Press Room

12 Sep 2019

Failure to file FBAR case underscores importance of disclosure and risk of penalties


This article was written by Leonard Schneidman and Jeff Malo of Andersen, United States.

A recent case involving the failure by a taxpayer to report foreign assets and file a Report of Foreign Bank and Financial Accounts (FBAR) highlights a spate of recent activities by IRS regarding taxpayers’ failure to comply with the FBAR filing requirements and acts as a reminder of the severe consequences associated with such failure. It also underscores the importance of consulting a tax advisor who is well-versed in the FBAR filing requirements and disclosing all requested information to the tax preparer so as not to run afoul of the foreign bank account reporting rules.

In United States v. Dadurian, the taxpayer entered into a settlement with the U.S. government for $1 million after being charged with failing to report foreign financial accounts on a Report of Foreign Bank and Financial Accounts (FBAR). The case illustrates the U.S. government’s intent to aggressively pursue maximum penalties against those who fail to report foreign assets. It also raises the question of whether reliance on a professional is a valid defense to the imposition of a willful FBAR penalty.

Background

A resident or citizen of the United States having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign county must report that relationship to the U.S. government for each year that the relationship exists by filing an FBAR by April 15 of the following year. Failure to do so subjects the resident or citizen to a civil penalty. That penalty is significantly greater if the failure to report is willful.

The settlement was reached in Dadurian after the U.S. government sought over $2.7 million in penalties and interest as a result of the taxpayer’s alleged failure to report her access to and control over a number of foreign financial accounts.

Willfulness in FBAR Context

In Dadurian, the taxpayer argued that there was no evidence that her failure to report several of the accounts was willful. However, the District Court (Court) found that there was circumstantial evidence by which a trier of fact could reasonably infer that she had willfully failed to file FBARs for the accounts at issue. For example, the Court noted that the taxpayer used funds from two of the accounts to purchase condominium units. The Court also found that the taxpayer used the funds from another account to pay for her mother’s living expenses. It was also alleged that the taxpayer failed to tell her tax preparer about her foreign assets for the years at issue.

Reliance on a professional advisor is a valid defense in tax crimes and with respect to the civil fraud penalty; however, a question remains as to whether relying on a professional is a valid defense to the imposition of a willful FBAR penalty. In Dadurian, the taxpayer was counseled by a tax attorney that she did not have to disclose her accounts. She then declined to tell her new tax return preparer about the foreign assets and further declared on her income tax return that she did not have an interest or signatory authority over any foreign financial accounts. This conduct undermined her reliance on a professional advisor defense.

The Takeaway

The settlement amount in Dadurian was significantly less than the $2.7 million the U.S. government sought. However, the case signals the U.S. government’s intent to aggressively pursue maximum penalties against those charged with willfully failing to file an FBAR. Those who fail to report foreign assets potentially face severe consequences. The risk of penalties can be managed through proper disclosure of all relevant foreign account information and the assistance of a tax advisor who is well-versed in the FBAR filing requirements.


Julian Nelberg

Julian is Head of the Private Client group at Andersen LLP. His clients include international high net worth individuals, senior executives, trusts and companies.

Email: Julian Nelberg