Court Finds Penalized FBAR Tax Filings Not Excessive

Expert Scottsdale Tax Lawyers Discuss The Case Of a Penalized Taxpayer For Failure to Report All Foreign Accounts On An FBAR Filing

The IRS has many measures in place to crack down on taxpayers who do not report all their income – especially income from foreign accounts. In yet another case, the IRS penalized a taxpayer for failing to properly report all foreign accounts on an annual FBAR filing. The taxpayer challenged these penalties in the case of United States v. Collins, and the court ruled that the penalties were not excessive and were fairly assessed.

Expert Scottsdale Tax Lawyers Discuss The Case of a Penalized Taxpayer for Failure to Report all Foreign Accounts on an FBAR Filing

IRS Imposes Penalties After Thorough Tax Audit

The case involved the tax years 2007 and 2008. The IRS alleged that the taxpayer willfully failed to report foreign accounts on his FBAR filing for these tax years, and it imposed $154,032 in civil penalties for each year. The agency did not assess the steepest penalties that it could have imposed, such as 50 percent of the highest balance for each year.
After an audit, the IRS found that it could have assessed $382,666 for 2007 and $233,462 for 2008 based on internal mitigation guidance. However, the IRS said it reduced the penalties upon further consideration of all circumstances in the case, and it agreed on penalties that amounted to about half of what it could have assessed.

The Taxpayer’s Offenses

The IRS found that the taxpayer in the case, Richard Collins, was “a sophisticated taxpayer, with a sophisticated understanding of finance, financial obligations and financial consequences,” and that his behavior shows he intended to willfully deceive the IRS to avoid paying taxes on his foreign accounts.
The arguments put forward by the taxpayer for not disclosing these accounts – and the arguments that were rejected by the IRS – include:

  • That he filed a W-9 form with the IRS, which satisfied all foreign reporting obligations
  • That he was advised by the U.S. Embassy in Paris in the 1970s that he did not have any tax obligations
  • That his foreign bank withheld taxes, so he was not obligated to disclose these accounts to the IRS
  • That secrecy laws for Swiss banks prohibited him from disclosing his foreign accounts to his U.S. accountants
    The IRS rejected these arguments and found that the taxpayer also took steps to evade detection, such as by avoiding receiving mail on these accounts in the U.S. and by discretely transferring funds from Switzerland to the U.S. as part of a mortgage transaction.

    Total Amounts of IRS Fines Did Not Abuse Discretion

    The court reviewed the IRS’ actions and determined that it did not abuse its discretion when assessing the fines. In particular, it noted that the agency lowered the amount of penalties far below what its own internal guidelines instructed it to do. Therefore, the court ruled that the agency acted reasonably in reaching its decision.
    Altogether, the IRS found that the taxpayer had five foreign accounts in 2007 with a total balance of $885,913 and six foreign accounts in 2008 with a total balance of $906,004.

    Tax Court Denies Penalty Cap at $100,000

    Previously, two other courts ruled on this case, finding that the maximum penalty for willful failure to accurately report foreign accounts on an FBAR was $100,000. However, the current court found that no such cap exists for this violation, and it overturned those 2018 rulings.
    Specifically, the court cited a 2004 law passed by Congress that increases the maximum civil penalty to the greater of $100,000 or 50 percent of the balance of the accounts not reported. The previous cap was $100,000.

    No Eighth Amendment Violations for Fines from Failure to File Taxes

    The taxpayer also argued that the penalties he was assessed were an “excessive fine,” which is prohibited by the Eighth Amendment of the U.S. Constitution. However, the court argued that the fine was remedial in part, designed to compensate the government for a loss, so it was not covered by the Eighth Amendment. Additionally, the court noted that even if the type of fine were covered under the amendment, the fine was not excessive. It had even been reduced from what is permissible.

    Contact an Experienced IRS Tax Attorney in Scottsdale, AZ

    If you are facing an audit or penalties because of your foreign tax reporting, you need to contact an experienced tax attorney. Call the Scottsdale IRS tax lawyers at Silver Law, PLC. to talk to one of our dedicated tax attorneys about your options. All of our tax lawyers have experience working for the IRS, so they understand how your case can be prosecuted, and they will use that knowledge to create a strong defense for you. We represent clients facing civil and criminal penalties for all kinds of foreign tax reporting issues. Contact us in Scottsdale to schedule a consultation with a tax attorney to learn more.


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