Thursday, September 1, 2011

What is the Amount for the 50% FBAR Penalty, What is the Violation and When Does it Occur (9/1/11)

The FBAR penalty, in part relevant to most individuals, imposes two penalty regimes - one for the willful actor and the other for the non-willful actor. Only the willful actor penalty is alternatively based upon an "amount" -- i.e., the greater of $100,000 (a set amount) or "50 percent of the amount determined under subparagraph (D)." 31 USC 5321(a)(5)(C). The referenced subparagraph (D) provides in relevant part:

(D) Amount.— The amount determined under this subparagraph is—

* * * *

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.
The FBAR violation is the failure to file the report or the filing of a false report. The time of the violation thus would be July 1 ((The metaphysical moment in time when 6/30 ends and 7/1 begins is the time that the violation occurs.)) or, in the case of a false FBAR, on the date of filing the FBAR. See e.g., Exhibit 4.26.16-3 (07-01-2008) , in the LCCI initiative, stating: "the balance in the account at the time of the violation (the opening balance of the account on 7/1 of the subsequent year)."  The amount penalized under the 50% willful penalty thus is not the highest amount in the account during the year. This obviously can cut both ways.

Example (inspired by a case I am working on): Taxpayer receives $1,000,000 into a foreign bank account on January 1, 2007, it earns $40,000 interest during the year, and withdraws $1,039,999 on December 30, 2007, leaving $1 in the account. The taxpayer fails to report the $40,000 interest on his 2007 1040. The account then continues after 2007 with a $1 static balance and is closed on December 30, 2009. What penalties apply (other than income tax penalties)? Inside the program, the in lieu of penalty would be $260,000 (25% times the high balance of $1,040,000. Outside the program, the willful FBAR penalty would be a maximum of $100,000 (because the minimum penalty is $100,000). And, of course, if nonwillful, the maximum penalty is still $10,000, the same as otherwise, because that penalty is not keyed to an amount.

This might achieve a better result for the willful penalty, but, as noted, still leaves a substantial willful penalty and does nothing about the potential for criminal prosecution.

1 comment:

  1.   The statute does indeed call for penalties to be assessed on the date of the violation.

    But here's what it says about  civil penalty SOLs:

    The Secretary of the Treasury may assess a civil
    penalty .. at any time before the end of the 6-year
    period beginning on the date of the transaction with respect to which
    the penalty is assessed.

    The statute generally gives Treasury freedom to define 'transactions' that are reportable. But here is what's interesting: The Treasury has defined the 'transaction' to be an interest in (or signatory authority over) a foreign financial account the previous year.  That would mean the date of the 'transaction' is at worst, December 31st of (say 2010), rather than the date of the violation June 30th 2011. So the civil SOL should arguably run from December 31st 2010, not June 30th 2011.

    This does seem a little far fetched, but it seems from the statute that Congress was referring to the date of the reportable 'transaction', not the date of filing the report as starting the SOL. I don't think Treasury can redefine the 'transaction' to be the non filing of the FBAR. In a way, the SOL clause may not make sense, since its perfectly legal to hold a foreign account, and SOLs should normally proceed from violations (I think, I'm not a lawyer), but that is what the plain language seems to say.

    Jack, do you think this argument is just laughable ? Everyone seems to take it for granted that the SOL for unfiled FBARs begins June 30th, but maybe its not that straightforward.


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