Court Upholds FBAR Penalty That Exceeded Foreign Account Assets

A Federal appeals court recently upheld a case where a Florida taxpayer (Mr. Carl R. Zwerner) was assessed a penalty equal to 150% of the value of the foreign accounts that he should have reported to the IRS on a Report of Foreign Bank and Financial Accounts (FBAR).

The laws governing foreign accounts require that any taxpayer having, in aggregate, over $10,000 in assets in foreign accounts must report these foreign assets on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (which is the current FBAR form).  Form 114 must be filed electronically.  The Criminal Investigation division of the IRS administers this electronic system.

There is a good reason for this.  The IRS is aggressively pursuing taxpayers who fail to report foreign assets on an FBAR.  They even have a program for helping taxpayers “come clean.”  It’s called the Offshore Voluntary Disclosure Program (OVDP).  If you qualify for OVPD you avoid criminal charges, but it comes at a cost of 27.5% of the highest value of the account in each tax year that was not reported.

Many taxpayers attempt to avoid the 27.5% by “quietly” amending prior years’ returns, reporting the foreign income and paying the taxes.  Unfortunately, if the IRS discovers this, as they did in Mr. Zwerner’s case, the taxpayer is no longer in the OVPD and the penalties can jump to 50% of the highest balance for each year that goes unreported.  If the taxpayer has not reported the income for a number of years, the sum of the total penalties can quickly add up to more than the value of the account itself.

This ruling now makes the OVPD even more popular.

If you have foreign bank accounts that you have not reported on an FBAR and would like to discuss your options, schedule your free consultation by calling (480) 888-7111 [or submit a web request here].