Don’t Forget those FBARs (aka FinCEN 114)

FBAR stands for Foreign Bank Account Report. It must be filed by “U.S. persons” if the person has an interest in, or signatory authority over a foreign financial account, and the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. An FBAR is authorized pursuant to Title 31 of the Bank Secrecy Act, which is not part of the Internal Revenue Code. The FBAR is due on June 30th. Since it is not filed under the Internal Revenue Code it must be RECEIVED by the IRS on or before June 30th.

There are both civil and criminal penalties for failure to file. The criminal tax penalties can result in a fine of not more than $ 250,000, or five years in prison, or both. 31 U.S.C. 5322(a).   In addition to criminal penalties there are civil penalties – particularly a three tier system for these civil FBAR penalties. For willful violations occurring after October 22, 2004, the maximum civil penalty is the greater of $100,000, or 50 percent of the balance of the account at the time of the violation. 31 USC 5321(a)(5). Furthermore, for each year the FBAR is not filed the penalty can be imposed again. Therefore it is quite possible for the maximum FBAR penalty to be several times the balance in offshore accounts.

Many of us have the perception that the DOJ goes after the “big fish”. So unless there are tens of millions of dollars at stake, we can fly under the radar. This is not necessarily the case. The net worth of the taxpayer is not disclosed but according to a DOJ Tax Press Release this week: “Christopher B. Berg of Portola Valley, Calif., was sentenced yesterday to one year and one day in prison to be followed by three years supervised release.” See press release here.

Furthermore –

• Berg paid restitution to the Internal Revenue Service (IRS) of more than $250,000
• As well as a penalty of $287,896 for failure to properly report his foreign account.

According to court documents, Berg began working as a consultant in 1999. In 2000, Berg met with Beda Singenberger, a Swiss financial consultant, and a vice president of banking at UBS in San Francisco regarding setting up a bank account at UBS in Switzerland to shelter a portion of his consulting income from taxation. Beginning in 2001 and continuing through 2005, Berg used wire transfers to deposit $642,070 in earned income into UBS accounts. Berg used money in these Swiss UBS accounts to purchase a vehicle, to obtain cash while in Europe and to pay the balance on a Eurocard he used while traveling in Europe. Berg did not disclose the existence of his accounts at UBS in Switzerland to his certified public accountant, and also failed to disclose the income earned by these accounts or the consulting income deposited to the accounts. The tax harm associated with Berg’s conduct exceeded $250,000.