By: Coleman Jackson, Attorney, Certified Public Accountant
July 16, 2019
The 1970 Currency and Foreign Transactions Reporting Act, which is otherwise known as the Bank Secrecy Act requires U.S. residents, citizens and businesses with foreign bank accounts and certain other overseas assets to report those interest to the Financial Crimes Network annually on Form 114 by April 15th of the following year. Form 114 is the Report of Foreign Bank and Financial Accounts or (FBAR). The Bank Secrecy Act has a number of reporting requirements that are placed on financial institutions as well as those placed persons with foreign asset interests. The record keeping and reporting requirements placed on foreign account holders are set out in detail in 31 U.S.C. Sec. 5414. Form 114, the FBAR must be filed electronically through the Bank Secrecy Act E-Filing Network website. The Financial Crimes Network is an agency of the United States Treasury but it is not the Internal Revenue Service. These are two separate agencies under the U.S. Department of Treasury.
The Bank Secrecy Act at 31 U.S.C. Sec. 5414 also requires taxpayers with foreign bank accounts to disclose those accounts on their annual federal tax returns. IRS Form 1040 at line 7a of Schedule B specifically asks whether the taxpayer has an interest or signatory authority over a foreign bank account. A ‘yes ‘answer to this question on Schedule B requires the taxpayer to identify the country of the account and certain other details. A taxpayer’s failure to check the box ‘yes’ when they have foreign bank interest or signatory authority over a foreign asset seriously increases their legal jeopardy because courts have said that failure to ‘check the box’ constitutes a willful violation of the Bank Secrecy Act. Failure to read the return has been held to be insufficient to avoid liability under the Act. Avoiding knowledge of the Acts requirements has not been a successful plan. Federal courts all over the country have addressed these various defenses and found them lacking weight.
When a violation of the Bank Secrecy Act is not willful, the FBAR penalty for failure to disclose financial interest in foreign bank accounts, securities or other financial assets is capped at $10,000. This cap only applies to non-willful violations of the FBAR statute. Failure to check the box correctly and failure to disclose to a tax return preparer the existence of foreign bank accounts or other assets overseas is extremely likely to be found to be a willful violation of the Act. The penalty permitted under the Bank Secrecy Act for a willful violation is equal to the greater of $100,000 or 50% of the highest balance in the account at the time of the violation. There are also criminal penalties for violation of the Bank Secrecy Act if a taxpayer is tried and convicted under the Act. Under the law, the Internal Revenue Service has 6 years from the date of the violation to assess the FBAR penalty and they can sue the taxpayer or the taxpayer’s estate to the collect the penalties. Note that assessed FBAR penalties do not go away with the death of the taxpayer.
Again, If the IRS assess FBAR penalties and the taxpayer refuses to pay them, the U.S. government can seek to collect the penalties in federal court pursuant to 31 U.S.C. Sec. 5321(b)(1). The government must demonstrate in court by a preponderance of the evidence that (a) the taxpayer is a U.S. resident, citizen or business entity subject to the Bank Secrecy Act, (b) the taxpayer had a reporting obligation under the Bank Secrecy Act and failed to satisfy that reporting obligation, and (c) the nature of the taxpayer’s violation in terms of non-willful or willful violation of the statute, and (d) the taxpayer has failed to timely pay the assessed penalty. The taxpayer must plead and prove any statute of limitations defects in the government’s case. FBAR cases, as a general matter, are fact based cases. Taxpayers win some and loose some.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
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