Failure to Report Foreign Account Holdings Results in $2.2 Million Penalty

By Stanley Rose June 20, 2014

An Editorial

As the deadline for filing “FBAR” forms (foreign bank account reporting – formerly filed on Form TDF 90-22.1, now filed on FinCEN 114 and due June 30) draws to a close, a story has emerged of a significant victory for the Treasury Department in their pursuit of non-filers. For those unfamiliar with it, FinCEN 114 forms must be filed to report the balances of foreign financial accounts that collectively exceeded $10,000 during the previous year. No tax at all is due with these forms.

Carl Zwerner is a resident of Florida who for many years held foreign bank accounts that he failed to report as required. The balances were approximately $1.6 million during the years in question. He was assessed a penalty of 50% of the account balances for each year in a three year period, for a total penalty of $2.2 million that exceeded the amounts he held in the accounts. Significantly, this penalty was assessed not for underpayment of taxes or income, but for failure to report the existence of the balances.

Tax attorneys are watching this case with interest because Mr. Zwerner is expected to appeal by arguing that the 150% penalty violates a clause in the Eighth Amendment to the US Constitution that prohibits excessive fines.

It is easy to see both sides of this case. It appears that Mr. Zwerner deliberately hid these accounts. He attempted to disclose them in an OVDI (voluntary disclosure) program, but it was determined after he did so that he technically did not qualify for the program. His easy-to-follow trail for the Treasury Department, combined with an IRS audit, led to the steep penalties.

This editor’s thoughts on the matter (and not necessarily those of BNN or its other professionals) are this:

1. Shame on Mr. Zwerner for hiding assets in violation of the law! It seems clear that he knew better, although he may not have understood the severity of the consequences.
2. Shame on the Treasury Department for assessing penalties that so greatly exceed the crime! The government has a number of penalties at its disposal, including “normal” penalties commonly assessed on underreported income. If they truly want scofflaws to come forward, they should use something from that tool belt, rather than obliterating (and then some!) citizens’ account balances.

I am not proposing a slap on the wrist. A more balanced approach that is based on existing income tax penalties and related charges could consist of income tax of up to 39.6% on underreported income from hidden accounts, a 0.5% per month penalty (capped at 25%) for failure to pay tax, and interest, which currently is around 3%. For those who point out that some hidden accounts pay very little interest, and therefore income-based penalties would apply virtually no “toll charge” for bringing those accounts into compliance, perhaps it could be assumed for this purpose that interest income was earned at a rate at least equal to the IRS “Applicable Federal Rate,” a rate assumed to exist on certain non-interest bearing loans. Tax, penalties and interest charges could be assessed on that fictional interest income, if that amount was lower than the amount truly earned.

There undoubtedly are many taxpayers who are afraid to step forward because the penalties for not reporting mere balances are so harsh that they feel forced to risk the consequences of noncompliance. They are trapped. I suspect that if an assessment perceived as fair (but still toothy) was substituted for the current regime, the Treasury Department would see its burden reduced and its coffers immediately and substantially swelled. Once brought into compliance, tax revenues likely would be generated on those same holdings for years to come. It is unfortunate that existing FBAR penalties are so high and inconsistently applied. Voluntary compliance is encouraged, but in practice, the existing process discourages compliance due to ambiguity and the very legitimate fear of financial ruin. If the point of these rules is to ensure that taxes are not skirted, our nation’s rule makers should realize that there may be easier ways to get what they want.

If you would like to discuss further, please call Stan Rose at 1-800-244-7444.