United States: US Treasury Department Announces a New Proposal to Add Additional Civil Penalties to the Requirement for Disclosure of U.S. Person’s Financial Accounts Overseas

Introduction

The United States has stepped up its efforts to seek out bank accounts held by US residents, citizens or persons (which includes green card holders and other long term residents) citing these accounts as a means to violate or evade domestic tax and regulatory requirements. In a press release on January 13, 2004, the U.S. Treasury Department announced that it has proposed to seek additional civil penalties on U.S. citizens and other U.S. persons failing to a report the existence of financial accounts held outside of the United States.

This move follows a statement by U.S. Internal Revenue Service (IRS) made in a report to Congress pursuant to the USA Patriot Act indicating that the service was concerned by the lack of said reporting even though it is currently mandatory. At present, persons or entities who hold overseas bank or other financial accounts are required to disclose the existence of these accounts if these accounts exceed $10,000 at any time during the tax year. Failure to report can lead to civil and/or criminal penalties. The new announcement regarding the proposed additional penalties and the earlier report to Congress suggests that significant focus will be placed in future on this often overlooked legal requirement and that prosecutions and the assessment of civil penalties for failing to disclose will increase.

In its report to Congress on April 26, 2002, pursuant to Section 361(b) of the USA Patriot Act, the IRS asserted that it has begun a "large-scale initiative to seek out taxpayers who have undisclosed accounts overseas".

The Banking Secrecy Act authorizes the secretary of the Treasury to require residents, Citizens, and persons to keep records and/or file reports concerning transactions with foreign financial institutions. Specifically, the law provides as follows:

"Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a US person) having a financial interest in, or signatory or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form."

The people or entities who meet the description above are by law required to disclose the existence of foreign accounts that at any time during the calendar year meet or exceed $10,000 in value. This is done using a special form, entitled the Report of Foreign Bank and Financial Accounts (FBAR), TD F90-22.1, which is filed with the Detroit Computer Center or as indicated on the form. It must be filed by June 30 or as otherwise indicated of each reporting year. Once filed, these forms are made available to Financial Crimes Enforcement Network (FinCEN) analysts, law enforcement and other appropriate regulatory agencies to track money flows.

Under the existing law, the failure to file an FBAR is punishable by a fine of not more than $250,000 and/or five years' imprisonment. When the failure to file is part of a pattern of illegal activity, the punishment is increased to a fine up to $500,000 and/or 10 years' imprisonment. In addition, the director of FinCEN can assess against a person who wilfully fails to file an FBAR money penalties equal to the balance at the time of the violation not to exceed $100,000 or $25,000, whichever is greater.

The additional proposed civil penalty is an effort to streamline the burden faced by the I.R.S. in penalizing persons who fail to reports and to increase compliance with the existing rules.

To date there has been only a limited number of 'failure to file FBAR' charges brought by the IRS and the Department of Justice. The IRS is putting people on notice with the announcement and the report that this lack of enforcement is soon about to end . The IRS estimates that there are over a million accounts abroad that should be reported, but it only received 177,151 for the calendar year ending 2001. The U.S. State Department estimates that there are somewhere between 3 to 4 million U.S. citizens living overseas (but no one seems to be certain), not including other US persons required to file under the rule. Utilizing the average filing rate provided by the IRS, there could be up to several million unreported accounts held overseas by U.S. citizens. The IRS's official stance is that it intends to increase compliance with this rule using a two-step approach. The first step is to educate filers who would report if they were aware of the law. The second step is to prosecute actively those who fail to file because they are concealing income or are engaged in some type of criminal activity. On this level, the IRS may not only prosecute the underlying crime, but will bring stand-alone failure-to-file charges when such accounts are discovered.

Through this announcement, the IRS is making it clear that people with foreign financial accounts who do not file FBAR disclosures will be sought out for prosecution and/or assessed civil penalties in the near future. It is therefore advisable to inform clients of this particular regulatory scheme to determine whether they are covered persons, and if so, of their duties to file, in default of which they could face the severe penalties described above.

For further information on this topic please contact David Forbes-Jaeger or John McBrayer at Secretan Troyanov by telephone (+41 22 789 70 00)or by fax (+41 22 789 70 70) or by email (david.g.forbes.jaeger@secretantroyanov.com or john.mcbrayer@secretantroyanov.com). The Secretan Troyanov website can be accessed at www.secretantroyanov.com.

This article has been prepared by Secretan Troyanov for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Readers of this article should not act upon this information without seeking professional legal advice applicable to their specific circumstances.