What Happens When an Individual Fails to Report Foreign Bank Accounts
- Feb 1, 2013
- 2 min read
This article examines what can happen to an individual who fails to report foreign bank accounts on FinCEN Form 114 to the Internal Revenue Service.
On July 20, 2012, the Court of Appeals for the Fourth Circuit in Williams held that an
individual willfully failed to comply with foreign bank account report (FBAR) requirements
when he signed a tax return without disclosing foreign accounts.
In another closely watched case, on November 8, 2012, a federal district court in the Northern District of Utah in McBride held that an individual was subject to the civil willfulness penalty because he failed to report his interest in four foreign financial accounts
Observations
A few general observations can be made from the McBride and Williams cases:
The government can establish that an individual was willful in failing to comply with the FBAR requirements by showing reckless conduct or blind willfulness.
A responsible person is reckless, if he knew or should have known of a risk that the taxes were not being paid, had a reasonable opportunity to discover and remedy the problem, and yet failed to undertake reasonable efforts to ensure payment.
Willful blindness may be inferred where an individual was subjectively aware of a high
probability of the existence of a tax liability and purposefully avoided learning the facts that point to such liability.
The government’s burden of proof is a preponderance of the evidence (51 percent), as opposed to clear and convincing evidence.
The IRS can reach out and bring an individual’s accountant into the case as a fact witness
How the IRS Factually Develops a Case
The Williams and McBride cases are instructive in the sense that they show how the IRS factually develops a case to determine whether a civil FBAR penalty should apply. The IRS’s investigation may probe the following areas:
Why the individual failed to fi le the FBAR reports; when the person fi rst learned of the FBAR reporting requirements; and whether the individual read the information supplied by the government in the tax forms
What the individual’s reasonable cause defense is for failing to report the foreign accounts under 35 U.S.C. §5321(a)(5)(B)(ii) (nonwillfulness civil penalty)
Why the individual answered “no” in response to Question 7a, Part IV of Schedule B, if that is the case
What person’s level of education and sophistication is, particularly in the fi eld of business and accounting
Whether the individual engaged in any activity with respect to the funds overseas (i.e., transferring money overseas, buying and selling securities, or making investments) or whether the account is a “passive account”
Whether the individual knew that the funds deposited into the foreign financial account were taxable, and why the person failed to report the offshore income, if that is the case.
The IRS may seek to interview the individual to obtain answers to its questions. Also, if an accountant or enrolled agent prepared the tax returns at issue, the IRS may interview the return preparer to determine what, if anything, the taxpayer told the accountant about the undisclosed bank accounts. The IRS may want a copy of any tax organizer to see whether the person disclosed the foreign accounts to the return preparer.
For additional information, please refer to the published article, below.
