Foreign Accounts and FBAR Penalties

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Foreign Accounts and FBAR Penalties

A District Court for the District of New Jersey recently granted a default judgment against a defendant taxpayer and ordered him to pay almost $119,000 — $100,000 for “Defendant’s willful violation of the FBAR statute” as well as late fees and accrued interest.

The case arose out of the failure of taxpayer, Sal Guggenheim, to report his interest in several foreign bank accounts for a three-year period. Mr. Guggenheim was purported to have received several large deposits of Swiss francs into offshore bank accounts to avoid the payment of tax. Mr. Guggenheim did not report any of the deposits on his federal income tax returns for the years that they were received. He also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) stating he had an interest in any foreign bank account, as was required under Section 5314 of the Bank Secrecy Act and its regulations. Subsequently, the Government filed an action against Mr. Guggenheim under § 5321(a)(5) of the Bank Secrecy Act to collect penalties against him for the failure to report his interest in the Foreign Accounts and to file the FBAR. The Government requested a default judgment after Mr. Guggenheim failed to file an answer to the complaint and did not respond.

The court noted the authorization under Section 5321(a) for the Government to impose a civil penalty “for the willful failure to file an FBAR if (1) the person is a citizen of the United States [or resident]; (2) the person had an interest in or authority over a foreign financial account; (3) the financial account had a balance exceeding $10,000 at some point during the reporting period; and (4) the person willfully failed to disclose the account or file an FBAR form for the account.” (citations omitted.) Taking the facts laid out in the complaint, the court found that the elements were satisfied because the complaint alleged that Defendant was a New Jersey resident with an “interest in and authority over the Foreign Accounts” and that several bank accounts under Defendant’s control and authority had balances exceeding $10,000 at various points from 2011-2013.

The court further noted the elements of “‘recklessly’ fail[ing] to comply with an IRS filing requirement” as such: “(1) she clearly ought to have known that (2) there was a grave risk that [the filing requirement was not being met] and if (3) [he or she] was in the position to find out for certain very easily.” The Court found that the complaint alleged the Defendant had received distributions from the accounts through offshore companies and failed to report those distributions from 2011-2013. In addition, the Complaint claimed Defendant did not disclose an interest in the foreign accounts and did not file the required FBARs.

The court fund that the Complaint pled a “sufficient basis to determine the Defendant acted willfully in failing to file FBARs reporting his interest in the Foreign Accounts because they support an inference Defendant ‘engaged in conduct meant to conceal or mislead sources of income or other financial information.’” In addition, the court reviewed a certification included by the Government in which an IRS FBAR Penalty Coordinator laid out an assessment of penalties for the years 2010-2013 under Section 5321. The Court concluded that prejudice against the government would occur a default were not granted, as the Court stated that “denial would further delay the Government’s collection efforts under Section 5321 for penalties arising from Defendant’s failure to comply with the FBAR requirements.

The Court granted the Government’s Motion for Default Judgment and ordered a judgment be ordered against defendant in the amount of $118,793.85, in addition to any other late fees, accrued interest, or other fees allowed by law. The case serves as yet another cautionary tale to those U.S. persons with an interest in foreign accounts. Failing to report an interest in such accounts—such as failing to file a required FBAR—could result in penalty exposure.