In preparing your Form 1040 you may notice a question that asks about foreign bank accounts on Schedule B. “At any time during 2016, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? ” Do NOT ignore this. If you have such an account, unless you meet an exception, you must file a FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Failure to do so can result in penalties as shown in the recent case of USA v. Bohanec.
Mr. and Mrs. Bohanec operated a camera store which ultimately became very successful as the Bohanecs were the exclusive Leica dealer. They worked with a Canadian supplier and ultimately shipped to customers around the world, such as the Philippines, England, South Korea and Hong Kong. Commissions from these international sales were deposited into an account at UBS in Switzerland in the Bohanecs’ name.
The Bohanecs did not provide UBS with their home address, did not use a bookkeeper or kept any books, even though in the past they had done both of those tasks. They also did not tell anyone in the US, other than their 2 children, of the Swiss account. Eventually, the Bohanecs opened accounts in Austria and Mexico. At one point their UBS account had more than 1 million dollars.
The Bohanecs did not file their individual tax returns from 1998 until 2010. On January 2010, the Bohanecs were preliminarily accepted into the Voluntary Disclosure Program for Offshore Accounts and filed the FBAR and their tax returns for the years, 2003 through 2008. The FBARs included their Swiss account but did NOT include their Austria or Mexico account. They were ultimately rejected for participation in the Voluntary Disclosure Program.
The Internal Revenue Service (“IRS”) asserted failure to file penalties and the fraud penalty totaling almost $500,000. If a foreign account holder “willfully” fails to file returns, the maximum penalty is increased from $10,000 to the greater of $100,00 or 50% of the balance in the account at the time of the violation. Thus , the issue in this case was whether the Bohanecs’ actions were “willful”.
While the Bohanecs argued the term “willful” means “intentional violations of known legal duties and not reckless disregard of statutory duties”, the court noted that no court has adopted that position in civil (as opposed to criminal) matters.
The IRS argued that, in a prior case, the Supreme Court recognized willfullness as “not only knowing violations of a standard, but reckless ones as well” (emphasis added). Recklessness is conduct which entails “an unjustifiable high risk of harm that is either known or so obvious that it should be known.”
The court noted that the Bohanecs were reasonably sophisticated business people. They had applied for a patent on their own and had received same, they had a world wide reputation and sold and shipped to customers around the world. Originally they had a tax preparer and kept books. They did not disclose their Austria or Mexico accounts. The court found the Bohanecs were at least reckless, if not willfully blind, to the requirements of the FBAR and asserted the additional penalties.
ADVICE: Pay close attention when you review or complete your Form 1040. If you do have foreign bank accounts, then make sure you answer the questions properly and complete the FBAR. If, for any reason, you have an issue with foreign bank accounts and need to make any voluntary disclosure, then immediately contact an attorney as non-disclosure can lead to high penalties and possible criminal action.
WORD OF THE WEEK: Eleemosynary means anything having to do with a charity, philanthropic and benevolent. “Ben and Susan are engaged in eleemosynary work as they are they are on the board of many charitable organizations”.
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