US citizens, residents, and corporations must generally file a Report of Foreign Bank and Financial Accounts (FBAR) if they have a financial interest or signatory authority over foreign financial accounts that have an aggregate value over $10,000 at any time during the calendar year. Those who fail to abide by this law can face serious financial penalties. It is not uncommon for the government to go after millions in fines for FBAR cases.
There are options for those who face these types of heinous claims from the government. Two potential arguments to help fight back against allegations of an FBAR violation or an attempt to collect an excessive fine are to review whether the alleged failure to file was an honest mistake and to push back against the constitutionality of a large fine.
Option #1: Willfulness
It is possible that you needed to file an FBAR and simply did not know. These types of honest mistakes can happen, but the government is often hesitant to believe such claims. This is likely motivated by the fact that penalties skyrocket if the government can establish the failure to file was willful. For these purposes, the Internal Revenue Service (IRS) defines the term willful as an intentional wrongdoing designed to circumvent tax obligations. Examples of evidence the government may use to build this type of claim could include submission of false information or a complete failure to file when the taxpayer is otherwise a savvy entrepreneur who handles advanced business issues.
To counter this argument, the taxpayer would want to establish that there was a good faith misunderstanding and reasonable cause. This often requires provision of evidence to support the claim, but taxpayers are wise to take care with the evidence they provide as it could also be used by the government to show that the failure to file the FBAR was, in fact, negligent, non-willful or willful.
Option #2: Excessive fine
Another defense option is to argue that a proposed fine for an FBAR violation is a violation of the Excessive Fines Clause. A taxpayer recently used this argument in a case that made it all the way to the Supreme Court — where the justices refused to provide clarification. Unfortunately, this means that there is some confusion over whether this argument will succeed or not.
The lack of clarity on whether or not the Excessive Fines Clause applies to civil tax penalties is a hurdle. If a taxpayer can establish it does, the law will limit the amount the government can penalize taxpayers for a civil violation. If not, the fines can quickly snowball into ridiculously excessive amounts. Although the highest court in the country did not provide guidance, one justice spoke out against the government’s use of civil penalties to circumvent fine limitations. Justice Neil Gorsuch noted this practice, when used to punish the taxpayer, should fall within the realm of judicial scrutiny. Although an official holding is not available for legal counsel to use to build a case, this dissent can still provide some support for this type of argument.
These are just two options to consider when dealing with an investigation by the IRS. Whatever pathway is chosen, it is important to move forward with any correspondence carefully, as the government could use the information to help build their case.