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Failed to Report Offshore Accounts -- Call an FBAR Attorney for Help

What is an FBAR Attorney?

An FBAR Attorney is someone who can help you to come into compliance with a series of offshore reporting requirements administered by the IRS.  An FBAR is a Report of Foreign Bank and Financial Accounts (“FBAR”), now reported on FinCEN Form 114.

FBAR ISSUES ARE SERIOUS

Why do you need an FBAR Attorney?  Glad you asked.  FBAR problems are serious.  The FBAR requirements mean that you need to file FinCEN Form 114 if the aggregate value of your foreign financial bank accounts exceeds $10,000 at any time during the calendar year.  The FinCEN Form 114 must be electronically filed with the Department of the Treasury on or before June 30 of the year following the calendar year being reported.  There are no exceptions.

Let’s say you have $100,000 sitting in an account overseas that has been there for the past 5 years, which has never been reported to the IRS.  What will happen if you do nothing?  The penalty is $10,000 for each non-willful violation and where a person willfully fails to file an FBAR, the IRS may impose a penalty equal to the greater of $100,000 or 50 percent of the account’s highest balance.  There are also criminal penalties of $250,000 and 5 years in federal prison.  The IRS can impose both civil and criminal FBAR penalties and can can impose the penalties for each year the violation occurred!  Yikes!

ASSERTION OF MULTIPLE FBAR PENALTIES FOR MULTIPLE YEARS

One case that illustrates how bad the FBAR penalty can get is U.S. v. Carl Zwerner.  Carl Zwerner had millions overseas in foreign bank accounts.  In U.S. v. Carl Zwerner, Civil Docket Case #1:13-cv-22082-CMA, a Federal District Court in Florida determined, after a full jury trial, that Carl Zwerner knew about his FBAR reporting requirements and willfully failed to disclose the foreign accounts.  All told, Carl Zwerner had $1.4 million overseas.  The penalty for the four years in question, calculated at the 50% rate, would amount to about $700,000 per year or a total of about $3 million!  That is about a 200% penalty.  The IRS ultimately settled for $1.8 million!  These are not small numbers.  Carl Zwerner paid more than the aggregate value of the highest value for these accounts in total penalties.  And you could too.  Which is why it is important to have a competent FBAR Attorney assist you with coming into full compliance and negotiating with the IRS.

Interestingly, arguments were made prior to settlement that the fines may violate the constitutional prohibition against excessive fines contained in the 8th Amendment to the Constitution contained within the Bill of Rights.  The issue has yet to be litigated in the Supreme Court of the United States.  In the past, the Supreme Court has stated that a fine is “excessive” under the Constitution if it “amounts to a deprivation of property without due process of law.” Waters-Pierce Oil Co. v. Texas, 212 U.S. 86 (1909).  That case involved a daily fine of $5,000 for a total fine of $1.6MM for ongoing antitrust violations.  The optics are also an issue, where that case involved a 300 day trial and an absolute refusal to admit to wrongdoing by Waters-Pierce Oil Company.  Commentators note that where the Congress passes laws and sets up a process whereby police action and a fine/taking of property follows an established set of rules, together with the right to a hearing and other due process protections, it will be facially valid.

In another seminal Supreme Court decision, the Court found a fine violated the 8th Amendment prohibition on excessive fines.  In  United States v. Bajakajian, 524 U.S. 321 (1998), Mr. Bajakajian tried to leave the United States with a large sum of money in violation of a provision that he was required to report any funds in excess of $10,000 to Customs and Enforcement.  To be specific, Mr. Bajakajian tried to leave with $357,144 in cash.  Why did he have so much cash on hand?  He was using the funds to repay a debt.  So there was no illicit or illegitimate reason for bringing the money overseas.  Bajakajian was initially targeted and approached at an airport boarding a plane, ostensibly, because he was a Syrian-American, raising possible 4th Amendment problems.  A money-sniffing dog ((*yes, you read that correctly)) alerted to Mr. Bajakajian’s carry on, and he initially denied having the cash on hand, raising the suspicion level of authorities at the airport.  But, who was Bajakajian?  A simple gas station owner who had borrowed the money from a family member to start his business, and after a small measure of success, was bringing money home to pay back the loan.

