Filing a False or Fraudulent FBAR – What are the IRS Penalty Risks?
False or Misleading FBAR Filing
FBAR Audits are no longer uncommon. This is especially true now that the United States and the IRS in particular has made finding, locating, and penalizing individuals with unreported foreign accounts or offshore accounts a key enforcement priority.
One of the biggest mistakes an individual can make when it comes to reporting foreign accounts is to commit FBAR Fraud, either by intentionally not reporting the accounts, or misrepresenting the accounts on the FBAR.
Common FBAR Audit Issues
At Golding & Golding, our entire tax law practice limited to IRS Offshore Voluntary Disclosure Programs, including FBAR and FATCA representation. We have seen a surge in audits for individuals who have FBAR related issues (primarily by individuals who went at it alone or with a CPA instead of an attorney) and who thought they could get away with a “Quiet” or “Silent” disclosure — only to get caught by the IRS.
These individuals are facing very high fines and penalties, and the following scenarios are some of the most common ways individuals get caught:
Never Filed an FBAR (But Knew About It)
In this scenario, either through friends, family or a possibly tax professional, a person learns about foreign account reporting and specifically the FBAR — they intentionally and willfully do not file the form.
Only Report Some of The Accounts
This has to be one of the gravest mistakes a person can make when it comes to FBAR.
By filing an FBAR and only reporting some of he counts, you are doing yourself a huge disservice. First, you are putting the IRS on notice that you are aware (aka knowledge) of the requirement to report. Second, you are knowingly (aka Willfully) omitting certain accounts — thereby establishing a prima facie case of fraud against yourself.
Lying to Your CPA
These days, most CPAs or tax professionals who handle anything remotely related to international tax have some idea about foreign account reporting. As such (and primarily to cover themselves) they will almost always include information requesting foreign accounts within their questionnaire.
If you received a questionnaire asking you about the foreign accounts but do not complete that portion of the questionnaire (and your CPA is none the wiser), the only person who will get in trouble is you. That is because if you pull the wool over your CPA’s eyes, so that he or she is unaware that you have the accounts (and even if the CPA signs the return) it is the Taxpayer who will get in trouble.
FBAR Penalties Can Be Serious
The following is a real-life case example of what can happen when you get caught in the IRS cross-hairs and were willful or intentional in your non-reporting or mis-reporting.
Be Careful What You Read!
There’s a lot of mis-information on the world wide web. There are numerous rogue individuals who tell people that they have no business filing these forms, and that the government should not have the right to enforce penalties.
They might preface their tirades on the fact that because you reside outside of the United States possibly because you are an accidental American. What happens when you get caught…will these people also be footing the bill for your IRS penalties?
Nevertheless, if the IRS finds you and determines you were willful, your life may be turned upside down. You will experience excessive fines and penalties, the IRS may levy or seize your assets (domestic or abroad), and/or you may lose the right to travel if your passport is revoke.
The following is a summary of one situation we dealt with recently in which a person went down this road, was caught-and is now facing serious consequences.
FBAR Audit Trigger Example – Michael From India
Michael is originally from India. He has numerous accounts in India and was aware of the fact that he was supposed to file the necessary forms. He first came to the United States in 2008 on an H-1B visa.
In early 2009, he was at a dinner party with friends from India, and learned that U.S. individuals (even those on still on Visa and who meet the Substantial Presence Test) are required to file taxes just as any US person would.
Moreover, if Michael had any foreign accounts he was required to report the information on an annual FBAR, as well as report the income.
Myth 1: Offshore Reporting is A New Phenomenon
While FATCA may not have come into existence until 2010, with enforcement in 2014, there have been laws on the books requiring the disclosure of foreign accounts for many years. In fact, FBAR reporting dates back to the 1970s.
Therefore, just because your CPA or Accountant may have just learned about FATCA, you still had a reporting requirement under many other different US laws. In other words, just because FATCA is new, does not make offshore reporting new as well.
