IRS Assesses Penalty 40% Greater than the Account Balance
An 87 year old man who has a secret Swiss bank account with $1.5M faces penalties of $2.2M for failure to disclose his bank account to the IRS. This is the first case made public where an individual's penalties associated with failing to report a foreign bank account exceeded the balance in the account.
When the Patriot Act was enacted in 2003, it allowed the IRS to assess penalties of up to 50% of the highest balance in an offshore account for each year the individual "willfully" failed to report the account to the IRS.
The test for willfulness is whether there was a "voluntary, intentional violation of a known legal duty." A finding of "willfulness" must be supported by evidence of willfulness and the IRS has the burden of proof.
However, if you can prove the violation was due to "reasonable cause", the willfulness penalty may not be asserted.
In this case, the individual failed to report the account to the IRS and other evidence suggested the individual took some steps to hide the identity of the account.
Each year, all "U.S. persons" must report the existence of their foreign bank accounts on Schedule A of their individual 1040 income tax return. If the aggregate balance in all their foreign bank accounts is $10,000 or more, they then must also report their accounts on FinCEN Form 14 (formerly the FBAR form).
A "U.S. Person" includes; U.S. citizens; U.S. residents; entities, including corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
The accounts required to be reported are generally accounts that a person has a "signature authority" over or "financial interest" in the financial account located outside of the United States.
If you have a foreign bank account or financial investment, and have not reported your account to the IRS, you have until June 30 of each year to report your account. With new U.S. laws and regulations, many foreign countries have signed agreements with the U.S. government requiring the banks in those countries to report accounts that have a connection to a U.S. person.