How Criminal Tax and FBAR Violations Intersect (Examples)

The Intersection of Criminal Tax and FBAR (Common Examples)

The Intersection of Criminal Tax and FBAR Compliance

Foreign bank and financial account violations (FBAR, FinCEN Form 114) will generally be a civil tax matter and not a criminal one. However, sometimes taxpayers may violate a criminal tax statute, which can result in more than just monetary fines and penalties, but possible criminal sanctions and incarceration. In the typical FBAR violation matter in which the taxpayer simply was unaware they were required to report foreign accounts and/or misunderstood the extent of the reporting that is necessary to be compliant —  this will not be a criminal tax violation. Alternatively, if the taxpayer was aware that there was a reporting requirement but intended to circumvent the filing requirements by either willfully failing to file the form, underreporting the account values, or excluding accounts that should have been included on the form, this may lead to willfulness penalties and, ultimately a criminal tax violation.

Let’s look at a few common examples of criminal FBAR violations.

* For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, What is IRS FBAR (Foreign Bank Account Reporting) Compliance?

FBAR compliance refers to the annual filing of FinCEN Form 114 to disclose foreign accounts, assets, and investments to the U.S. Government. While the preparation and submission of the form is not as difficult as several other of the international information reporting forms, if the taxpayer is out of compliance for failing to report in prior years, then it can become a problem. One very important fact that taxpayers should consider is that if they are out of compliance for prior years, they have to be cautious before filing the form in the current year so that they can avoid finding themselves in a quiet disclosure situation.

Let’s look at three (3) common examples of willful and non-willful noncompliance. Noting that for a violation to be criminal, it must be willful (beyond just civil willfulness). 

Failure to File the FBAR

• • • Willful Example: Adam learned for the first time this year that he was required to file the annual FBAR. He has millions of dollars in foreign accounts and does not want to disclose this information to the IRS, so he intentionally does not file the form even though he knows he is required to.  This would be an example of willfulness.

    • Non-Willful Example: Amanda learned that for the first time this year that she was required to file the FBAR. She has only been a U.S. person for a few years and her tax accountant never asked her about foreign accounts in prior years, so she had no idea that she was required to report the accounts. She does not access the accountas and has not made any contributions or distributions since becoming a U.S. person a few years back.  This is a common example of non-willfulness.

Reporting Incorrect Values

• • • Willful Example: Brian is a U.S.  person who inherited several large value accounts a few years back.  Typically, the account values are relatively low, but Brian received an inheritance worth seven figures last year and he deposited the funds into his foreign accounts. Brian knows he is required to report this information to the IRS, but he intentionally reduces the value of the accounts he reports on the FBAR. This can be an example of willfulness.

    • Non-Willful Example: Brad is a U.S. person who has foreign accounts that he has not accessed in several years. He has been filing his FBAR each year and reported the accounts based on what he believed the values were – but he was unaware that his family members were making some deposits into his foreign accounts. Brad’s family never told him about these deposits, and he only recently learned that the value of the account he reported was incorrect. When Brad goes back to amend the FBARs he should qualify as non-willful.

Omitting Accounts

• • • Willful Example: Charles is a U.S. person who has several accounts overseas. He has been actively trading and depositing his earnings into a foreign account and the value is now $5 million. He does not want to report this information, does not believe his foreign bank will report him to the IRS, and intends on withdrawing the money to purchase a home. Thus, Charles intentionally omits the account from his FBAR. This would be an example of willfulness.

    • Non-Willful Example: Chris is a U.S. person and citizen of India. He files his annual FBAR but did not realize that he still had some dormant accounts that he has not accessed in several years and that all have low balances. When Chris goes back to amend the FBAR, he should qualify as non-willful.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.