Federal law requires individuals to report annually to the Internal Revenue Service any financial interests they have in any bank, securities, or other financial accounts in a foreign country. 31 U.S.C. § 5314(a). The report is made by filing a completed Form TD F 90-22.1 with the Department of the Treasury, and the report must be filed on or before April 15 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year. 31 C.F.R. § 1010.350.
The Secretary of the Treasury may impose a civil money penalty on any person who fails to timely file the report. 31 U.S.C. § 5321(a)(5)(A). In cases where a person “willfully” fails to file the FBAR, the government may impose an increased maximum penalty, up to $100,000 or fifty percent of the balance in the account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C).
The IRS’ investigation may probe the following areas:
- Why the individual failed to file the FBAR reports, when did the person first learn of the FBAR reporting requirements, and did the individual read the information supplied by the government in the tax forms;
- What is the individual’s reasonable cause defense for failing to report the foreign accounts under 35 U.S.C. § 5321(a)(5)(B)(ii) (non-willfulness civil penalty);
- Why the individual answered “no” in response to Question 7a, Part IV of Schedule B, if that is the case;
- What is person’s level of education and sophistication, particularly in the field of business and accounting;
- Did the individual engage in any activity with respect to the funds overseas (e., transferring money overseas, buying and selling securities, or making investments) or is the account a “passive account”; and
- Did the individual know that the funds deposited into the foreign financial account were taxable, and why did 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. See e.g., United States v. McBride, 2012 U.S. Dist. LEXIS 161206 (D. Utah 2012); United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. Va. 2012).
Individuals who fail to report their interest in foreign financial accounts run the risk of substantial civil penalties and possibly a criminal investigation by the IRS. Persons with unfiled foreign bank account reports or unreported income from offshore accounts would be wise to seek the advice of competent tax counsel, who can evaluate the case, explain the options, and develop a defensible strategy.