A recent district court decision may require rethinking tax strategies on assets held abroad.
The case, which was decided on May 16, 2018, struck down an Foreign Bank Account Reporting penalty in excess of $100,000, despite the authorization of higher penalties provided by the statute, 31 U.S. Code 5321(a)(5)(C). While the regulation pertaining to the statute sets a maximum penalty of $100,000, the statute has been amended to allow a greater penalty.
The FBAR requirement is a product of the Bank Secrecy Act of 1970, but the section that requires filing of FinCEN Form 114 (formerly known as Treasury Form 90-22.1) has only been seriously enforced in the past decade. The provision applies to a person having an interest in or signature or other authority over a bank, securities or other financial account in a foreign country if the aggregate value of the accounts is greater than $10,000 at any time during the year. Penalties for failure to file may run as high as $100,000 per account, or 50 percent of the account value per year. While there is a reasonable-cause exception for non-willful violations, the penalty for willful violations can be staggering. In 2013, Ty Warner, the inventor of Beanie Babies, paid more than $53 million in FBAR penalties.
In U.S. v. Colliot, the judge granted the taxpayer’s motion for summary judgment on the basis that the regulation’s maximum penalty of $100,000 was valid despite the government’s argument that the regulation was overridden by the change in the statute in 2004.
“Under the government view, an individual could have two accounts, each with $1 million, and the penalty could be 50 percent of each account per year,” said Larry Kemm, of counsel at Carlton Fields, who argued the case for the taxpayer. “But this decision would limit the penalties to $100,000 for each account.”
The two sides in the case – the government and the taxpayer – have 30 days from the decision on May 16 to submit a brief as to whether the case should be dismissed in its entirety, Kemm noted: “The government will argue that the case should not be dismissed but that the amount of penalties should be adjusted in line with the regulation. If the judge dismisses the case in its entirety, the government will not be able to come back and reassess the penalty.”
The Offshore Voluntary Disclosure Program, set to wind down in September 2018, has offered taxpayers a way out of the draconian penalties, by hitting them with a one-time penalty of 27.5 percent of the balance in the overseas account, and no criminal prosecution.
However, with this court ruling, taxpayers currently considering going the OVDP route may want to reconsider, according to Kemm.
“The penalty charged in OVDP may very well far exceed the amount the regs would indicate as appropriate,” he said.
“I’m surprised because I haven’t seen this analysis before,” said Jon Barooshian, partner at Bowditch & Dewey. “The challenges in most of these cases are constitutionally based – on the ‘Excessive Fines’ clause. We now have a judge saying ‘Hey, you never amended the reg.’ The IRS and FinCIN [Financial Crimes Enforcement Network of the U.S. Treasury] created this, and it didn’t change when the statute was amended.”
“If you’re a taxpayer who has money overseas which you haven’t disclosed, you might think twice,” he said.“
“When it comes time to write a check, some may think it’s not worth it because the penalty is capped at $100,000, but there are holes in that strategy,” he said. “There’s nothing to stop the government from changing the regulation, and the government can pursue criminal charges as well.”
“The burden of proof on the IRS for willful failure to file in a civil trial is not a whole lot less than in a criminal trial,” he added. “They’re looking at the same evidence. The main difference is that a criminal trial requires a unanimous verdict. The average juror wouldn’t be able to discern the difference between ‘clear and convincing’ evidence, or evidence ‘beyond a reasonable doubt.’”
