FBAR Defense: “I Didn’t Know” Usually Doesn’t Work

May 13, 2019

A former pharmaceutical CEO must fork over nearly seven figures for failing to comply with FBAR regulations. The case is a reminder to submit annual foreign account reporting forms or risk high penalties.

If you’re a U.S. taxpayer with foreign bank or investment accounts that you haven’t reported to the United States government, then this post is worth the read.

FBAR Defense Case: 1970s Swiss Account Uncovered in the Noughties

First Things First: What is FBAR

FBAR stands for Foreign Bank Account Reporting, and under United States law, taxpayers with overseas financial accounts and holdings — wherein the aggregate value equals or exceeds $10,000 at any point during the year — must report them annually. Qualifying parties may not owe any U.S. tax on the money, but for various reasons, including national security, it must be reported.

The Latest FBAR Case to Make Headlines:  1970s Swiss Account Uncovered by Uncle Sam Decades Later

Disclaimer: For various reasons, we’ve changed the name of the defendant.

Back in the 1970s, a U.S. businessman named “John” opened a Swiss bank account. According to reports, for about 20 years, he kept its existence to himself. Finally, sometime in the 1990s, he told his accountant, who in turn explained that reporting it to Uncle Sam was a must.

Fast forward to 2007. Thanks to new international data sharing agreements, the United States government learns that “John” has had an unreported Swiss bank account for decades. When confronted, he claimed he had failed to look over his financial filings, including the one-page FBAR form.

Ultimately, the court ruled against “John,” citing “reckless willfulness” on his part. It ordered him to hand over about a million dollars in fines.

Willful v. Nonwillful: “I Didn’t Know” Rarely Works

Whether or not “John” acted willfully or nonwillfully mattered in this case, mainly because fines for the former are much greater than those for the latter.

In the simplest terms, “John” tried to use the “I didn’t know” defense to wriggle out of the FBAR violation, but it didn’t work. As far as the Third Circuit court was concerned, John:

  • Acted “recklessly” by not looking over his tax filing before signing and submitting it — especially since his accountant had warned that failing to report foreign accounts flew in the face of regulations; and
  • Took an “unjustifiable risk” by not doing a double check.

The court also ruled that the district judge, who had deemed “John’s” actions nonwillfull, conflated objective and subjective standards, and, in doing so, failed to consider whether or not “John” understood the risks associated failing to review his paperwork.

The defendant argued that negligence is not willfulness. He also claimed that the IRS didn’t have evidence of willful actions. The Third Circuit, however, ultimately disagreed.

The big takeaway from this case: Pleading ignorance or negligence won’t get you far in an FBAR case.

Connect with an FBAR Defense Lawyer

The Gordon Law Group regularly works with people dealing with FBAR matters. If you were unaware of the rules and have failed to comply, we can help. Remember: The IRS is leagues more lenient with taxpayers who come forward on their own volition. Don’t delay. The sooner you get it cleared up, the better you’ll feel.

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