The Bank Secrecy Act requires U.S. taxpayers to file FBARs with the U.S. Treasury disclosing any interest in, or signature authority over, foreign financial accounts with assets in excess of $10,000. If a U.S. taxpayer fails to file an FBAR, the IRS can assess a penalty of $10,000 per violation per year for up to six years. However, where a taxpayer willfully fails to file an FBAR, the IRS can assess a penalty of the greater of $100,000 (adjusted for inflation) or 50% of the balance in the unreported bank account for each year the taxpayer fails to file. A willful violation may also lead to criminal prosecution.
U.S. v. Bohanec
The Bohanecs owned a high-end camera store in California and, for years, had an accountant prepare their tax returns. The Bohanecs sold to customers around the world and brokered transactions between Leica Camera’s Canadian subsidiary and international buyers. The Bohanecs deposited the commissions from Leica and, on some occasions, the proceeds from their international sales, into an account with UBS in Switzerland.
The Bohanecs did not provide UBS with their U.S. address nor did they tell anyone other than their children about the existence of the Swiss account. The Bohanecs never discussed the Swiss account with their accountant, lawyer, or banker. The Bohanecs also opened other foreign bank accounts in Austria and Mexico. As of June 2008, they had nearly $650,000 in the UBS account and, for about a decade, they did not file any federal income tax returns or any FBARs.
In January 2010, the Bohanecs applied to participate in the Offshore Voluntary Disclosure Program (“OVDP”). The OVDP permits U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to the IRS. In their application, the Bohanecs, under penalty perjury, misrepresented that all the funds in Swiss bank account were after-tax earnings from their camera business. The Bohanecs also failed to include their Austrian and Mexican accounts in their voluntary disclosure.
On December 8, 2016, a California District Court held that the Bohanecs’ failure to file FBARs was willful despite their application to participate in the OVDP. The Bohanecs argued that a willful violation only encompassed intentional violations but the District Court disagreed and concluded that willful conduct includes reckless conduct. The District Court cited the Supreme Court’s general understanding of willfulness as encompassing not only intentional violations but also reckless violations. The District Court also noted that recklessness is an objective standard that looks to whether conduct entails an unjustifiably high risk of harm that is either known or is so obvious that it should be known.
In finding the Bohanecs’ violation willful, the District Court considered their sophisticated business dealings. For a time they were the exclusive Leica Camera dealer in the world, they had a worldwide reputation and sold to customers around the world. Moreover, they were careful not to disclose the existence of their foreign bank accounts to anyone aside from their children. Based on these facts, the District Court concluded Bohanecs’ failure to file FBARs was willful exacerbated by their misrepresentations under penalty of perjury in their OVDP application.
The Offshore Voluntary Disclosure Program
Taxpayers should be forthright and thorough in their voluntary disclosures. The OVDP provides taxpayers with the opportunity for reduced civil penalties and, more importantly, avoid criminal prosecution. The IRS and the courts will not look favorably on sophisticated taxpayers who try to skirt their FBAR obligations and are less than complete in the OVDP process. Taxpayers should also keep in mind that their individual tax returns (Form 1040) asks whether they have an interest in, or signature authority over, foreign financial accounts. While not dispositive, answering dishonestly can be used as evidence of willfulness. Taxpayers should work with their attorneys to ensure their application to the OVDP is complete and ultimately accepted.