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FBAR Criminal Penalties (2018) – Civil FBAR vs. Criminal FBAR Penalty

FBAR Criminal Penalties (2018) – Basics of Civil vs. Criminal FBAR Penalty

FBAR Criminal Penalties (2018) - Basics of a Civil vs. Criminal FBAR Penalty (Golding & Golding)

FBAR Criminal Penalties (2018) – Basics of a Civil vs. Criminal FBAR Penalty (Golding & Golding)

Unfortunately, some attorneys are intentionally manipulating and twisting how the FBAR laws work when presenting information to clients, in order to make the penalties seem worse than they are, in most situations.

FBAR Scare Tactics

You may see these attorneys advertising the following:

  • “Unfiled FBARs are a Criminal Offense, and you will be fined $500,000.”
  • “Unfiled FBARS will get you 5 years in Jail.”

There are half-truths. These attorneys are making it appear that by not filing an FBAR, you’re going straight to jail for five years and fined $500,000.

Reverse FBAR Scare Tactics

On the other end of the spectrum, other attorneys will tell you that even if you were willful in not filing FBARs (and/or other international information returns) for just a year or two, you can still submit to either the streamlined program or reasonable cause – both which require an element of “non-willfulness” – to get into compliance. They do not tell you that if you get caught lying or misrepresenting your “non-willfulness” in a Streamlined or Reasonable Cause submission, you may then end up being criminally prosecuted by the DOJ.

This is a serious problem designed by unethical attorneys. For a case study on how they sell you on FBAR Streamlined when you know you were willful (and other scams to watch out for), please click here: How to Hire an OVDP Tax Lawyer and Avoid OVDP Tax Scams.

Article Summary

This article can be summarized as follows: While Civil FBAR Willful penalties can be extraordinarily high, and the burden of proof is a mere preponderance of the evidence, simply being found liable for civil Willful FBAR Penalties, does not make you guilty of an FBAR crime and/or subjecting you to jail or prison. In order for the government to pursue criminal penalties for willfulness, they have to prove beyond a reasonable doubt in a criminal proceeding.

What is an FBAR (FinCEN 114)?

The FBAR is the Report of Foreign Bank and Financial Account Form. We have written countless articles on matters involving FBAR related issues, but at its core, the FBAR it is a form that is filed electronically each year on the FinCEN department website, by any person who has more than $10,000 in annual aggregate total in foreign accounts.

It does not matter if it is one account or if the money is spread over multiple accounts, and it does not matter if the money belongs to you or somebody else of which you have signature authority.

FBAR Non-Willful

Briefly, if a person was non-willful, then there is no crime. In order to prove a crime you have to prove intent or some form of intent. While even non-willful penalties can be much higher than anyone anticipated for simply negligently failing to report an FBAR – the non-compliance is not criminal.

And, oftentimes there are procedures such as delinquency procedures, reasonable cause, or streamlined procedures, which may reduce or eliminate penalties

Section 31 U.S.C. § 5321 – Civil Willful Penalties

Section 5321 involves civil FBAR penalties, and makes the distinction between willful and negligence/non-willful with respect to the monetary penalties that can be issued for an FBAR Willful violation.

It should be noted that in the civil arena, a person cannot be found guilty and sent to prison. Rather, if the IRS or US government wants to enforce criminal penalties, they would have to pursue criminal procedures, and seek an indictment or criminal complaint – which is a major process.

Civil Willful Violations

In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314

(i)the maximum penalty under subparagraph (B)(i) shall be increased to the greater of;

(I) $100,000, or

(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

(D) Amount.—The amount determined under this subparagraph is—

– in the case of a violation involving a transaction, the amount of the transaction, or

– in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation

Section 31 U.S.C. § 5322 – Criminal Willful Penalties

The criminal penalties for willfully not filing the FBAR are intense, and are as follows:

(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.

(b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.

(c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues.

(d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.

FBAR Criminal Willful Penalties – Beyond a Reasonable Doubt

If a person is being charged with a crime, and their freedom is at stake, the burden to provide guilt increases, so that the US government must show that beyond a reasonable doubt they have willfully violated the law, and they must be charged in a criminal procedure.

FBAR Civil Wilfulness – Prepronderance of the Evidence

On the other end of the spectrum, in order for the IRS to issue willful civil FBAR penalties that are civil in nature (aka, Monetary penalties but no jail or prison) – despite the sheer amount of the penalty – the US government only has to show preponderance of the evidence.

