FBAR Penalty over $100,000 Allowed for Multiple Penalty Assessments

In  a recent case relate to the penalties for non-reporting of foreign accounts under the FBAR, the United States District Court for the Central District of California sided with the IRS related to the application of the FBAR penalty assessment. The case is cited at United States v. Shinday, No. 2:18-CV-06891-CAS-EX (C.D. Cal. Dec. 3, 2018).

 

Statutory Framework for FBARs

Pursuant to 31 U.S.C. § 5314, United States citizens must “report certain transactions and relationships with foreign financial agencies.” The implementing regulations, promulgated by the Department of the Treasury, require that “[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists . . . .” The regulation further specifies that United States citizens must report to the IRS, no later than June 30 of each calendar year, foreign financial accounts exceeding $10,000 maintained during the previous calendar year. Id. ¶ 6 (citing 31 C.F.R. § 1010.306(c)).

Taxpayer's Foreing Bank Account Background and FBAR Filings​

From the record, the Taxpayer had multiple transactions with the foreign bank account. The record provides that the Taxpayers owned a bank account at UBS UBS AG (“UBS”), a bank in Switzerland, in 1998 with an initial deposit of $5,000. Taxpayers  arranged transfers into and out of the account, and before 2002, provided instructions to UBS to use defendants’ account to purchase and sell securities and currencies. Additionally, defendants frequently transferred money from their account to their relatives.  The government alleges that in 2002, UBS prepared a memorandum indicating that defendants asked UBS whether Nila’s brother could withdraw $50,000 of defendants’ funds from UBS’s London branch without it being reported. Id

IRS Penalty Assessed on Failure to File FBARs

The IRS assessed multiple penalties against the Taxpayer for the failure to file FBARs to report the foreign bank accounts. First, the  IRS assessed non-willful FBAR penalties against Nila for the tax years 2007 to 2011. Each penalty was $10,000, totaling $50,000. The government alleges that on or about August 23, 2016, the IRS also assessed willful FBAR penalties against Money for the tax years 2007 to 2011. The aggregate amount of the penalty was $257,888, which represents 25% of the combined 2006 year-end balance of defendants’ UBS and SBI accounts, equaling $1,031,548. This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011.

Legal Discussion on FBAR Penalty

Defendants argue that the government’s claim to reduce Money’s penalty assessments to judgment must be dismissed because the government has assessed penalties totaling $269,839, which exceeds the $100,000 penalty cap established by 31 C.F.R. §1010.820. The Court disagreed, and sided with the IRS. The Court reviewed cases cited by the Taxpayer whereby the FBAR penalty in excess of $100,000 was disallowed. In those cases, as discussed by the court, the FBAR penalty related to a single tax year. Here, unlike the cases cited by the Taxpayer's attorney, the penalty was assessed on multiple years, allowing the assessment in excess of $100,000. 

This case continues to show the importance of Taxpayers understanding their duty to file FBAR to report foreign bank accounts. Taxpayer's that are not compliant will be wise to become compliant. Programs, such as the Streamlined Offshore Filing Procedure and a new Voluntary Disclosure Program announced by the IRS can help mitigate potential civil penalty exposure. Taxpayers should consult an international tax attorney to discuss options available. 

IRS CIRCULAR 230 NOTICE: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY ATTORNEYS AT HARLOWE & FALK LLP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

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International Tax

A BLOG BY MEHRDAD GHASSEMIEH

Partner at Harlowe & Falk LLP

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