FBAR Penalties Build Up Over Years, Even Through Criminal Penalties

Red Penalty Stamps - FBAR Penalties

As a U.S. taxpayer, you may believe that one run in with the IRS is enough. If you have faced FBAR penalties or criminal prosecution for tax evasion or failure to file necessary forms, you may assume you don’t have to worry anymore. But FBAR penalties build up over years, and you could still face penalties, even after a criminal sentence.

Annual FBAR Reporting Requirements Can Add Up to Big Penalties

The Bank Secrecy Act requires U.S. taxpayers, whether domestic or overseas, to file annual Reports of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). This report discloses ownership or signatory authority over any account with a cumulative value of $10,000 at any point during the year. Failure to file FBAR penalties start at $10,000 per year, per account, for non-willful omissions. Where a taxpayer willfully ignores the duty to report these assets, he or she may face up to 50% of the balance of each unreported account.

The obligation to report foreign financial accounts renews every year, as do the penalties. The statute of limitations on the Bank Secrecy Act is six years. When the IRS audits a taxpayer, or discovers a foreign account through international banking disclosures, that taxpayer may suddenly be faced with years of built up FBAR penalties. But just because the IRS is investigating years past doesn’t forgive the ongoing failure to file FBARs. In fact, it can make the decision more costly.

Criminal Penalties Don’t Cut Off FBAR Penalties

As a recent Ninth Circuit Court of Appeals decision shows, even a former tax-related criminal conviction doesn’t prevent the IRS from issuing new FBAR penalties. United States v Letantia Bussell stands for the ongoing obligation to file FBAR reports.

Letantia Bussell was no stranger to the IRS’s international tax filing requirements. She had been criminally charged with concealing financial assets in 2002. Her appeal of that conviction wasn’t finalized until July 12, 2005. But by the time the 2006 tax season had rolled around, she had already forgotten the lessons of that case. Instead, she willfully failed to disclose her financial interests in overseas accounts in 2006 under the Bank Secrecy Act and the Foreign Account Tax Compliance Act (FATCA). The IRS caught up with her again in June 2013, issuing a $1.2 million FBAR penalty. But Bussell appealed again, arguing that her prior criminal penalties protected her from ongoing penalties. She also claimed the penalties were against the statute of limitations and even unduly burdensome under the United States Constitution.

The Ninth Circuit Court of Appeals rejected each of her objections. The court found the willful FBAR penalties were not grossly disproportionate in light of her previous conviction, saying she had failed to prove the punitive forfeiture violated the Constitution’s Excessive Fines Clause. The timing of the government’s FBAR penalties were appropriate because they related back to 2007 filings, rather than the 2006 tax year.

Most relevantly, the court found that Bussell’s previous criminal conviction did not prevent new FBAR penalties from being issued under the Ex Post Facto clause of the U.S. Constitution. Nor had she received multiple punishments for the same behavior. This is because the failure to file reports for the 2006 tax year was not related to the prior criminal conviction, even if some of the funds in the account had carried over from one year to the next.

Taxpayers with substantial assets overseas shouldn’t wait for the IRS to catch up with them. To avoid FBAR penalties building up over time, taxpayers should meet with a CPA with international experience and a seasoned tax attorney as soon as feasible. Together, these professionals can help correct FBAR omissions and reduce potential penalties, removing taxpayer anxiety over a future IRS audit. If you have substantial unreported foreign financial accounts, contact an experienced tax attorney today to evaluate your options.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years’ experience. If you have questions regarding FBAR penalties, contact Joe Viola to schedule a consultation.