If I correctly understand the 50% FBAR penalty in criminal cases, it is based upon 50% of the highest account value. But doesn't this overpenalize those who left money overseas relative to those who transferred it back into the U.S.? Look at this example...Anonymous raises a good issue, so I encourage readers to weigh in on it.
For example, if someone has an overseas account with $1,000,000 and makes 10% every year, but takes out the 100,000 profit every year to sneak it back into the U.S., the account will never grow above $1,000,000 and after 10 years they will have snuck $100,000 each year into the U.S. They will pay an FBAR penalty of $500,000.
But, if someone has an overseas account with $1,000,000 and makes 10% every year (or $100,000), but leaves it over there, at the end of 10 years they will have $2,000,000. They will pay an FBAR penalty of $1,000,000.
The way they are calculating the penalty is penalizing the people who left their money overseas more than those who engaged in more egregious activity by bringing it back into the U.S.
The income tax is the same, but the FBAR penalties are wildly different. You get a 50% discount for worse behavior effectively.
My comments are:
1. The same phenomenon, although less exacerbated, applies to the settlement initiative that ended 10/15/2009. That penalty was 20% of the highest amount for the years 2003 forward.
2. I don't believe a 10 year time horizon has been included for calculating the penalties. The settlement initiative included only the years 2003 forward. I believe that some of the criminal cases may have included 2001 forward, but the inclusion of earlier years would not make any difference under the fact pattern Anonymous posits because the highest year in any event would have been in the years 2003 forward. (Actually, in the first alternative in the example, the $1,000,000 would have been the same in all years, but including pre-2003 years would not affect the penalty; even if a 10 year horizon was used, that same phenomenon would occur; so that a 10 year horizon would only be damaging to those whose highest year preceded 2003 which neither alternative in the example assumes.)
3. As I recall (and I am fuzzy on this), the IRS implemented the penalty in the settlement initiative in a way that would include in the penalty base cash movements of funds from the offshore account to some other offshore investments (e.g., real estate or diamonds or gold held in some medium other than a financial account). Thus, for example, in Anonymous' example above, if instead of bringing the annual $100,000 income back into the United States, the taxpayer had invested the annual $100,000 in offshore real estatewith no U.S. reporting requirements, I understand that the IRS was prepared to assert that the entire $2,000,000 amount ($1,000,000 base amount plus 10 transfers of $100,000 each) is included in the base. (This does not consider any "earnings" on the funds moved out of the offshore account.) I have not had any clients with this pattern, so I cannot speak definitively to what the IRS did.
4. If the assumption of #3 is correct, then the question posited by Anonymous is what is the difference, if any, between the U.S. person who puts the money to some use offshore and the U.S. person who brings the money to the U.S. and uses it here. In terms of the policies behind the FBAR (which is to spot offshore movements and investments for the various purposes inspiring the FBAR requirement), then I think an argument can be made that they are different circumstances and perhaps should have a different result. After all, under any of the various considerations giving the IRS particular angst about foreign accounts and Congress angst in inspiring the need for the FBAR, money onshore is just different than money offshore. It is true that, each separate act of bringing the money back to the U.S. might be a separate criminal offense of some sort (money laundering, CTR violation, tax obstruction, etc.), but still once it is back onshore it is at least not offshore. (That is hardly a startling observation, but I hope the reader gets my point.)
5. On the other hand, if the assumption in #3 is not correct, then it is only the presence of the funds in an offshore account subject to the FBAR reporting requirement that is the concern and, logically, there is no difference between the use of the offshore and onshore use of the funds outside the offshore account and the same result should obtain -- the proper base for any penalty is only the amount in the offshore account.
The Cittadini case is an example what you're talking about above. According to the press, he had an inheritance from overseas and left it overseas, yet he was charged with the exact same violations as Rubinstein, Moran, etc and had to pay the exact same FBAR penalty, even though Moran, Rubinestein, etc. engaged in various transfers in and out of the country.
ReplyDeleteBased on the example outlined above, the logical conclusion would seem to be that the FBAR penalty for those who left money overseas should be 25%, so that the dollar FBAR penalty would be the same as for those who transferred money back into the U.S. (ie $2,000,000 * 25% = $500,000). So, Cittadini is really paying double the penalty of the other guys and isn't facing anylesser criminal charges.