FBAR – When Ignorance is not Bliss
If you have a bank account outside of the U.S., be aware of the requirement to file a Foreign Bank Account Report (FBAR). Ignoring this report could result in steep consequences.
The Bank Secrecy Act of 1970 mandates the reporting of certain foreign financial accounts. Among other provisions, it requires holders of foreign bank accounts to file an FBAR if the aggregate value of all offshore accounts exceeds $10,000 at any point in the calendar year. This requirement was put in place to go after taxpayers hiding money in offshore tax havens. And the recently decided case of Peter and Susan Horowitz serves as a reminder of why it’s best to play by the rules.
The Horowitz Case and Why You Should Care
Peter Horowitz is a doctor who moved to Saudi Arabia with his wife in 1984. He worked there until moving back to the United States in 2001. In 1988, they opened a Swiss bank account with UBS and kept it after returning stateside, ultimately closing them in 2008. Peter then opened another Swiss account at a different bank and added Susan to that account later.
However, the Horowitzes did not file an FBAR or disclose the existence of foreign accounts on their tax returns for any of these years. In 2010, they entered the Treasury’s Offshore Voluntary Disclosure Program and filed FBARs for 2003-2008. But in 2014, the U.S government decided their failure to file the forms amounted to willful intent. Peter and Susan were each penalized $250,000 for their noncompliance.
The Horowitzes refused to pay and the case went to court. The court found that, while they lacked the technical knowledge of FBAR reporting, the facts exhibited that they were reckless in their willful disregard of the filing requirements. The district judge found each to be liable for penalties and interest—Peter for $654,568 and Susan for $327,284.
Reckless and Willful – Don’t Play Coy
While the Horowitzes tried to argue that they didn’t know any better, they discussed their Swiss bank account and the interest income with friends. (Remember back in the day when you actually made interest on your bank account?) Yet somehow, they never mentioned this fact to their accountants. They also had all of the mail related to the account held in Switzerland. Additionally, their U.S. tax return included Schedule B, a schedule that reports interest and dividends and contains a question about the existence of foreign accounts and FBAR requirement. The Horowitzes signed their tax returns and marked “no” in Schedule B when asked about the existence of any foreign bank accounts.
Why the Devil is in the Details of Schedule B
This is where the IRS backs you into a corner. When you sign a U.S. tax return, you’re attesting under penalty of perjury that everything in the return is true and accurate to the best of your knowledge. There are disclosures in a tax return that when signed, amount to constructive knowledge. And with the FBAR, it’s all about Schedule B.
Schedule B of the Form 1040 includes a question about whether you have foreign accounts. This puts you on notice of your potential FBAR filing requirement. If you answer no or leave the box blank when in reality you have a foreign bank account, this constitutes constructive knowledge of the filing requirement and shows reckless disregard for the rules.
Remember that non-compliance with FBAR—especially when deemed willful—is a serious matter with the potential for large penalties (up to half of the highest value of the account per year!). Do not close your eyes to this requirement. Problems can be easily avoided if you are forthright with your tax professional.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.