Michael’s Tax Professional Knows Less Than Michael
When Michael went to see his tax preparer for the first time, the taxpayer was relatively new. When the tax preparer asked Michael about his income, he never made any reference to foreign accounts, and Michael never volunteered the information to him.
Myth 2 – Your CPA is in IRS Trouble, Not You
In this particular situation, Michael was aware that he had a reporting requirement. The mere fact that his tax preparer did not ask him about foreign accounts does not absolve Michael from liability. In fact, it makes it worse because it clearly shows that Michael was willful, and knowingly did not disclose his foreign accounts or report the income.
Michael’s CPA Learns About Foreign Account Reporting
By 2017 and with the introduction of FATCA, it would be nearly impossible for tax preparers to not have some knowledge (of if at least be aware) of foreign account reporting. In fact, the IRS has made offshore enforcement a key priority, and the exceedingly high penalties are reflective of the IRS’ goal of catching and penalizing individuals.
When it’s time for next year’s tax returns, Michael’s CPA sends Michael a questionnaire asking him to complete all necessary portions. In addition, it asks Michael he had any foreign accounts. Michael does not complete the questionnaire, although he did confirm to the CPA that he received it.
Since Michael did not return the questionnaire (which is not uncommon for clients in general), the CPA presumed that nothing had changed, and continued reporting Michael’s US income based on the information Michael provided to him.
Myth 3 – Michael did not Actually “Lie” to the CPA
This is not true. Aside from making intentional misrepresentations to a tax professional there is the inverse, which is knowingly omitting key information from a tax professional. In other words, because Michael was aware that he had foreign accounts that he should have been reporting, but he never reported them – he is knowingly making an intentional misrepresentation to the tax preparer by proactively omitting the information (aka Willful Omission)
As such, the tax preparer is under false pretenses that Michael does not have any foreign accounts or foreign income, which is why he did not report it on the return.
Michael is Audited/Under IRS Examination
Michael returns home from a long day only to find a certified letter from the IRS. He opens it to learn that the Internal Revenue Service wants to Audit him.
As of now, the Audit has nothing to do with foreign accounts. Rather, Michael (who is a software engineer) also started a side consulting business, and tried to claim some unreimbursed expenses from his W-2 job through his consulting business. This is a typical red flag, and something the IRS frowns upon.
By embellishing his expenses, Michael was hoping to take more deductions through his consulting business than would not otherwise be available as a W-2 employee, which has the net effect of reducing his tax liability.
Michael Receives an IDR for ALL Income and Accounts
About a week prior to start of the examination, Michael’s CPA (who agree to represent him in the audit) receives an IDR – Information Document Request. The request is about five pages, and asks questions including (a now standard question) whether Michael has any foreign bank accounts or other foreign money or income that he did not report.
When Michael CPA goes to confirm with Michael, Michael relents and explains to his CPA that he does have foreign accounts and income. Michael’s CPA is understandably upset, and refuses to represent Michael at the audit. Moreover, now that the CPA will not represent Michael, Michael has to find new representation as well as worry about whether the IRS will ask Michael CPA about Michael’s file.
There is NO ATTORNEY-CLIENT PRIVILEGE with the CPA
We understand individuals make decisions about tax preparation/disclosure in-part based on the fees charged by the tax professional. And, the fees charged by a non-attorney are typically less expensive than an attorney. But that comes at a cost, and with a risk.
The risk being that the IRS has every right to ask the CPA for any documents or other information provided by Michael to the CPA, or by the CPA to Michael. This is a major catastrophe, because now the IRS will learn that the CPA sent Michael a questionnaire that specifically asked whether Michael had foreign accounts, and Michael received it, but did not complete it. This could lead to Michael being held to be willful
On the flip-side, the IRS agent will learn that Michael received this questionnaire but did not return it to the CPA and still signed the return.
Serious Penalties at Stake
The IRS can issue a slew of potential different penalties against Michael, including:
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.
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.
Underpayment & Fraud Penalties
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.
Even Criminal Charges are Possible…
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.