The government has routinely
relied on the later legislation to collect penalties that can run into the
millions of dollars based on 50% of the value of the accounts not reported.
Subsequent to the Colliot and
Wahdan cases, the United States Court of Claims held in Norman
v. United States, that the later legislation had superseded the regulation
relied upon in those cases, upholding a penalty of over $800,000. Consequently,
there is now a split of authority.
Schedule B of the U.S. Form
1040 tax return includes an often-overlooked question as to whether the
taxpayer had signature authority over any foreign financial account, such as a
bank or securities account. Many U.S. expatriates working in foreign countries
undoubtedly have such accounts, as do numerous foreign nationals residing and
working in this country.
Indeed, the relevant accounts
include even accounts in foreign branches of U.S. banks, if the account is held
by a U.S. person. If the aggregate amount of such accounts exceeds $10,000
at any time during the year, the taxpayer is required to file a separate
Treasury Department Report of Foreign Bank and Financial Accounts (usually
referred to as the “FBAR”) by 15 April of the following year.
The penalty for failing to file
is severe; even a non-intentional failure is subject to a penalty of up to
$10,000, while the penalty for a willful failure can be the greater of $100,000
or 50% of the amount in the account.
The current issue results from
a 2004 change to the statute. Up to that time, the penalty for willful failure
to report was limited to the greater of $25,000 or the account balance at the
time of the violation up to a maximum of $100,000. That number was reflected in
the Treasury Department’s implementing regulation. In 2004 Congress amended the
Bank Secrecy Act to provide that the penalty for willful failure to report is
the greater of $100,000 or 50% of the account value. However, Treasury never
repealed or revised the earlier regulation limiting the penalty to $100,000.
In Colliot and Wahdan, the U.S.
District Courts held that the new law did not automatically supersede the old
regulation, which was still applicable. In Norman, the U.S. Claims Court
disagreed. The IRS has rushed to assert the Claims Court rationale in a number
of pending cases. However, the ultimate outcome is uncertain, and many
observers think it will eventually have to be decided by the U.S. Supreme
Related: U.S. Senate Holds Hearing on CFPB and Ex-Im Bank Nominees
In recent years, the U.S. IRS
has vigorously pursued tax avoidance caused by maintenance of unreported
foreign bank accounts, and aggressively asserted penalties for failure to
report. Worldwide ERC® has advised members that it is important that employees
posted overseas understand their reporting obligations. The penalties for
failure to report can be huge, as noted, and the IRS will continue to assert
the larger penalties as long as the litigation reported here is ongoing. It
remains important for U.S. expats to understand and comply with their reporting