As I discuss the interplay between Bajeakajian and Zwerner, I would note that this particular Supreme Court case is one of the more interesting cases taught in law school.  Anyone interested in digging deeper into the facts can refer to this web link -- http://www.jamesblatt.com/documents/NewsArticles/USvBakaminjianArticles.pdf

Obviously, there are many reasons to limit the ability to take cash out of the U.S. without reporting it.  Expatriating cash may signal a violation of any number of laws, from money laundering, tax evasion, to narcotics trafficking, etc.  But, it can also be for an entirely innocuous reason, like making an investment overseas, or, as in Bajakajian’s case, the repayment of a loan.  Certainly, traveling with large amounts of cash is out of vogue, and inherently unsafe, but some people are old fashioned and don’t trust the banks.  18 U.S.C. § 982 provides for the forfeiture of property involved in or traceable to any other federal criminal offense, including non-reporting of a sum over $10,000 being taken out of the country.  So, when Mr. Bajakajian was caught, the U.S. confiscated the full $357,144 of cash he had on hand. 

The case proceeded up to the U.S. Supreme Court, where Justice Thomas delivered the opinion of the court, determining that confiscation and seizure of the full $357,144 was “grossly disproportional” to the gravity of the offense.  Excessiveness then is tied to proportionality.  A proportional fine or penalty is not excessive, and a disproportional fine or penalty is excessive.  Why use this additional language?  One, a lot of Circuit Courts adopted tests using the “proportional” anchor.  Two, the word “excessive” implies that a punishment must be appropriate to or proportional to the crime involved.  Three, the proportionality term is in Webster’s dictionary as part of the definition of excessive punishment, which defines excessive as “beyond the normal measure of proportion.”  Thus, in the case of Bajakajian, he may have violated the law, but there was no deeper criminal activity afoot, and the appropriate or proportional punishment for a civil/criminal offense of failing to comply with a reporting requirement was something less than a complete confiscation of hundreds of thousands of dollars. 

The Court stated that this was “solely a reporting offense.”  The proceeds were lawfully obtained and were to be used to pay back a lawful debt.  Bajakajian was not the type of bad actor or a part of the class of persons the civil/criminal forfeiture laws were specifically designed to target.  As Justice Thomas noted, “He is not a money launderer, a drug trafficker, or a tax evader.”  Indeed, the maximum fine for his crimes was $5,000 and the maximum sentence was a six (6) month term of imprisonment.  Justice Thomas also noted that the “[actual] harm … caused was also minimal.”  There was no fraud against the U.S. and the Country was only deprived of information.  The Court looked to both the maximum $5,000 criminal fine and the actual harm caused by the failure to supply the information and compared the $357,144 forfeiture to these anchors, finding easily, that the fine was constitutionally excessive.

https://en.wikipedia.org/wiki/United_States_v._Bajakajian

LESSONS OF ZWERNER AND BAJAKAJIAN

What can we glean from the Zwerner and Bajakajian decisions?  How would the Supreme Court potentially rule on a Constitutionally Excessive Fine defense for an FBAR defendant?  There are a number of commonalities between Zwerner and Bajakajian that a casual observer will immediately note:

  • Neither defendant was a criminal – they were not “money launderers, drug traffickers or tax evaders” – the class of bad guys the provisions in each case were legislatively enacted to address and punish;
  • Both offenses were “solely reporting offenses” where the “[actual] harm was minimal” – Zwerner was making funds available to enjoy when he was vacationing overseas and Bajakajian was taking funds offshore to pay off a valid legal debt;
  • Both offenses have “criminal provisions” with punishments well below the fines imposed – In Zwerner, a potential criminal penalty is only $250,000 or 5 years in prison.  Steep, for sure – but from a monetary perspective – even if multiplied by 4, with a penalty for each tax year in question, still less than 50% of the ultimate settlement amount and less than 25% of the maximum penalty threatened by the IRS.  Certainly, the fines imposed were “grossly disproportional” to the offenses charged.

For these three (3) reasons, a case that reached the Supreme Court, depending on its composition, and adherence to Bajakajian, might well result in a finding that FBAR penalties, by their very nature are constitutionally excessive.  Time will tell.

