Bad Banks subject account holders to 50% penalty

On June 3, 2015 the IRS added two more banks to its list of banks at which accounts subject the holder to a 50% OVDP miscellaneous offshore penalty on all offshore assets connected with the non-compliance.  The two newcomers bring the list of bad banks to 21.  The new members of the bad bank club are:

  • Rothschild Bank AG, and,
  • Banca Credinvest SA

The above two banks were added to the list after public disclosure of their having entered into non-prosecution agreements with the U.S. Department of Justice. Account holders at these banks who’ve submitted OVDP Letters before June 3, 2015 are not affected by the 50% bad bank penalty and continue to pay an OVDP miscellaneous offshore penalty of 27.5% on all offshore assets connected with the non-compliance.  The complete list of banks is linked in the OVDP FAQ 7.2 (FAQS effective July 1, 2014).

IRS FBAR penalty guidance

On May 13, 2015 the IRS issued a memorandum of Interim Guidance for FBAR penalties that its employees must follow.    The cover letter states:

“When asserting an FBAR penalty, the burden is on the IRS to show that an FBAR violation occurred and, for willful violations, that the violation was in fact willful.  The FBAR penalty provision of Title 31 (United States Code) establishes only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case.”

The guidance establishes procedures for consideration and pre-assessment review of FBAR penalty cases.

For multiple year willful violations the guidance states:

In most cases (emphasis added) , the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”

Examiners can recommend a higher or lower penalty than the 50% suggested maximum, but in no event will the suggested penalty exceed 100% of the aggregate highest balance.  Most likely, the higher penalty will only be asserted in the most egregious cases.

The Internal Revenue Manual FBAR Penalty Mitigation Guidelines (IRM continue to apply and the examiner must first determine if the guideline threshold conditions are met.  For willful violations when the aggregate highest balance exceeds $1 million, however, the mitigations rules do not help and the maximum FBAR penalty may be asserted (For violations occurring after October 22, 2004).

Application of interim penalty guidelines in OVDP submissions

These guidelines do not apply to OVDP cases but will apply to cases in which the taxpayer opts-out of the OVDP and submits to an audit.  The guidelines will be helpful in making opt-out decisions.

Application of interim FBAR penalty guidelines to Streamlined Filings

The guidelines should alleviate the concerns of some about the Streamlined Filing Compliance Procedures: The risk of having one’s non-willful certification rejected; and. then becoming subject to draconian confiscatory FBAR penalties.

The linchpin of Streamlined Filings remains determining up front that the taxpayer’s conduct has been non-willful and that the affidavit will not simply offer admissions of a tax crime.  Once tax crimes are ruled out, a transparent, truthful affidavit is the key to minimizing Streamlined Filing risks.

The DOJ has repeatedly stated (most recently at an NYU Tax Controversy Forum) it will compare information received from banks in the Swiss Bank Settlement Program with Streamlined certifications of non-willfulness and intends to prosecute those taxpayers whose conduct, contrary to their certification, was, in fact, willful.

At the NYU Forum a DOJ attorney also stated that the Department has a program to identify quiet disclosures.  The DOJ has cautioned taxpayers considering quiet disclosures about the threat of possible enforcement action.

In a similar vein, some advisers suggest those with accounts of less than $1 million simply begin to file FBARS and report the offshore income going forward (WSJ 6/6/15 article by Laura Saunders, “The New Rules of Offshore Accounts”).  They argue that filing forward may be appropriate for those who can tolerate some risk for a few years.  That advice begs the real question, not whether the taxpayer can sleep at night, but whether he or she can afford the hit should the presumed unlikely audit occur.  Risk capacity not risk tolerance is the real issue in going without wind insurance because another Hurricane Andrew is unlikely.  Remote events happen with regularity and if your return is selected for audit the risk becomes 100%.

Statute of Limitations (SOL) considerations

How much risk one is assuming depends, among other things, on how close is the SOL expiration date. The FBAR penalty SOL (6 years from the date of the violation) for 2008 will expire on June 30, 2015. The criminal SOL for FBAR violations is five years. There is a question whether the SOL would be extended for the period during which one is outside the U.S. Jack Townsend has discussed the issue in his Federal Tax Crimes Blog. (Statutes of Limitations for FBAR Noncompliance Related to Tax Noncompliance (3/12/13)). It seems the likelihood of tolling is lower for FBAR crimes which require the accused to be fleeing justice (18 USC § 3290) but certain for tax and tax-related crimes where the SOL is tolled if the taxpayer is absent from the U.S. (26 USC § 6531).  The SOL (normally 3 years but extended to 6 years for many tax and tax related crimes) for tax crimes may also be extended if acts to cover up the crime (possible tax crimes themselves) are committed after the initial violation. There is no tolling of the SOL for civil FBAR penalties which is an absolute 6 year period.

© 2015 by Robert S. Steinberg, Esquire
All rights reserved


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