Enhanced FBAR Penalty for Incomplete Offshore Disclosure Submission
Offshore Disclosure is the process of getting into compliance with the IRS for foreign account reporting.
If a Taxpayer disagrees with the Offshore Voluntary Disclosure penalty (or grows tired of his or her inexperienced and incompetent attorney) the taxpayer cannot just stop, cold turkey.
The OVDI applicant still has to finish the process, even if it means submitting an OVDP Opt-Out.
One thing the Taxpayer cannot do is leave the IRS hanging.
Mr. Howard Bach left the IRS hanging, and learned this the hard way.
U.S. vs. Howard Bach (Background)
Howard Bach had foreign accounts, but did not properly report all the accounts on the FBAR.
Therefore, he had knowledge of the FBAR, and knew he was required to file it — but intentionally did not file the FBARs.
This will typically lead a client into becoming willful.
Howard Bach is a United States citizen who resides in Laredo, Texas.
Bach has at least three foreign financial accounts, which at one time were jointly owned with his late wife, Carol Bach.
For the years 2003 – 2010, Bach disclosed his interest in the ZKB account, timely filed FBARs for the ZKB account, and interest income therefrom was reported on the Bachs’ U.S. income tax returns.
Accordingly, the penalty assessments described below do not include amounts from this account.
Bach did not, however, disclose his interest in the BNP Paribas Account or the securities retirement account at Lienhardt & Partner on an FBAR, or his U.S. income tax returns.
OVDI (Offshore Voluntary Disclosure Initiative)
OVDI was the predecessor of OVDP, which was used to report foreign account as a type of Offshore Amnesty program.
Bach entered into the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”) program on August 11, 2011. Bach was accepted into the OVDI program on October 24, 2011.
Bach Never Completed the OVDI Program
Pursuant to Bach’s involvement in the 2011 OVDI program, he was issued a Closing Agreement (Form 906). However, Bach did not sign the Closing Agreement.
Bach was removed from the OVDI program on November 20, 2014.
Bach was notified of his removal from the program on Letters sent on May 6, 2015, and July 21, 2015, but he did not respond to these letters.
The IRS Alleges Bach was Willful
The IRS believes Mr. Bach’s actions were willful, here’s why:
For the years 2003 through 2010, Bach filed a Schedule B with his original federal income (Form 1040) tax return, and checked “Yes” in regards to having a financial interest in or signature authority over a financial account located in a foreign country. As such, Bach had knowledge the requirement to disclose foreign bank accounts.
However, Bach only reported amounts for his ZKB account, and only listed Switzerland as the foreign country where the financial account was located.
Bach omitted both the BNP Paribas account, and the Lienhardt & Partner account on this Schedule B. Bach further omitted that he had an account in France. Bach did not file an FBAR for the BNP Paribas account or the Lienhardt & Partner account.
On information and belief, Bach only provided information regarding the ZKB account to his tax return preparer, and did not provide information on the BNP Paribas account, or the Lienhardt & Partner account
Willful Penalty for FBAR
Willful penalties for incomplete FBAR can be intense:
31 U.S.C. § 5321(a)(5) provides for the imposition of civil penalties for a willful failure to comply with the reporting requirements of Section 5314 – i.e. when the person(s) maintaining a foreign account fails to timely file an FBAR reporting that account despite having an obligation to do so. For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed is 50% of the balance of the account at the time of the violation or $100,000, whichever is greater. 31 U.S.C. § 5321(a)(5)(C)(i). 26.
The IRS may also abate part of the FBAR penalty, such that the penalty imposed may be less that the 50% account-balance maximum.
On June 20, 2016, due to Bach’s willful failure to timely file FBARs reporting his financial interest in the BNP Paribas and Linehard & Partner accounts, a delegate of the Secretary of the Treasury assessed penalties against him pursuant to 31 U.S.C. § 5321(a)(5).
As of May 26, 2017, the total outstanding balance consisting of the FBAR penalties, penalties for late payment under 31 U.S.C. § 3717(e)(2) and interest, is $853,119.20.
Use an Experienced Offshore Disclosure Specialist
Had Mr. Bach retained a specialist, he may have been able to reduce his penalty in OVDI by way of opt-out. Instead, he is now subject to higher penalties than he would have had to pay if he completed the program, or successfully opted out.]
Golding & Golding, Board Certified in Tax Law
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.