FBAR Criminal Investigations
FBAR crimes come in many different shapes and forms. Oftentimes they will include either:
- Failing to file the Annual FBAR
- Filing a False FBAR
- Intentionally Omitting Accounts
- Intentionally Reporting a Lower Balance
You Must Be Willful or Reckless
If you did not file the FBAR or filed it incorrectly, that does not per se make you willful or criminal.
Rather, you must have also acted with Intent, Knowledge or Reckless Disregard. Otherwise, you would probably be considered non-willful, which carried harsh – but not criminal – penalties.
A perfect example of willful/criminal allegations are those alleged in the indictment which was issued against Messrs. Manafort and Gates. In this case, the Government alleges the defendants acted intentionally in failing to report their FBARs, as well as intentionally misrepresenting their ownership of foreign accounts on Schedule B.
FBAR Fraud Crime
Even though there are numerous allegations being alleged against Messrs. Manafort and Gates, we are going to focus on one specific allegation, which is the primary area of law we focus on at our firm – IRS Offshore Voluntary Disclosure, which also includes FBAR & FATCA.
Summary of FBAR Allegations
As you can imagine, government complaints are technical and boring. Therefore, we are going to do our best to summarize each paragraph of the FBAR allegation in order to bring you a better understanding of what the government alleges as to these two individuals — and what the penalties may possibly entail.
**Links in this article to prior articles we have previously authored on the related topic.
U.S. Citizens with Authority over Foreign Bank Accounts
U.S. Citizens (as well as Legal Permanent Residents and Non-Legal Permanent Residents who meet the Substantial Presence Test) have a responsibility to update the U.S. government regarding certain foreign accounts that they may have.
A few things to keep in mind is that U.S. Citizen also includes U.S Persons, and the term “Accounts” is far more detailed than just bank accounts. It may include investment accounts, pensions, mutual funds, etc.
When a person has an annual aggregate total of more than $10,000 over foreign accounts (either as the owner, joint owner, or signatory) they are required to file the FBAR annually online (electronically) – detailing all of the requisite foreign account information.
It does not matter if the money is one account with $500,000, or eight accounts with $1,500 each – once the $10,000 threshold is exceeded, all accounts must be reported.
What is the Purpose of the FBAR?
While most individuals would tell you that the main purpose of the FBAR is as a ways and means for the IRS and U.S. government as a whole to hassle people, the technical rationale for having to file the form is: “The [FBAR] reports filed by individuals and businesses are used by law enforcement to identify, detect, and deter money laundering that furthers criminal enterprise activity, tax evasion, and other unlawful activities.”
Obligated to report information to the IRS (Schedule B)
Schedule B is a relatively common schedule that is filed along with a 1040 tax return.
There are two main purpose is to the form:
-The first purpose is when a person has more than $1,500 in interest or dividends (but no foreign account authority). When a person has less than $1,500 they are not required to identify each specific institution or the amount of the interest/dividend from each institution. But, once a person exceeds the threshold, they are required to parse the total aggregate into an itemized list, detailing the institution, the amount of the passive income, and whether it was interest or dividend.
– The second situation is when a person has ownership or signature authority over foreign accounts during the tax year. It does not matter if the person has ownership of the funds, or mere signature authority — they still must file Schedule B. This is true, even if the person does not have any interest or dividends from U.S. or Foreign Sources.
No FBARs were Filed
Neither Defendant in this indictment filed the FBAR detailing the amount of money they had overseas. Based on the fact that it appears they each had several million dollars abroad, each defendant would have been required to file his own separate FBAR Report for each year his annual aggregate total in the accounts exceeded $10,000.
Schedule B (Foreign Account Ownership) was Misrepresented
In addition, Manafort specifically marked off “No” on schedule B, which asked him whether the person filing the return had any ownership or signature authority over any foreign accounts abroad.
