The IRS requires U.S. taxpayers to file a Report of Foreign Bank and Financial Accounts, or FBAR, in any foreign account if the aggregate value exceeds $10,000 at any time over the year. Being accused of a willful FBAR violation can result in criminal charges or costly penalties. However, those costs could be substantially mitigated if the taxpayer took part in one of the agency's offshore voluntary disclosure program, a so-called "amnesty" that was offered in 2009, 2011, and 2012 and heading forward.
The IRS's focus on collecting civil penalties for FBAR violations is part of the federal government's general emphasis on preventing U.S. taxpayers from shielding assets in so-called "tax haven" countries. It might not come as a surprise that not everyone who attempted voluntary compliance encountered a friendly, hands-off IRS.
Earlier this month, the IRS brought a FBAR action against a Coral Gables man, seeking $3,488,609.33 in civil penalties for violations of FBAR. That amount apparently represents a penalty of 50 percent on any tax deficiency that would have been due if the Florida man had fully disclosed his interests through FBAR, along with additional penalties.
Was the Florida man a recalcitrant tax evader? It doesn't seem so. In 2008, when the IRS first went public with its FBAR crackdown, the Florida man quietly filed amended tax returns, including the delinquent FBARs, and paid the tax deficiencies. What he apparently did not do was take direct advantage of the offshore voluntary disclosure programs, instead opting for a "quiet disclosure."
The IRS, however, accuses him of willful noncompliance because, it says, he "made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements." Therefore, it proposed the maximum penalty for every single tax year affected.
Some observers have questioned whether the IRS's proposed multi-year, maximum penalty is even constitutional. The Eighth Amendment has been interpreted to prohibit fines "so grossly excessive as to amount to a deprivation of property without due process of law." This issue has not as yet been resolved in the federal courts.
While we can express no opinion on the particular case, it does seem a bit of a stretch to apply the maximum penalty to someone aware of the requirement -- willfully unaware or not -- who has, it appears, repaid all of the taxes owed.
Source: Forbes IRS Watch blog, "DoJ Files Action to Collect Multiple 50 Percent Civil FBAR Penalties in U.S.A. vs. Zwerner," Charles Rettig, June 17, 2013