updated 2:13 PM CEST, Jul 7, 2020

U.S. taxpayer hit with almost US$13m in FBAR penalties

A U.S. taxpayer has been hit with almost US$13m in FBAR penalties, following a U.S. District Court ruling in Florida earlier this month, in what experts say is one of the largest individual FBAR assessments ever.

The title for the largest FBAR penalty is believed to be held by a University of Rochester, New York professor named Dan Horsky, who was hit with a US$100m assessment in 2016, before being sentenced in February 2017 to seven months in federal prison for a tax evasion scheme that is said to have relied on Swiss bank accounts. (As reported here last year, FBAR penalty-watchers are keeping a close eye on a case in California, where the IRS is said to be seeking a record US$119.6m in FBAR penalties from a couple by the last name of Burga, who, according to media reports, had had some 294 foreign bank accounts in various countries between 2004 and 2009, for which they had failed to file the requisite FBARs.)

The US$13m ruling, by the U.S. District Court for the Southern District of Florida on May 18, is one of a number of FBAR decisions involving large penalties that were published in May. It came after a partially-successful legal attempt by the taxpayer in question, referred to in the court documents as Isac Schwarzbaum, to get his penalty reduced, on grounds that the U.S. authorities had wrongfully used “the highest aggregate balance” each year when it worked out how much he would be expected to pay.

In fact, when – as in Schwarzbaum’s case – a failure to file an FBAR is judged to have been “willful”, the maximum penalty should be no more than a figure equal to 50% of the balance in the taxpayer’s accounts “at the time of the violation”, which is defined as the FBAR filing deadline each year, at that time June 30. (It has since been moved to April 15, with an automatic six-month extension to Oct. 15.)

Schwarzbaum was thus able to reduce his final FBAR bill by almost US$900,000, to US$12,907,952, the Florida District Court documents show.

‘Stonkingly scary’

David Treitel on CNN croppedLondon-based tax expert David Treitel, of American Tax Returns Ltd., called the series of just-revealed FBAR cases, including this one, a “stonkingly scary” reminder to U.S. expats not only of the importance in making sure they file FBARs every year, but of making scrupulously sure that they’re correct.

“Even while much of the United States has been in lockdown, the US Department of Justice (DoJ) has continued to take huge FBAR penalty cases through the courts pretty much daily,” Treitel, pictured left, told the American Expat Financial News Journal, citing a catalogue of case details that have been published in recent days by certain tax industry trade journals.

FBARs ‘notorious for size of potential fines’

FBARs, or Foreign Bank Account Reports (FinCEN Form 114s), are required for all “U.S. persons” to file for any “foreign” accounts they hold in which the balance has exceeded US$10,000 during the year – whether they live in the U.S. or abroad.

Even an account with a balance of zero must be reported, if the aggregate total of all an individual’s accounts exceeds US$10,000 at any point during that 12-month period.

FBAR penalties are notorious for the fact that they can be sizeable, particularly when, as in the Schwarzbaum case above, the failure to file them is judged to have been a “willful” act of non-compliance.

But what concerns many tax industry experts is the fact that an apparently significant number of Americans are apparently not filing FBARs, in spite of the potential penalties.

Even though an estimated 7 million to 9 million Americans live abroad – and unknown numbers of Homeland Americans also maintain overseas bank accounts – fewer than 1 million Americans file Financial Bank Account Reports, a U.S. Government Accountability Office report published last year noted.

According to that report – which, as reported, revealed a range of issues resulting from the 2010 law known formally as the Foreign Account Tax Compliance Act, and which was seen to have contributed to a “nearly 178% increase in the rate of citizenship renunciations between 2011 and 2016 – only some 949,510 individuals filed FBARS in 2016.

Questions about
Eighth Amendment rights

Not for the first time, the Schwarzbaum decision has led a number of tax industry commentators to question whether such large penalties are in fact unconstitutional, because they violate the Eighth Amendment to the U.S. Constitution, which prohibits the federal government from imposing excessively large fines or other punishments.

Some tax experts think this is a disingenuous argument by those who attempt to use it, noting that those with the huge penalties tend to be, as one U.S. tax expert put it, "the bad actors with pretty egregious cases", who attempted to "play" but failed to win "the audit lottery". 

Schwarzenbaum himself had in fact tried to argue that he was being expected to pay an “unconstitutionally” large fine, but the court ruled that the FBAR penalty in question wasn’t a penalty at all, but in fact had a “remedial” purpose, which was necessary to compensate the government for its costs in policing the FBAR universe.

Treitel believes this way of thinking, on the part of the U.S. authorities, is only likely to increase.

“It seems inevitable that we’ll see the IRS starting to use more of the data it's collecting through FATCA to find more and more undisclosed offshore accounts, and assessing ever-larger penalties when it does,” he noted.

Ross McGill, the founder and chairman of Hampshire, England-based tax and regulatory specialists TConsult – and an author of ten books on regulatory compliance, anti-tax evasion frameworks and related topics – agreed, adding that the "eye-watering amounts of money being spent by all governments on propping up COVID 19-hit economies" would inevitably see an "explosion in the number of such cases in the next few years, as the [Automatic Exchange of Information] and FATCA frameworks begin to bear fruit, and the moral case against tax evasion gathers strength." 

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