Manafort’s Tax Preparer Asked Him Directly
As you may find from several other blog postings we have prepared, question seven and willfulness are two very important issues when it involves international tax crimes. Sometimes these issues will hinge on whether the Tax Preparer/CPA ever asked the client whether he had or she had foreign Accounts.
Once a person is asked whether they had foreign accounts (especially if asked in writing) and say no, chances are they are going to be found willful (aka criminal). We recently posted a comprehensive article on this very same issue due to the fact that there are many inexperienced offshore disclosure attorneys wrongfully recommending their clients to enter OVDP, even if they marked no on a questionnaire from their accountant CPA – because the attorneys are trying to make a quick buck.
As you can see, there is not much wiggle room when a person asks whether you had foreign accounts in a language you understand, and you answer…no.
As a result of these apparent intentional misrepresentations on the part of defendants, the government is bringing a criminal indictment against them. The penalties against a person who is found willful of these crimes can range upwards to several years in prison as, well as a complete forfeiture of the foreign money. The penalties are less severe when someone is found to be non-willful.
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203).
– Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.
– Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
– A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
– A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
– A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.
– A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
How to avoid a Criminal Investigation?
Even when a person is willful and acted intentionally in failing to report foreign accounts, there is a way out. There is a government program called OVDP, which is the Offshore Voluntary Disclosure Program. A person may qualify for OVDP as long as they submit to the program before they are contacted by the IRS.
OVDP Summary of the Basics
Understanding how the OVDP process works is important to effectively navigating the pitfalls and landmines of the submission process.
In fact, when it comes to OVDP, one of the hardest parts about moving forward is just understanding the process itself, and being able to distinguish fiction from reality.
As such, the four most important aspects of understanding OVDP for our clients are the following:
- What is a preclearance letter?
- What are the penalties associated with OVDP?
- What is a closing letter?
- What is opting out?
In this article, we will provide a summary about the different aspects of OVDP as they relate to these four main issues.
The preclearance letter is the initial submission made on behalf of an applicant considering OVDP. While a person is not guaranteed entrance into OVDP, by submitting the preclearance letter, the IRS Criminal Investigation Department takes the opportunity to run a background check on the individual, estate or business.
What is the Purpose of the Background Check
The main purpose of the background check is to make sure that the individual is not already in tax trouble, or other trouble with the law. Even though the penalties associated with OVDP are high, relative to what could happen if a person was to get examined or indicted on criminal tax related issues involving offshore and foreign income, OVDP is a great deal.
A Preclearance Letter is not technically part of OVDP
This is a bit of a nuance. On the one hand, by submitting the preclearance letter you are opening yourself up to the IRS regarding your foreign accounts, assets, investments, etc. so that they can inspect, research and do their due diligence to determine whether you are authorized to apply.
On the other hand, technically, the preclearance letter is not part of the submission. In other words, feasibly you could submit an OVDP letter and then not move forward with submitting to the formal program, which is the the next step and involves submitting forms 14454 and 14457. Alternatively, if you were to submit the 14454 and 14457 and then discontinue the process, it would be considered a breach of the program and you can find yourself in some serious trouble.
OVDP penalties are broken down as follows:
Penalty on the Assets & Accounts
The penalties are relatively straightforward as follows:
– The applicant will categorize their submission down per year, within the 8-year compliance Period.
– For example, if a person is submitting for 2016 and already submitted their 2016 tax return incorrectly, they will need to amend for eight years-which would mean 2009 through 2016.
– Thereafter, the person will look at each year independently. For example, a person will look at year 2012 and assess which foreign accounts, specified foreign assets or income generating real estate they have for that year.
– Then, for that specific year only, and using the exchange rates for that particular year, the applicant will figure out the maximum balance of each account within that year. The applicant will then aggregate or add the maximum account balances together to calculate the annual aggregate total for that particular year.
