Zwerner Answers DoJ Efforts To Collect Multiple 50 Percent Civil FBAR Penalties

U.S. taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to analyze and seek advice regarding the most appropriate methods of coming into compliance with their U.S. filing and reporting obligations. Many are pursuing participation in the current IRS offshore voluntary disclosure program (the OVDP which began in 2012), modeled after similar programs in 2009 and 2011. Taxpayers participating in the ongoing 2012 OVDP generally agree to file amended returns and file FBARs for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an "FBAR-related" penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years.

Under the 2009 OVDP, the FBAR-related penalty was 20 percent and under the 2011 OVDP the FBAR-related penalty was 25 percent of the highest account value during the prior six tax years. The 2012 OVDP is ongoing and does not have a stated expiration date but it can be terminated by the IRS at any time either entirely or as to specific classes of taxpayers.

Quiet Disclosures. There remain viable alternatives to the OVDP, including the voluntary disclosure practice of the IRS set forth in Internal Revenue Manual 9.5.11.9 [see Example 6(A) – a letter from an attorney which encloses timely amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns) and which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full), Section 4.01 of the Criminal Tax Manual for the U.S. Department of Justice, and Section 3, Policy Directives and Memoranda, Tax Division of the U.S. Department of Justice. These practices and policies provide protection from a criminal investigation and prosecution but do not determine the outcome of any civil examination proceedings.

Despite various potential risks of not coming into compliance through the OVDP, some continue to disclose their offshore accounts outside the OVDP in a "quiet disclosure" by simply filing amended income tax returns for all or some of the tax years otherwise covered by an offshore program, and report previously unreported income – whether such income is associated with the previously unreported accounts or otherwise. At the same time, taxpayers attempting a quiet disclosure typically file late Forms 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), if they had not previously filed FBARs, or amended FBARs, if they had, to disclose the previously unreported offshore accounts.

BSA Filing Requirements. Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the United States must file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by noting the account on their income tax return and by filing the FBAR. Civil penalties for willful failure to comply with the reporting requirements of Section 5314 can be imposed under 31 U.S.C. § 5321(a) (5). For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed under Section 5321(a) (5) is the greater of $100,000 or 50 percent of the balance in an unreported foreign account, per year, for up to six tax years.