Orlando Gotay, Tax Attorney
Mindy is a teacher in New York. In 1999 Mindy opened a Swiss bank account. It didn’t have her name; it just had an account number. Around the time of this story, the account had a balance of just under $2 million.
Mindy’s difficulties? She never reported the account as required. When Swiss banks began furnishing information to the U.S. Treasury, she did not take advantage of a program designed to provide reduced penalties in exchange for future compliance. Instead, she opted to quietly file amended returns and late foreign bank account reports (FBARs), hoping no one would notice. Someone did.
The IRS assessed a “willful” FBAR penalty of 50% of the highest account balance for one of the years. In Mindy’s case, the fine came to $803,530.00. That’s some chunk of change.
She went to court and got taken to the cleaners. Why? Just about everything she said “strained credulity” –judicial speak for “we don’t believe a word.” She could not remember if she opened the account, where the money came from, the banker’s signature, her efforts to prevent investments in U.S. securities, a cash withdrawal, and on and on. The story is amazing. How a teacher manages to pile up that much cash is also unexplained and unaddressed. One can only wonder.
There is no mind-reading machine out there, so the best measure of willfulness is to look for tangible actions or omissions that suggest you knew and chose not to comply. Things that look like efforts to conceal always look bad. Shifty explanations make you look even worse. When she got audited, she initially denied there was an account at all. Then there was an account, but it wasn’t her money. As more evidence came to light, however, she slowly amended and eroded her statements until she reached her final testimony: that she knew that the account and money were hers, and that she had met with bank representatives to manage it, and that she had withdrawn money. Bad.
You can end up in this pickle quite by accident. Inherit a foreign bank account and not report it, …and that would be bad. A minor inconvenience (the original bank report) now risks becoming a “willful” FBAR penalty of 50% of the highest *yearly* balance on the account. Each year is a separate violation– nothing prevents the IRS from assessing a penalty for each annual willful violation. It can add up real quick.
Don’t be like Mindy.
Please note: This article is just a most general outline. It is informational only and not meant as legal advice.