Most Americans understand the obligation to file taxes in April of each year.  Most of the criminal tax cases in the United States stem from a taxpayers’ failure to meet that obligation.  Failing to file a tax return can subject a taxpayer to criminal charges for failure to file and other civil penalties.  Filing a fraudulent return likewise has criminal and civil implications.

Filing a tax return is not the only requirement from the federal government each tax year.  The Internal Revenue Code (IRC) and the Finance Code (Title 31) prescribe additional requirements which are often unknown to the average taxpayer.  These obligations are triggered by certain financial backgrounds and often require additional filings to the Internal Revenue Service (IRS) or the Treasury Department.  A failure to fulfill these additional obligations can carry hefty civil penalties and criminal charges.

Many IRS – Criminal Investigations Division (CID) cases start with a discrepancy in the taxpayer’s return.  However, once the investigation begins, the IRS will scrutinize every facet of the taxpayer’s financials.  This includes ownership of foreign assets, foreign bank accounts, and business dealings overseas.  Depending on a taxpayers’ foreign holdings, the federal code can trigger disclosure of foreign accounts under the Foreign Bank Account Report (FBAR) regulation.  Over the last five years, the IRS has increased their focus on the regulatory requirements surrounding the FBAR. This increased focus has made understanding the FBAR requirements, and the penalties involved, imperative for all criminal tax lawyers.

This article will lay out the background of the FBAR regulation, the factors which trigger the FBAR requirement, the criminal and civil penalties associated with a violation, and the willfulness requirement for criminal prosecution.

FBAR Background

The United States is skeptical of all offshore accounts.  These accounts send up red flags for fraud, money laundering, and tax evasion.  In response, the United States Congress has passed various regulations to increase transparency in foreign account holdings.  A main staple of these regulations is the FBAR requirement.  The FBAR requirement has nothing to do with paying taxes to the IRS.  The regulation merely requires taxpayers to disclose certain foreign bank accounts, and levies heavy penalties for a failure to fulfill the obligation.

The FBAR regulation applies to any United States tax resident with a foreign account balance of $10,000 or more at any point during the tax year.  The threshold is determined using an aggregation of all foreign accounts.  This means a taxpayer must add up the total balance of all foreign accounts at every moment during the tax year.  If that total never adds up to $10,000, no FBAR is required.  However, if the total account balances hit or exceed $10,000, even for one minute, a FBAR must be filed to avoid civil, and potentially criminal, penalties.

The ownership of an account is determined by signature authority.  If a tax resident can call the bank and cause the disbursement of funds, they “own” the account for purposes of the FBAR regulation.  A taxpayer who has signature authority on a family or business account would need to file a FBAR regardless of the source of the money.  In addition, joint accounts must be handled correctly under Title 31.  A spouse may fulfill the FBAR obligation by filing a FBAR on jointly held accounts.  However, the other spouse is still required to file a companion form notifying the government of their consent.

Determining whether a FBAR is required, and what forms need to be filed, is an arduous task with many potential pitfalls.  If a United States tax resident has foreign accounts, it is strongly advised they contact a tax professional before filing any forms.

Civil Penalties for Failing to File a FBAR

A taxpayer who fails to file a FBAR as required by statute can incur hefty penalties. If the taxpayer did not know about the FBAR requirement, the government can fine the taxpayer up to $10,000 per violation.  If it is determined a taxpayer acted willfully in failing to file a FBAR, the penalty can be up to $100,000 or 50% of the balance of the account when the violation occurred, whichever is greater.  For example, if a taxpayer has $1,000,000 in a foreign account, and willfully fails to file a FBAR, the taxpayer could owe $500,000 in civil penalties to the government.  Further, if a taxpayer fails to file an FBAR for 5 years, the penalty can quickly grow for even unknowing taxpayers. The civil penalties associated with the FBAR regulation are some of the most punitive in the federal code.

Criminal Penalties for Failing to File a FBAR

The IRC is codified under Title 26 of the United States Code.  The IRC contains numerous criminal provisions which could be triggered by a taxpayers’ failure to file a FBAR.  Notably, failing to submit a FBAR can trigger criminal liability through failure to file under 26 U.S.C. § 7203, tax evasion under 26 U.S.C. § 7201, tax obstruction under 26 U.S.C. § 7212, and tax perjury under 26 U.S.C. § 7206.

In addition to the potential IRC violations, Congress has instituted further criminal penalties under Title 31 – Money and Finance Reporting.  Various sections of Title 31 subject a taxpayer to significant prison time for failing to file a FBAR.  Under § 5322, a taxpayer who willfully violates the FBAR requirement can face up to 5 years in prison and a $250,000 fine.  If the taxpayer willfully violates the FBAR requirement, and does so while violating another federal law, the range of punishment moves to 10 years in prison and a fine not to exceed $500,000.

As with most criminal tax violations, the government must prove the taxpayer willfully violated the statute.  This means a taxpayer must know of the FBAR requirement and choose to not fulfill the obligation.  The definition of willful, and its use in criminal tax, is further explained in a previous post. Often, a knowing failure to report is accompanied by an attempt to hide tax liability from the IRS.  After all, most sane people would not subject themselves to harsh civil and criminal penalties to merely hide their net worth from the government.  A person who is simply not aware of the FBAR requirement should not be prosecuted in criminal court.  The willfulness element aims to separate those filers who are just ignorant of the laws from those who purposefully circumvent United States’ regulations.

Though the intention behind the willfulness requirement makes sense, the intended separation of actors is not always clear cut.  This creates a “gray” area which accounts for the majority of criminal tax cases under the FBAR framework.  Financially savvy taxpayers may be presumed to know of reporting requirements when no such knowledge exists.  Persons who have filed FBARs in the past will have a hard time clearing up accidental failures to file in subsequent tax years.  Taxpayers who innocently forget to disclose foreign accounts to their CPA may run the risk of criminal penalties if a CID investigation digs into their finances.  All of these “gray” area situations may allow the government to impute knowledge of the FBAR requirement to the taxpayer.  If the government believes a taxpayer knew of the requirement, criminal charging becomes a real possibility. The taxpayer could then be in a dog fight to save their financial and personal livelihood.

Conclusion

With the increased focus on foreign transactions, the FBAR regulation has become an integral part of CID investigations and criminal tax work.  These more nuanced, unknown regulations are becoming a more common vehicle for criminal prosecutions.  Taxpayers without help from a knowledgeable tax professional are unlikely to know the finer points of the FBAR provisions.  Without this knowledge, these taxpayers walk on dangerous ground as they navigate the IRC each April.   Taxpayers who seek assistance from professionals, or tax software, are not immune from FBAR violations.  Programs like Turbotax, or even Certified Public Accountants, are only as good as the information they receive.  It is important a taxpayer discloses the existence of foreign accounts when discussing finances with a tax professional.

If a taxpayer forgets to file a FBAR they need to contact a tax attorney immediately.  The government has set up amnesty programs if the taxpayer can catch the mistake before going under federal investigation.  However, if a CID investigation is opened prior to a FBAR correction, there is little assistance from the government.  The taxpayer needs to contact competent criminal tax counsel to help them through the process.  A criminal tax attorney’s first goal is to steer the investigation away from criminal charges (largely on the willfulness element).  If criminal charging is circumvented, then the goal is to protect the taxpayer from the harsh civil penalties and interest which often accompany an FBAR violation.

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