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Archive for FBAR Penalties

Collins Reminds That Corrective Actions Alone Do Not Always Negate Willful FBAR Penalties

Collins Reminds That Corrective Actions Alone Do Not Always Negate Willful FBAR Penalties

As a general matter, the FBAR is not a difficult tax form to prepare, at least for most taxpayers and their tax professionals.  At its very basics, it merely asks for identifying information regarding the taxpayer and certain basic information regarding foreign accounts held outside the United States.  Thus, one would suspect that the failure to timely file this seemingly innocuous information return should not result in significant penalties.

However, tax professionals know better.  Under Title 31, a taxpayer’s willful failure to file a timely and accurate FBAR can result in penalties of up to 50% of the foreign account balances, a penalty that can be applied over multiple years. And because federal courts and the IRS view certain reckless behavior as constituting “willfulness,” the bar for willful FBAR penalties can be a seemingly low one.

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IRS Goes After Holocaust Survivor For Willful FBAR Penalty

IRS Goes After Holocaust Survivor For Willful FBAR Penalty

FBAR Penalties

On March 8, 2022, the Southern District of New York issued its Opinion in the case of United States v. Schik, No. 20-cv-0221 (MKV), 2022 U.S. Dist. Lexis 41148 (S.D.N.Y. Mar. 8, 2022).  In that case, the United States brought a lawsuit against a Holocaust survivor for willful failure to file an FBAR for one year:  2007.  Incredibly, the United States sought to assess the maximum willful FBAR penalty against Mr. Schik—i.e., 50% of the foreign account balance—which would have resulted in close to a $9 million FBAR penalty.  As seems more and more common, the United States moved for summary judgment on the willfulness determination.  This article discusses the Schik case.

FBARs Generally 

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Willful FBAR Penalties And A District Court’s Authority To Remand IRS Willful Penalty Computations

Willful FBAR Penalties And A District Court’s Authority To Remand IRS Willful Penalty Computations

Willful FBAR Penalties

The Schwarzbaum case has received a lot of attention in the last few years from tax professionals.  For example, in 2020, the district court concluded—contrary to some other federal court decisions—that the simple act of signing a federal tax return and not filing an FBAR does not in and of itself constate a finding that there was a willful FBAR violation.  See U.S. v. Schwarzbaum, No. 18-CV-81147, 2020 WL 1316232, at *8 (S.D. Fla. Mar. 20, 2020).  In 2021, after finding that Schwarzbaum’s conduct in failing to file FBARs was willful, the district court granted the government’s motion for an order requiring Schwarzbaum to repatriate millions of dollars of foreign assets to provide security to the government for full payment on the affirmed willful FBAR penalties.  See U.S. v. Schwarzbaum, 128 AFTR 2d 2021-6436 (S.D. Fla. Oct. 26, 2021).  Months later, though, the district court changed course and granted Schwarzbaum a stay of repatriation until after the Eleventh Circuit reviewed the district court’s decision on willfulness.  See here.

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Challenging FBAR Penalties In Federal Court: FBAR Litigation

Challenging FBAR Penalties In Federal Court: FBAR Litigation

In most cases, IRS exam initiates FBAR assessments.  And, after an IRS examiner determines that an FBAR penalty is appropriate, taxpayers are generally afforded pre- or post-assessment appeals rights with the IRS Independent Office of Appeals (“Appeals”).  If Appeals agrees with IRS exam that the FBAR penalty is appropriate, Appeals will either recommend assessment (if a pre-assessment case) or sustain the assessment determination (if a post-assessment case).

But, what happens after the assessment?  The short answer:  litigation.  And as discussed more fully below, this litigation is likely to occur whether the taxpayer wants it or not due to the unique collection procedures applicable to FBAR assessments under Title 31 of the Code.

FBAR Assessments 

United States persons who have a financial interest in or signature authority over one or more foreign financial accounts located in a foreign country with aggregate balances exceeding $10,000 at any time during the calendar year must file a timely and complete FBAR.  If the United States person fails to file a timely and accurate FBAR, he or she can be liable for “willful[i] or “non-willful” FBAR penalties.

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What Is The Difference Between Willful And Non-Willful Conduct For FBAR Penalties: The Hughes Decision Provides Some

Willful And Non-Willful Conduct

FBAR penalties can be steep.  Indeed, under current law, if a taxpayer “willfully” fails to file a timely and accurate FBAR, the taxpayer may be liable for civil penalties of $129,210 per year or 50% of the balance in the accounts at the time of the violation, whichever is higher.[i]  And even non-willful violations—given the 6-year statute of limitations—can add up with civil penalties of $12,921 per year currently.[ii]

Because the amount of FBAR penalties often hinges on whether the conduct was “willful” or “non-willful,” tax practitioners must take careful notice of the distinction between the two when advising their clients of the results of failures to timely file.  Thus, a recent federal court decision out of the Northern District of California is worth a read and provides some helpful insights to tax professionals and taxpayers alike as to how to potentially distinguish between the two types of conduct.[iii]

The Facts of Hughes.

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Do FBAR Penalties Survive Death? A Texas Court Says “Yes”

Do FBAR Penalties Survive Death? A Texas Court Says “Yes”

A federal district court in Texas recently took up an interesting FBAR issue: whether civil FBAR penalties survive death? That is, if a taxpayer/account holder dies after the IRS assesses an FBAR penalty against them, do the FBAR penalties remain against the decedent’s estate?  Or do the penalties die, so to speak, along with them?

