The specter of deadlines and limited time to act has always hung over the issue of tax compliance for individuals who never reported a foreign financial account via the annual Foreign Bank Account Report (FBAR). For those who did not get compliant through any one of the multiple prior rounds of foreign account amnesty, June 30, 2014 looms as a hard deadline and a true ‘last chance’ to attain US tax compliance.
In my February 2013 Nob Hill Gazette article “Secret Foreign Bank Accounts,” I covered the topic of US taxpayers’ undisclosed foreign accounts and the IRS’ Offshore Voluntary Disclosure Program. This article, coming just 16 months later, serves as a critical update in an extremely fast-moving field – and also goes to press just one month in advance of the special date of June 30, 2014.
June 30, 2014 is a special date not just because that is the yearly FBAR reporting deadline, but also because the vast majority of the legitimate first-world financial institutions will be reporting, for the first time, information on their US depositors and, more broadly than that, any account relationship displaying what the US’ Foreign Account Tax Compliance Act (FATCA) refers to as ‘US indices’ which is essentially any information indicative of a US person’s relationship with the account.
That means, for virtually every US person with any documented relationship with a $10,000-plus foreign account not previously disclosed on the annual FBAR (now known as FinCEN 114), there is no time left on the clock. You must come in before June 30th or your institution will disclose your name to the US tax authorities.
That seems like a simple message, and it is.
Do Any Alternatives to Full Disclosure Remain?
For purposes of discussion, though, let’s talk about the risks to those who think that there might still be more time on the clock. Perhaps you’re not convinced that FATCA is indeed forcing every major foreign financial institution to become an agent of the US tax authorities. Perhaps your foreign banker has assured you that your name isn’t on their disclosure list (false reassurances are a foreign wealth advisor specialty) and that you ‘don’t need to worry.’
Events of the past year have proven that the US tax enforcement noose is getting tighter and tighter, and the US has answered two important enforcement questions in ways that are very unfavorable to taxpayers. For anyone willing to risk staying non-compliant, these developments demonstrate that inaction is a massive risk:
The first long-standing enforcement question was whether simply shutting down a non-compliant account and quietly repatriating the funds was a plausible solution to a US person with FBAR non-compliance. The answer – it is now clear – is absolutely not.
In a development that could support its own series of stand-alone articles, the threat of US Department of Justice prosecution induced over 50 Swiss banks to enter an essentially ad hoc ‘Swiss banking initiative’ in which these institutions made arrangements to divulge on or before June 30, 2014 all information on US accounts, and further encourage their US depositors – even former depositors with closed accounts as distant as 2008 – to disclose to the US. To avoid prosecution, the banks agreed to pay massive fines for those US depositors it could not certify participated as a result of their encouragement.
Expansion of compliance to be retroactive (here, back to 2008) was an enormous coup since the US had – previously – only succeeded in obtaining compliance on a forward (prospective basis). With the US having obtained this tax enforcement ‘holy grail’ in Switzerland, we can speculate with good cause that when the US’ attention turns to other notorious tax havens in future years (Singapore being a particular destination of ‘hot money’ that is currently non-cooperative with the US) that it may seek and win similar concessions with a similar six-year look-back period. The clear lesson here is that simply shuttering a non-compliant foreign account is not a permanent solution.
The 50% Per-Year FBAR Penalty
The other long-standing IRS enforcement question resolved this year arises from the fact that the ‘willful failure to file’ an FBAR is punishable by a penalty equal to the greater of $100,000 or 50% of the high balance of the account in the year of non-disclosure.
The IRS has always maintained that it has the statutory right to impose this penalty for up to six years of non-compliance, cumulatively (that is, collecting 50% penalties for each of up to six years). Until the recent case of U.S.A. v. Carl R. Zwerner, there were no known instances of the IRS actually seeking multiple years of the 50% penalty.
Unfortunately for Zwerner, the IRS has decided to seek from him four years of the 50% penalty. If the underlying federal court litigation to collect is successful, Zwerner will owe nearly $3.5 million for his four failures to report an account that, in the highest year of penalty impact, did not exceed $1.7 million. In other words, the IRS seeks to collect 200% of Zwerner’s account as penalty.
For individuals with facts indicative of a willful failure to file, the possibility of losing not just 50% of the account but an amount equal 100%, 150% or 200% or more must weigh heavily in the decision of whether to continue to stay non-compliant or to – instead – enter the Offshore Voluntary Disclosure Program to obtain certainty of outcome at the cost of a significant sum equal to standard taxes, penalties and interest and a special 27.5% penalty.