Foreign Accounts: Take the FBAR Requirements Seriously

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Foreign Accounts: Take the FBAR Requirements Seriously

Jun 25, 2019

By Gregory S. Dowell

June 25, 2019

When taxpayers have foreign assets (bank and brokerage accounts, real estate, collectibles), they are required to file foreign financial reporting forms on an annual basis. Filing is required when the value of the assets is equal to or greater than $10,000 at any time during the year. The filing is made on form FinCEN 114, which is more commonly referred to as the FBAR form. The filing requirements have existed for several years now, and there are significant penalties for failing to file the form. The penalty for failure to timely file an FBAR varies according to the level of the taxpayer’s culpability. A willful violation can result in a civil penalty of up to 50% of the balance of each foreign account or $100,000, whichever is greater. A claim by the Government to collect civil penalties for a willful violation consists of seven elements: (1) the defendant was a U.S. citizen at the time of the filing; (2) the defendant had a financial interest in or signatory authority over the account at issue; (3) the account balance exceeded $10,000; (4) the account was in a foreign country; (5) the defendant failed to disclose the account; (6) the failure was willful; and (7) the amount of the proposed penalty is proper. In the past, when these filing requirements were newer and were being emphasized, the IRS has been very willing to accept late-filed FBAR returns in many circumstances, as a way to gain voluntary compliance.

Taxpayers, however, would be wise to heed the findings of the US District court that held that a US citizen willfully failed to file FBARs regarding his Swiss bank accounts. In a recent case, the court found that the taxpayer’s testimony was not credible; he was financially sophisticated and had created financial structures to evade taxes.

Some background: Edward Flume was a US citizen and an experienced businessman who lived and worked in Mexico. As his foreign holdings grew, Flume used a Mexican tax preparation firm, and incorporated his business in the Bahamas initially, and then reincorporated it in Belize. Flume also opened a Swiss account under the corporation’s name with UBS in 2005; only his wife and he had signature authority and they held all of the stock. Flume signed a waiver of a right to invest in US securities, which the IRS later said was evidence that they wanted to hide the activity from US authorities. Flume failed to report his interest in the foreign UBS account to the IRS in 2007 and 2008, in accordance with the FBAR filing requirements, although he did report the interest income on a Mexican bank account. Separately, UBS was under investigation by the IRS on a charge of a broad tax-evasion scheme it was conducting for its US clients. Upon learning of the investigation by the IRS into UBS, Flume moved his account, first to another Mexican bank account, and then back to the US. Finally, in 2010 UBS agreed to comply with the IRS and released the names of its American clients, including Flume.

In June of 2010, Flume filed the delinquent FBAR tax returns for 2006 through 2009, although the value of the accounts he reported were significantly understated. Even though he was eligible, Flume did not apply to the IRS’s Offshore Voluntary Disclosure Initiative (OVDI), which might have reduced his liability if he had disclosed the Swiss bank account. In 2014, the IRS determined that Flume had made a willful attempt to avoid US taxes and assessed penalties in excess of $450,000. Flume claimed the failures were inadvertent, as he had no knowledge of the FBAR requirement until 2010.

The District Court concluded that Flume’s 2007 and 2008 FBAR filing failures were willful, noting the following reasons:

Flume’s testimony was not credible and contained numerous contradictions.
Flume changed his account of when and how he first learned of the FBAR reporting requirement at least twice.
Flume’s account of the discrepancies between his delinquent FBARs and the actual balance of his UBS account strained credulity.
Particularly when viewed in light of his disingenuous testimony, Flume’s financial structure reflected a sophisticated tax-evasion scheme.
Flume’s testimony about the 2001 transfer of Wilshire Holdings, Inc. from the Bahamas to Belize further demonstrated his familiarity with international tax laws.
Flume’s tax preparer’s testimony that Flume was sent an annual reminder of the foreign-account reporting requirements was credible.
The fact that Flume disclosed his Mexican account on Schedule B of his tax returns suggests that he was aware of the foreign-account reporting requirement and made a conscious choice not to disclose his Swiss account.
Together, UBS’s client-contact records and Flume’s trial testimony establish that Flume was aware of the IRS investigation into UBS by mid-2008. However, Flume did not file any FBARs until after UBS agreed to turn over its American clients’ records to the IRS. This timing strongly suggested that Flume knew he was breaking the law but continued to believe he could get away with it until it became clear that U.S. authorities would learn of his Swiss account.
Even if the Court accepted Flume’s claim that he did not know about the FBAR requirement until 2010, his testimony at trial clearly established that he acted with extreme recklessness by failing to review his tax returns before signing them.

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by Gregory S. Dowell Updated May 16, 2023 Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds. To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. Medical expenses are only deductible if they exceed 7.5% of adjusted gross income; using only one spouse's income may allow a deduction to be taken if filing separately, compared to losing the medical deduction entirely if both incomes are combined by filing jointly. We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking income tax considerations into account before tying the knot. That’s particularly true for those who plan to marry late this year or early next year. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year. For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket. For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers. Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%. Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.