The IRS and Treasury face a number of challenges in administering our tax and financial systems. This includes challenges presented by foreign transactions by U.S. citizens and residents.
In recent years, high-profile cases involving Americans using offshore accounts to evade taxes have prompted the U.S. government to crack down on tax evasion and make it more difficult for U.S. persons to conceal assets and income.
The approach to these challenges has changed significantly over time. This includes a shift and focus on foreign accounts in the early 2000s. The various compliance initiatives have come and gone, leaving behind a strict penalty regime. The penalty regime can be harsh and, in some cases, produce unfair results. There is no reasonable cause defense, generally. Luckily some IRS employees see the inequity and use their discretion to try to make the system work. This creates a luck-of-the-draw situation for taxpayers as the outcome is largely dependent on who is assigned to work the case.
The United States v. Quiel, No. CV-21-00094-PHX-GMS (D. Ariz. 2023) case provides an opportunity to consider how the government’s approach to foreign compliance has changed over time. It also highlights the opportunities taxpayers have to move out of the government’s way in this enforcement regime.
- 1 Facts & Procedural History
- 2 About FBAR Reporting Obligations
- 3 Evolution of FBAR Reporting Enforcement
- 4 The IRS Offshore Credit Card Initiative
- 5 The Foreign Account Tax Compliance Act
- 6 The UBS-Swiss Accounts Case
- 7 The Offshore Voluntary Disclosure Program
- 8 Where Are We Today
- 9 The Streamlined Filing Compliance Procedures
- 10 Delinquent FBAR Submission Procedures
- 11 Voluntary Disclosure Practice
- 12 Conclusion
Facts & Procedural History
This case involves a former securities brokerage firm owner and hedge fund manager who engaged in various financial ventures, including assisting private companies with capital raising and public offerings. The taxpayer is a U.S. citizen.
In the early 2000s, the taxpayer used a Visa card linked to a bank account in Belize but failed to report this offshore credit card account to the IRS. In 2005, an audit by the IRS revealed the account and a settlement was reached in 2006 with the assistance of the taxpayer’s tax attorney.
During this time, the taxpayer also opened a second foreign bank account in Belize. Around 2006 or 2007, the taxpayer and his business partner, who was also a U.S. citizen, established two Swiss investment funds.
In 2006, the taxpayer’s tax attorney provided a warning about reporting offshore accounts. The taxpayer did not disclose any additional foreign accounts to the IRS for the following three years.
In 2011, the taxpayer and his business partner were indicted on charges that included conspiracy, false tax return filings, and willful failure to file Foreign Bank and Financial Account Reports (“FBARs”). The conspiracy charges were dropped in 2013, but the taxpayer was convicted of willful subscription to false individual tax returns. In 2019, the IRS imposed civil penalties on the taxpayer for willfully failing to report the four foreign accounts on their 2007 tax return and 2008 FBARs.
About FBAR Reporting Obligations
The U.S. imposes numerous restrictions on its citizens concerning foreign accounts. These reporting requirements have grown stricter over time, driven by the government’s goal to combat tax evasion and financial crimes.
The Bank Secrecy Act (“BSA”) was enacted in 1970, mandating financial institutions to report certain transactions that may indicate criminal activity. In 1974, the BSA was amended to introduce FBAR reporting, which obligates U.S. persons with a financial interest in or signature authority over foreign financial accounts to disclose them to the Treasury Department annually. FBAR filings are made electronically through the FinCEN website, with a deadline of June 30th each year.
To file an FBAR, taxpayers must first determine if they have a “financial interest” or “signature authority” over any foreign accounts. A person has a “financial interest” in a foreign account if they are the owner of record or holder of legal title. Additionally, having signature authority over an account constitutes FBAR filing obligations.
The penalties for FBAR violations can vary depending on whether the non-reporting is willful or non-willful. Non-willful violations refer to instances where the taxpayer’s failure to file an FBAR was not intentional or with reckless disregard for the reporting requirements. For non-willful violations, the penalty can range from $0 to $10,000 per violation.
For willful violations, the penalties can be significantly higher. The penalty for a willful violation can reach up to the greater of $100,000 or 50% of the balance in the foreign account at the time of the violation, per violation, for each year the violation occurred. In cases where the willful violation is part of a pattern of illegal activity, the penalty can be increased to 100% of the account balance, per violation, for each year of the violation. This includes reckless conduct as well.
Evolution of FBAR Reporting Enforcement
Prior to the early 2000s, the IRS was not focused on and essentially did not enforce foreign account compliance. The level of enforcement and scrutiny of foreign account compliance increased over the years.
The IRS Offshore Credit Card Initiative
The IRS’s Offshore Credit Card Initiative was launched in 2003 as part of its efforts to address offshore tax evasion. Under this foreign credit card initiative, the IRS focused on identifying taxpayers who used offshore credit cards linked to undisclosed foreign accounts to evade taxes. The initiative aimed to ensure that taxpayers properly reported and paid taxes on income generated from these offshore accounts. The initiative involved cooperation with credit card companies and foreign banks to obtain information on U.S. taxpayers’ offshore credit card transactions. The IRS utilized this data to identify individuals who failed to report their offshore credit card accounts and income on their tax returns. This is likely why the IRS picked up the taxpayer in the case described above. It is also likely why the a settlement reached in 2006.
