What is FBAR? How can the IRS prove the willful FBARs violation?
On November 8 a federal district court held that the government could proceed to collect the FBARs penalties from Jon McBride. This is the second FBARs case for year 2012.
Let’s review the case to understand how the IRS succeeded in proving the case of the FBARs willful violation.
The IRS filed a civil suit alleging that Jon McBride failed to report interest in several foreign accounts on his 2000 and 2001 expatriate tax returns. Moreover, McBride used a sophisticated scheme to launder his U.S. business income through foreign shell companies. A financial management firm established several accounts in the name of international business corporations. McBride later repatriated funds from these offshore accounts. Also, he didn’t file the FBARs for the years during which the accounts existed.
How did the Utah district court prove a willful violation?
First, the Utah district court stated that McBride had an interest in foreign accounts that were not reported on the FBARs form. Although, all accounts were established in the names of corporations, McBride had a financial ownership and functional control over the accounts. This fact was sufficient to establish an agency relationship that requires the FBARs reporting. The Utah district court stated that recklessness is an example of willful act. The court held that the direct proof of taxpayer’s intent of failure to file the FBARs is rarely available so circumstantial evidence and reasonable inferences can be used to prove the motive of willful violation.
Second, the court stated that McBride had knowledge that he was required to report his foreign account and file the FBARs since he signed his returns. McBride attempted to suggest that he didn’t read his expatriate tax return in full. However, the court did not accept this statement because it is a taxpayer’s duty to follow the filing instructions. Moreover, McBride had promotional materials from an investment company. These advertising papers explicitly mentioned that it is a requirement to report interest in foreign accounts.
Third, the court ruled that using an expatriate tax preparer does not mitigate the willful act. McBride didn’t inform his tax preparer about foreign accounts that constitutes the act of reckless disregard.
The FBARs civil penalty in this case was substantial in the amount of 50 percent of the account balance for every year of FBARs willful violation.
If you are not sure about your FBARs filing requirements and how you should proceed with past due FBARs, please contact an expatriate tax CPA that provides international tax services. International tax experts at Artio Partners have helped American expats from over 75 countries.