How Tax Evasion and Willful FBAR are Intertwined
Technically, the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114) is not a tax form, and therefore there is no tax implication for not filing the form. In fact, the FBAR is not even covered under Title 26 (Internal Revenue Code, the Tax Code) but rather Title 31 (Money & Finance). Thus, despite the fact that a person may not have any tax requirement as a result of having certain foreign bank and other financial accounts abroad, oftentimes a willful failure to report foreign accounts may coincide with the crime of tax evasion. It is not uncommon for a US Taxpayer who violates a criminal tax statute for unreported offshore income to also have willful and criminal FBAR implications as well. Here is an example of how a US Person may violate the tax evasion criminal statute in a conjunction with a willful FBAR violation.
Tax Evasion and Willful FBAR Example
Denise is a US Citizen who resides in the United States. Recently, she learned that she should have been filing the annual FBAR statement each year to disclose her several offshore accounts — but has decided not to report them because she doesn’t want to be on the IRS’ radar. Denise then travels to the foreign banks and closes her accounts — but opens new accounts using foreign identification (not letting the institution know she is a US Citizen). Unfortunately, one of the foreign financial institutions is an old bank that Denise used to have an account at several years ago, and they still have on record that she was a US Citizen. The bank updates the US government in conjunction with their annual FATCA Reporting.
Denise continues to file annual tax returns in the United States but does not include her foreign accounts nor the interest in dividends generated from her foreign bank and investment accounts. Denise is audited in what is referred to as a reverse eggshell audit. The Internal Revenue Service is already aware that Denise has foreign accounts when they begin her IRS examination. During the examination, Denise doubles down on the fact that she does not have foreign accounts nor does she have any unreported income from abroad.
The examination wraps up and Denise believes she is in the clear; however, a few months later, Denise is investigated by IRS Special Agents where the US Government determine that Denise committed the affirmative act of falsely filing a tax return along with willfully avoiding the reporting of her foreign accounts and reporting her foreign income. She may be prosecuted for both tax evasion and criminal FBAR violations.
FBAR Amnesty Program Summary
The FBAR Amnesty Programs are programs developed by the IRS to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs include:
Can I Just Start Filing FBAR This Year Instead?
No, unless the current year is the first year you had an FBAR Reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (“filing forward”), it is illegal. In the world of offshore disclosure, this is referred to as an FBAR Quiet Disclosure. The IRS has warned Taxpayers that if they get caught in an FBAR Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
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