updated 10:30 AM CEST, Sep 19, 2019

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Record penalties sought in California in latest major FBAR case

The U.S. Internal Revenue Service is seeking what is said to be a record US$119.6m in penalties over what it has claimed in California district court documents were violations of the FBAR regulations, which require Americans to disclose their overseas financial accounts above a certain amount each year.

Foreign Bank Account Report penalties are famously high, which is why tax experts often stress to their clients the importance of complying, particularly as the penalties for "wilful" non-compliance are that much greater.

The case (U.S. vs Burga, No. 5:19-cv-03246-EJD), emerged in the U.S. media recently, where it was noted that court documents had claimed that Francis Burga and her late husband, Margelus Burga, had some 294 foreign bank accounts between 2004 and 2009, in Liechtenstein, the British Virgin Islands, Switzerland, Singapore, Japan, Panama, China and Vietnam, for which they had failed to file the requisite FBARs. 

According to Law360.com, a legal news website, the IRS is claiming that the defendants, Francis Burga and the estate of her late husband, Margelus Burga, had "used complex business structures to divert income overseas".

The report notes that the IRS began investigating the couple as long ago as 2007.

Law360.com wasn't able to obtain comments from either the IRS or an attorney for the Burgas. 

If the IRS is successful in the Burga case, it will be the largest FBAR penalty case thus far. Currently the title for that distinction is held by a University of Rochester, New York professor named Dan Horsky, who was hit with a US$100m penalty 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. 

According to a statement issued by the U.S. Department of Justice in November 2016, Horsky had been "employed for more than 30 years as a professor of business administration" in Rochester.

"Beginning in approximately 1995, [he] began investing in numerous start-up businesses through financial accounts at various offshore banks, including one bank in Zurich, Switzerland," the DoJ statement continues.

"Horsky created “Horsky Holdings,” a nominee entity, to hold some of the investments, and he used the Horsky Holdings account, and later, other accounts at the Zurich-based bank, to conceal his financial transactions and financial accounts from the IRS and the U.S. Treasury Department."  

Notoriously severe penalties 

As noted above, the penalties for not filing a Foreign Bank Account Report – or FinCEN 114 Report, as it's known to tax experts – are severe.

The minimum penalty for the “non-wilful” failure to file  is US$10,000 for each year that a U.S. taxpayer is deemed to have failed to file as required, but the penalty increases substantially where "wilful" failure to report is assumed.

Here, the penalty is US$100,000, or 50% of the account balance in question at the time of the violation, whichever is larger.

The requirement to file a “Report of Foreign Bank and Financial Accounts” (FBAR) has existed since 1970. Emphasis on monitoring assets held in offshore financial institutions increased in the wake of the 9/11 terrorist attacks on the U.S., through the passage of the so-called Patriot Act. 

To read more about FBARs, see Expat tax experts Richardson, La Torre Jeker go looking for ‘Mr FBAR’.