirmed a lower court’s decision in favor of the IRS, which assessed an approximately $1.2 million penalty against a taxpayer for failing to disclose her financial interests in an overseas account.
The decision, U.S. v. Bussell, is noteworthy for two reasons. First, it shows the magnitude of penalty that can be reached, even with respect to an individual and a single foreign account and tax year (in this case, the relevant tax year was 2006). Second, it shows the type of taxpayer arguments that courts will likely reject when reviewing an FBAR penalty case.
THE FBAR REQUIREMENT – A QUICK BACKGROUND
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year. The FBAR form (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”).
For tax years 2016 and onwards, the FBAR due date is April 15th, with a maximum extension of 6 months.
A “non-willful”’ failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year. The IRS has recently stated that these penalties represent maximum amounts and lower penalties may be appropriate depending on the circumstances.
A “willful” failure to file may be subject to civil penalties equal to the greater of $100,000 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.
THE BUSSELL CASE
While the Bussell decision does not describe exactly how the IRS calculated its $1.2 million penalty, it does conclude that Ms. Bussell willfully failed to disclose her foreign account, which may explain the high penalty amount. It also mentions that the taxpayer had previously been criminally charged for concealing financial assets in 2002, so her background may have influenced the IRS and Court decision.
The arguments that were rejected by the Court include:
- the penalty against her violates the Eighth Amendment Excessive Fines Clause
- the government violated the statute of limitations by failing to bring its claim earlier (the government did in fact file suit within the 6-year period)
- the assessment against her violated her due process rights because the government could have brought the claim against her earlier
- she received multiple punishments for the same underlying offense
- the IRS abused its discretion in calculating the penalty amount
- the introduction of banking evidence at the district court violated an international treaty between the United States and Switzerland
FAILING TO FILE IS A SERIOUS MATTER
As recent case law demonstrates, not filing your FBAR is a misstep that can quickly get out of hand if not dealt with properly. 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 with FBAR fillings and 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.
Have a question? Contact Ephraim Moss. Comments are always welcome!