While there is no specific quantification of each standard of proof, preponderance of the evidence is the lowest standard and is typically quantified at more than 50%, as opposed to beyond a reasonable doubt that is typically quantified at 95%.

Why is the Civil FBAR Willful Standard so Low?

That is a very good question in fact, even the own IRS chief counsel believed that the standard of proof would be clear and convincing evidence – which is in the middle, and typically quantified at around 75%.

Chief counsel reached this conclusion because the FBAR Willful Penalties are similar to civil tax fraud and in order to prove civil tax fraud the U.S. government must show clear and convincing evidence.

In the cases to date that have analyzed civil FBAR Penalties, and found that the lower preponderance of the evidence is the proper standard, then all surmised that no matter how much money you may owe for FBAR Willful penalties… It is just money.

Reckless Disregard (Civil vs. Criminal)

This issue was recently summarized very will in the case of In Re Garrity:

The Supreme Court explicitly acknowledged in Safeco that “[i]t is different in the criminal law. When the term ‘willful’ or ‘willfully’ has been used in a criminal statute, we have regularly read the modifier as limiting liability to knowing violations . . . . Civil use of the term, however, typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.” 551 U.S. at 57 n.9.

Defendants concede that numerous courts have found that willfulness in the civil FBAR context includes reckless conduct. (ECF No. 106 at 11.)

  • See United States v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012)
  • United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017)
  • United States v. Katwyk, No. CV 17-3314-GW, 2017 WL 6021420, at *4 (C.D. Cal. Oct. 23, 2017)
  • Bedrosian v. United States, Civ. No. 15-5853, 2017 WL 4946433, at *3 (E.D. Pa. Sept. 20, 2017)
  • United States v. Bohanec, 263 F. Supp. 3d 881, 888-89 (C.D. Cal. 2016)
  • United States v. Bussell, No. CV 15- 02034 SJO, 2015 WL 9957826, at *5 (C.D. Cal. Dec. 8, 2015)
  • United States v. McBride, 908 F. Supp. 2d 1186, 1204 (D. Utah 2012)
  • United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311

Defendants cite no case in which a court has held to the contrary. Rather, despite the clear distinction the Supreme Court has drawn between willfulness in the civil and criminal contexts, the cases Defendants principally rely on are criminal cases.

As the Supreme Court has made clear, those criminal cases do not control this case.

What is the Court Saying as to Reckless Disregard?

While this is not a Supreme Court ruling, the court is making the distinction between civil and criminal willfulness. And, in order to prove criminal willfulness, just proving ‘reckless disregard’ would be insufficient (since it lacks “intent”), but the same is not true for civil willfulness, in which clear “intent” is not required.

In order to prove civil willfulness, the U.S. Government need not prove intent — which is why “reckless disregard” is sufficient to prove civil willfulness.

Avoid Harsher Willful Penalties with IRS OVDP

If you know you acted willful, you may consider entering into the traditional OVDP “program” before it’s too late. That is because traditional OVDP is ending on September 28, 2018, and the IRS is not put in place any new program.

While there is a traditional disclosure program that has been on the books for many years, it has its own pros and cons and is different than OVDP.

IRS Offshore Penalty List

A Penalty for failing to file FBARs

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

FATCA Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

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 

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.

What Brad Could have Done

Once Brad realized he had made some mistakes with his tax return, he could’ve easily gotten into compliance. That is because at that time he had not acted intentionally, and therefore would presumably qualify for the streamlined program.

Moreover, depending on when he learned about the reporting requirement, he may have qualified for the Streamlined Foreign Offshore Procedures, and avoided all fines and penalties.

Unfortunately, by knowingly, willfully or recklessly continuing to file tax returns improperly and intentionally not including the foreign accounts and income on his tax returns, Brad is now willful, and may suffer extensive fines and penalties.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Summary of IRS Offshore Voluntary Disclosure

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

What To Look For in an OVDP Attorney?

There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure. 

You will want to make sure you use an OVDP Attorney who has:

  • Litigation Experience
  • IRS Audit Experience
  • At Least 15-20 years of Attorney Experience
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.

Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.

Alternatively, once you are in OVDP, you may want to:

  • Make an MTM Election
  • Opt-Out
  • Argue a FAQ 55 Penalty Reduction

As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.

Contact us Today, We can Help You!