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Court Finds Couple Willfully Failed To File FBAR



Ephraim Moss

If you thought FBAR penalties were more bark than bite, a recent U.S. District court case is sure to change your mind.

In United States v. August Bohanec et ux, USDC CD Ca., No. 2:15-cv-04347 (December 2016), the Court found that the taxpayer’s failure to file the FBAR was willful and affirmed the IRS’s enhanced FBAR civil penalty, i.e., a fine equal to the greater of $100,000 or 50% of the balance in their unreported accounts.

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.

FBAR Penalties

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 Bohanec Case

In the Bohanec decision, the taxpayers were a California couple who for many years held Swiss UBS accounts, as well as other foreign bank accounts in Austria and Mexico, and failed to report the accounts on their FBARs. The couple actually attempted to come clean by applying for amnesty through the IRS’s OVDP program. The IRS rejected their application because they in fact did not include all of their accounts in their disclosure submission.

The Court addressed whether the couple’s failure should be considered “willful” for purposes of imposing the enhanced FBAR penalty. Interestingly, in contrast to the IRS’s past advice that “willfulness” should be defined more narrowly as “having knowledge and specific intent,” the Court accepted the broader definition of being “at least recklessly indifferent to a statutory duty.”

The couple was found by the Court to be so reckless due to the fact that they were sophisticated as businesspeople, but they never provided their bank with their home address (in the U.S.), and never told anyone other than their children of the existence of their account, including the tax preparers that they hired to help them file tax returns. The Court found that the couple should have known better, and simple communication with a lawyer, accountant, baker, or other professional about their foreign accounts would have alerted them as to their need to report them to the U.S. government.

Failing to File 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.

Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

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