Editor’s Standard Warning: The Isaac Brock Society doesn’t endorse tax professionals.
Thanks to all for the kind welcome. It feels a little bit like moving into a new neighborhood and everyone coming over with a freshly baked apple pie to say howdy. But I digress.
Here’s the hypothetical I promised. Suppose a nonresident alien, Tom, has a single non-US, interest-bearing bank account, which, at the outset of our story, had a balance of say $50,000. Tom sells his old home (outside the US) for $948,000 on December 31, 2009 and the proceeds go into his account, bringing the balance to $998,000. As of January 1, 2010, Tom becomes a US resident. In February 2010, he closes his non-US account and transfers the entire $1,000,000 (including $2,000 of interest since December 2009) to his newly opened US account. Due to Tom’s ignorance of US reporting requirements (and his accountant’s lack of attention to detail about foreign accounts), his 2010 return checked the “no” box (in response to the question about foreign accounts); he failed to include the $2,000 of interest income; and he failed to file an FBAR. Tom’s accountant never asked about foreign accounts, and it never occurred to Tom to bring it up.
Inside the program (absent an opt-out), Tom must pay a 27.5% penalty of $275,000. Absent some other, very bad, facts, I would say that any attorney who advises Tom to join the program and pay the $275,000 is incompetent (or, worse yet, more interested earning fees than serving his client). Outside the program, Tom could expect to pay an accuracy penalty, equal to 20% of the tax owed, and perhaps a single penalty of $10,000 for a nonwillful failure to disclose the account on a 2010 FBAR. On these facts, even talking about the penalty for a willful failure to disclose the account on an FBAR is ridiculous. Moreover, the maximum possible penalty, even if the violation were willful, is $100,000 because the 50% would be based on the balance on the date the FBAR was due, which is zero. (Just to clarify, the max penalty for a willful failure (per account, per year) is the greater of $100,000 and the balance of the account on the date the FBAR was due, i.e., June 30 of the following year.)
And, just to complete the loop, I would think it should be obvious, but I’ll say it anyway, this simplified fact pattern would (absent other, very bad facts) present no risk whatsoever of criminal prosecution. If I were Tom in this instance, I might or might not amend my 2010 return, but I’d laugh if anyone told me to do a voluntary disclosure.
I’d also be disinclined to file a late FBAR for 2010 in this scenario, but this is a point about which I believe reasonable minds can disagree.