The Foreign Account Tax Compliance Act
In 2010 foreign tax reporting requirements underwent further changes. The passage of the Foreign Account Tax Compliance Act (“FATCA”) introduced additional reporting obligations for U.S. taxpayers with foreign financial assets. Under FATCA, taxpayers meeting certain thresholds are required to report their foreign financial assets on Form 8938, in addition to filing the FBAR. The threshold for Form 8938 reporting is generally higher than the FBAR reporting threshold. As a result, taxpayers who meet the reporting thresholds for both FBAR and Form 8938 may need to file two separate reports, providing information about their foreign financial assets on both forms. This scrutiny is likely why the tax attorney for the taxpayer in the Quiel case advised the taxpayer to report the account.
The UBS-Swiss Accounts Case
The government’s foreign account compliance efforts really came to a head in 2009 with the UBS-Swiss accounts case. This case made headlines and put the rules in the public domain. Prior to this many foreign account holders did not even know of the rules.
In 2009, UBS AG, Switzerland’s largest bank, admitted to aiding American taxpayers in concealing assets in undeclared Swiss bank accounts. The Justice Department alleged that UBS had facilitated tax evasion on more than $20 billion in assets. As part of the settlement, UBS agreed to pay $780 million in fines and disclose the names of over 4,000 American account holders.
The UBS-Swiss case transformed the FBAR reporting landscape. Prior to this case, FBAR compliance was seldom enforced, and the IRS did not actively pursue cases of Americans hiding assets in foreign accounts. However, after the UBS-Swiss case, the IRS began aggressively enforcing FBAR regulations. In 2010, Congress passed FATCA, which facilitated the identification and prosecution of Americans with concealed foreign accounts.
Furthermore, the UBS-Swiss case had lasting effects on banks and financial institutions. Following its publicity, many banks ceased accepting American customers with undisclosed foreign accounts. This made it challenging for Americans to open new foreign accounts, effectively curbing opportunities for non-compliance.
The Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (“OVDP”) was launched by the IRS. Initially, the program allowed taxpayers with undisclosed offshore accounts to voluntarily come forward, disclose their accounts, and resolve their tax obligations. Over the years, the program underwent several modifications, with updated versions introduced in 2011, 2012, and 2014. These revisions aimed to provide additional incentives for taxpayers to participate while increasing the penalties for non-compliance. The OVDP officially ended on September 28, 2018, with the IRS citing a significant decline in the number of taxpayers using the program. Thus, the OVDP was not even an option in 2019 when the penalties were imposed by the IRS in the Quiel case.
Where Are We Today
Taxpayers with undisclosed foreign accounts still have options available, such as the Streamlined Filing Compliance Procedures, the Delinquent FBAR Submission Procedures, and the Criminal Investigation Voluntary Disclosure Practice to come into compliance with their tax obligations.
The Streamlined Filing Compliance Procedures
The Streamlined Filing Compliance Procedures are designed for non-willful taxpayers who failed to report their foreign financial assets and income. The streamlined filing compliance procedures provide a simplified process for taxpayers who unintentionally failed to report foreign financial assets and pay taxes. It involves filing amended or delinquent returns and resolving tax and penalty obligations. Eligibility requirements apply, and prior examinations or criminal investigations disqualify taxpayers. Returns are processed normally and may be subject to examination. The procedures are separate from the IRS Criminal Investigation Voluntary Disclosure Practice and prior OVDP.
Delinquent FBAR Submission Procedures
The Delinquent FBAR Submission Procedures allow taxpayers who have failed to file the FBAR to come into compliance. Taxpayers who need to file delinquent or amended tax returns but do not require the IRS Criminal Investigation Voluntary Disclosure Practice or Streamlined Filing Compliance Procedures can use the delinquent FBAR submission option. This option applies to those who haven’t filed required FBARs, are not under IRS examination or investigation, and haven’t been contacted by the IRS about the delinquent FBARs. To resolve the delinquency, taxpayers must review the instructions, provide an explanation for filing late, file electronically at FinCEN, select a reason for late filing, and contact FinCEN if electronic filing is not feasible. The IRS will not impose penalties if the income from the foreign financial accounts was properly reported on U.S. tax returns and all taxes were paid. The delinquent FBARs may be subject to audit through standard processes for tax and information returns.
Voluntary Disclosure Practice
The Voluntary Disclosure Practice offered by IRS Criminal Investigation provides an opportunity for non-compliant taxpayers who have willfully failed to comply with tax obligations to rectify their non-compliance and potentially limit exposure to criminal prosecution. By making a truthful, timely, and complete disclosure and cooperating with the IRS to determine tax liability and arrange payment, taxpayers may seek protection from potential criminal prosecution. The disclosure process involves a two-part application and cooperation with IRS examiners.
Staying informed and compliant with FBAR regulations is crucial for individuals and businesses to navigate the complexities of foreign financial transactions and ensure adherence to U.S. tax laws. The enforcement efforts by the IRS have evolved significantly, with a heightened focus on compliance with foreign financial accounts. The UBS-Swiss case and the subsequent implementation of FATCA have brought about substantial changes to FBAR reporting and tax enforcement. Today, taxpayers with undisclosed foreign accounts have accessible options, such as the Streamlined Filing Compliance Procedures, the Delinquent FBAR Submission Procedures, and the Voluntary Disclosure Practice, to rectify non-compliance and mitigate potential penalties, providing opportunities to address their obligations proactively.