The analysis typically turns on a subsidiary question: Are the penalties, for these purposes at least, penal or remedial?  If penal, the FBAR penalties would potentially dissolve at death.  If, on the other hand, they are remedial, maybe not.

FBAR penalties can be notoriously draconian.  If a U.S. person fails to file an FBAR, the IRS can impose a civil monetary penalty.  31 U.S.C. § 5321(a)(5)(A).  The amount of the penalty can vary.  If, for example, the failure to file results from willful conduct, the statute provides for a penalty equal to the greater of $100,000 or 50% percent of the amount of “the balance in the account at the time of the violation.”  31 U.S.C. § 5321(a)(5)(C), (D).

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FBAR Penalties: Another Court Holds That FBAR Penalties Can Exceed The Regulatory Ceiling

FBAR Penalties: Another Court Holds That FBAR Penalties Can Exceed The Regulatory Ceiling

The Report of Foreign Bank and Financial Accounts (i.e., the “FBAR”) was for many years confined to the lonely backwaters of Title 31 of the United States Code—the intriguingly-named Bank Secrecy Act.  For years, compliance levels were abysmal.  But penalties were generally not enforced.  To put the situation in perspective, in the course of more than a decade, you could probably have counted the number of penalties assessed against non-compliant account holders on one hand—maybe, just maybe, two hands—at least according to contemporary reports from the Treasury Department to Congress.

But my how the times have changed.  FBAR penalties are most certainly enforced these days.  Some might argue that they are enforced with a vengeance—a vengeance that is disconnected with the purpose behind the FBAR filing requirement.  Truly, the penalties associated with failing to file an FBAR are among the most punitive civil penalties on the books.

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Federal Court Imposes Willful FBAR Penalties On Long-Time CPA

Federal Court Imposes Willful FBAR Penalties On Long-Time CPA

In a recent decision, a federal district court found that a long-time CPA/tax-return preparer recklessly failed to file FBARs to disclose several foreign financial accounts.  As avid readers of our Insights are aware, many federal courts have found that reckless reporting failures are sufficient to impose “willful” FBAR penalties—and those penalties can be quite signficant.

The case was United States v. Kronowitz.  And it is yet another reminder that courts addressing FBAR reporting failures tend to look critically at the account holder’s background, including educational and professional.  Account holders with tax-related backgrounds or professionals with substantial business experience are often held to a higher standard.

The Foreign Accounts

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Is There Any Way To Avoid Paying FBAR Penalties?

Venar Ayar on FBAR Penalties

You may be able to avoid paying FBAR penalties if you qualify for a delinquent FBAR submission or the Streamlined Compliance Procedures. These voluntary disclosure methods eliminate or reduce your tax penalties while getting you into reporting compliance.

Key Insights We Will Discuss:
The qualifications for a delinquent FBAR submission or the Streamlined Procedures.
The benefits of making a voluntary disclosure.
Other options if you don’t qualify for these offshore disclosure options.

Delinquent FBAR Submissions
A delinquent FBAR submission is the simplest way to correct your failure to file FBARs. However, this option is only available if you meet the following conditions:
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FBAR Non-Willful Penalties Are Real

DARLENE HART

While there has been no official change to the current FBAR penalty rules we laid out in 2015, it should be noted there was a recent court case which has reached an unfavorable result for FBAR Penaltiestaxpayers with regard to potential FBAR non-willful penalties.

In an April 2019 California District Court case (U.S. vs Boyd), the court ruled that while the penalty rules for non-willful failure to comply with FBAR reporting requirements are ambiguous, it agreed with the IRS that it is more appropriate to impose the penalty ($10,000 max for the years dealt with in the Boyd case) on unreported accounts, on an account by account basis rather than per a calendar year penalty. So, rather than a maximum $10,000 penalty for all unreported accounts in a given year, in Boyd, the taxpayer was assessed a $10,000 per account penalty per year of non-compliance.
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Coming to America? Welcome To The Land of FBARs

Green Cards And Taxes

Thoughts From A Conversation About Green Cards And Taxes

The purpose of this is to reinforce some very simple points. I find that people always have more trouble remembering what’s simple.

Moving to America

1. Taxation of income from your remaining “non-U.S. assets”
You will be shocked to find that many of your “foreign assets” will be subject to particularly punitive U.S. taxation.

2. Reporting of your “non-U.S. assets”
If you are moving to America, you are moving from another country. You will very likely retain financial assets and bank accounts in that country. From a U.S. perspective, these assets are “foreign” and therefore a “fertile ground” for taxation and penalties.

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Understand How To Report Foreign Bank And Financial Accounts

IRS LOGO

In a global economy, many people in the United States have foreign financial accounts. The law requires U.S. persons with foreign financial accounts to report their accounts to the U.S. Treasury Department, even if the accounts don’t generate any taxable income. They need to report by April 15 of the following calendar year.

The U.S. government requires reporting of foreign financial accounts because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.

Who Needs To Report

Since 1970, the Bank Secrecy Act requires U.S. persons to file a Report of Foreign Bank and Financial Accounts (FBAR) if they have:

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