SECRET OFFSHORE BANK ACCOUNTS – THE IRS HATES THEM!

The IRS believes that taxpayers who have “secret” offshore accounts are living in a Dickensian world of cloak and dagger style subterfuge and shadowy shell games.  Indeed, there are bad actors out there who are actively engaging in tax evasion, but far more commonly individuals simply do not know about the FBAR reporting requirements, or do not report out of fear for what the IRS might do with the information.

According to a Bloomberg report, Zwerner held these funds in a series of foundations overseas and used the funds for personal expenses like European vacations.  The 87-year-old Octogenarian was not a “bond villain” or a high level tax evader.  But, nonetheless, the IRS chose to make an example of him, apparently, in part, because the funds were held in a Swiss account with ABN Amro Group NV, the Netherlands’ third biggest bank.

By the same token, Bajakajian was trying to repay a debt from a relative that he had borrowed to start a gas station business, and had no illicit purpose for expatriating cash offshore.

DIFFERENCE BETWEEN AN FBAR ATTORNEY AND AN ACCOUNTANT

An FBAR Attorney can litigate in Court if matters get out of control.  An accountant cannot.  An FBAR Attorney can advise you on relevant laws, their enforcement, and the risks of various courses of action in a way an accountant cannot.

FBAR PENALTY MITIGATION AND REDUCTION

How do you avoid excessive FBAR fines and penalties?  The whole issue resolves around whether a violation was “willful” or “non-willful” under the governing statutes.  The IRS requires that you show “reasonable cause” why you failed to report.  “Reasonable cause” is one of those hazy IRS standards that doesn’t tell you much unless you are an expert, or, for that matter, an FBAR Attorney.  What is reasonable to you is not what the IRS thinks is reasonable.

When the IRS talks about “reasonable cause,” what they mean is first that you meet the Internal Revenue Manual (IRM) provisions that an Offshore Specialist is required to consider under IRM 4.26.16.4.7, FBAR Penalties – Examiner Discretion.  The Examiner needs managerial approval from the Examiner’s manager “in writing.”  So, keep that in mind when arguing for penalty mitigation – your real audience is the manager – who the Examiner must convince to help you.

So what is “reasonable cause”:

  • You were unaware of the FBAR requirement, and had no reason to know;
  • You didn’t think to report the accounts/income because you are not earning any interest and/or would not have owed any tax anyway;
  • You had an account-type (i.e., government bond) that you did not realize was covered by FBAR requirements, or might not have immediately realized was covered;
  • You knew of the law, but it was so confusing you couldn’t figure it out – facts will have to bear that out; or
  • You relied on the advice of a professional that advised you no reporting was needed.

Another kind of issue that might help with “reasonable cause” is if there is a family account that is transferred for some reason, and which you had little control or authority over.  That alone can have a major impact on the FBAR Examiner’s view of the matter.

Under IRM 4.26.16.4.4.3, the IRS FBAR Examiner undertakes a “facts and circumstances” approach to determine if a lesser penalty is warranted.  An FBAR Examiner is to exercise discretion to ensure future compliance and to fulfill the purposes of the FBAR laws, not to harass and unduly burden taxpayers.

Often there will be rights to Appeal the FBAR Examiner’s decision about penalty mitigation.  But, one thing is for sure, where FBAR penalties are imposed and are being negotiated, if you don’t ask for penalty mitigation, and if you don’t ask with reference to the requirements the IRS expects to hear, and properly substantiate your argument with documentary evidence bearing out the basis for your request – you will not get penalty mitigation.

Please give us a call at (201) 529-8024 today for a free consultation and to get help with your FBAR issues.

http://www.woodllp.com/Publications/Articles/pdf/Zwerner.pdf

http://federaltaxcrimes.blogspot.com/2014/05/zwerner-jury-verdict-fbar-willfulness.html

http://www.bloomberg.com/news/articles/2014-05-28/florida-man-87-owes-150-of-swiss-account-jury-says

https://en.wikipedia.org/wiki/Eighth_Amendment_to_the_United_States_Constitution

https://www.irs.gov/irm/part4/irm_04-026-016.html#d0e1614