– Next, the individual or other applicant will prepare the same analysis for each year within the compliance. Then, the applicant will take only the year that has the highest value and multiply it by one of two numbers:
Account and Asset (FBAR & FATCA) 27.5% Penalty
27.5% penalty is the general penalty amount. For example, as long as the individual was not associated, at all, with a “bad bank” or investor, the individual would multiply the highest balance by 27.5%. So David’s highest year had $500,000 of unreported accounts and assets, his penalty amount would be $137,500.
Account and Asset (FBAR & FATCA) 50% Penalty
The IRS publishes a list (updated periodically) of foreign financial facilitators, which includes individual investor “professionals” and foreign financial institutions. If any of the applicant’s money (even minimal) is invested with one of these “bad banks,” then the entire amount of unreported money (for all institutions, assets, etc.) is multiplied by 50% instead of 27.5%.
Therefore, continuing the example from above, if David had any money in one of these bad banks, and the penalty jumps to 50% for $250,000. It should be noted, that the IRS does not parse out the funds that are in that that bank and only expose those to the heightened penalties – rather, the full amount of unreported money is subject to the 50%.
Penalties on Taxes
Beyond the penalties associated with the undisclosed assets, accounts or investments — are the penalties on the taxes that are due. For example, let’s say David had $10,000 of unreported income in year 2012 and was subject to a nearly 40% tax rate.
In that year, in addition to the penalties identified above, David would also have to pay $4000 in taxes that are due, as well as a 20% penalty on the $4000, which is an $800 penalty. In addition, David also has to pay interest.
So if David has significant unreported income for each year and a compliance, David may have significant taxes, penalties, and interest amount due.
**In addition, if David did not file or pay his regular taxes (for example, David was required to but never filed a tax return for year 2012), David would also have to be subject to a possible failure to file and failure to pay penalty.
Closing Letter (906 Letter)
Typically, within one to three years from the beginning of the submission, this monstrosity comes to an end. As a result, the Internal Revenue Service will send the applicant a 906 closing letter.
By submitting a signed closing letter back to the Internal Revenue Service, the applicant has acknowledged the penalty, and agrees to everything the IRS has required from him or her in the submission.
Presumably, once the closing letter is signed, the IRS puts the matter to rest. This has many benefits for our clients who might’ve waffled between the streamlined program and OVDP, but had the following issues:
- Avoiding a criminal investigation
- Avoiding further audits or examinations on these international related issues
- Usually avoiding a future audit on tax matters involving the same unreported money for years prior to the year compliance period.
- IRS Acceptance of the Mark-to-Market election
- Much smaller likelihood that the IRS will contact any other foreign countries in which the taxpayer may have also failed to pay tax.
In other words, for all intents and purposes — the matter is over.
For some people, the chances of going streamlined and being taken to task on willful versus non-willful is too much to bear. At the same time, the thought of paying a 27.5% penalty or 50% penalty solely because they were risk-averse against submitting a streamlined application when the IRS still refuses to publish a clear-cut definition of the term willful is absurd.
As a result, instead of signing the closing letter the applicant agrees to opt-out. In an opt-out situation, the applicant still maintains the opportunity to stay “protected” under the program. At the same time, the taxpayer disagrees with the penalty amount and would rather allow the Internal Revenue Service to audit him or her in order to try to get the penalty reduced.
Oftentimes, the IRS may reduce the penalty depending on the facts and circumstances presented by the taxpayer. But, it has to be noted and considered that the IRS can also increase the penalty.
Nevertheless, the mere fact that the IRS may issue higher penalties (which is not common when the facts support the taxpayer’s opt out position) should not be enough to dissuade the taxpayer from an opt out when they firmly believe they can achieve a better result.
Even the IRS has published memoranda wherein the IRS provides that for some individuals the penalties are absolutely lopsided and and opt-out should not be held negatively against taxpayer.
OVDP and IRS Offshore Voluntary Disclosure
Please feel free to visit our International Tax Library to research other topics we have written about.
In addition, if you’d like to read a more comprehensive summary regarding the different programs you may find our IRS offshore voluntary disclosure program options summary helpful to you.