Abstract
This chapter gives an overview of the voluntary disclosure process in Canada and the United States. It also considers the US federal legal regime for the reporting of foreign bank and financial accounts under the Bank Secrecy Act. The importance of the BSA cannot be overstated; as described below, its penalty provisions have been a major weapon wielded by the IRS against American citizens with bank accounts outside the United States. This chapter will provide important insight for professionals in the tax, accounting, and wealth management industries who have clients that are US non-filers, or who have offshore assets undeclared to either the IRS or CRA. This chapter will also be particularly relevant to governments and students contemplating policy changes to international tax law surrounding exchange of information, citizenship-based taxation, and the unique dilemma facing the US expatriate community in Canada, the UK, the EU, and elsewhere.
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- 1.
Pub L 91-508, Tit II, 84 Stat 1118, 10/26/1970, codified as amended at 12 USC 1829b, 12 USC 1951–1959, and 31 USC 5311–5314; 5316–5332 [BSA]. Regulations implementing Title II of the BSA (codified at 31 USC 5311ff) appear at 31 CFR Part 103 and, effective 1 March 2011, at 31 CFR Chapter X: see note 38, below in this chapter.
- 2.
Quoted in Itai Grinberg, “Beyond FATCA: An Evolutionary Moment for the International Tax System” (2012) [unpublished, archived at the Georgetown University Law Center, The Scholarly Commons, Paper 160] at 12, n 45, online: http://scholarship.law.georgetown.edu/fwps_papers/160, citing United States, HR Rep No 91-975 at 4 (1970), reprinted in 1970 USCCAN 4394 and 4397.
- 3.
Subtitle A of Title A of the Hiring Incentives to Restore Employment Act of 2010, Pub L No 111-147 enacted on 18 March 2010 [FATCA].
- 4.
September 1980 (as amended to the protocols signed on 14 June 1983, 23 March 1984, 17 March 1997, 29 July 1997, and 21 September 2007) [Canada–US Tax Treaty].
- 5.
RSC 1985, c 1 (5th Supp) [Act].
- 6.
RSC 1985, c E-15 [ETA].
- 7.
SC 2002, c 22 [EA].
- 8.
SC 2002, c 9, s 5 [ATSCA].
- 9.
SC 2006, c 13 [SLPECA]. The penalty and interest relief provisions are in the Act, above note 5, s 220(3.1); ETA, above note 6, ss 88 and 281.1; EA, above note 7, ss 173 and 255.1; ATSCA, above note 8, ss 30 and 55; and SLPECA, ibid, s 37.
- 10.
Act, above note 5, s 220 (3.1).
- 11.
Canada Revenue Agency, Information Circular IC00-1R4, “Voluntary Disclosures Program” (21 March 2014) [Information Circular IC00-1R4].
- 12.
See ibid at paras 32–34.
- 13.
2010 FC 950.
- 14.
Livaditis v Canada Revenue Agency, 2012 FCA 55 [Livaditis].
- 15.
Ibid at para 9.
- 16.
See ibid at para 13.
- 17.
2010 FC 1070 [Amour International Mines].
- 18.
2008 SCC 9 at para 47.
- 19.
Quoted in Amour International Mines, above note 17 at para 25.
- 20.
Ibid at para 27.
- 21.
See Information Circular IC00-1R4, above note 11 at paras 35–37.
- 22.
2006 FC 494, aff’d 2007 FCA 281.
- 23.
See Information Circular IC00-1R4, above note 11 at para 38.
- 24.
See ibid at paras 39–42.
- 25.
Ibid at para 40.
- 26.
Ibid at para 43.
- 27.
Ibid at para 44.
- 28.
BSA, above note 1.
- 29.
See Lauren Krugel, “Attention, American Expats in Canada: The IRS Is Eyeing You” Globe and Mail (13 June 2014, last updated 17 June 2014), online: http://fw.to/0KsbCYC; Robert W Wood, “Canadians Attack U.S. Expat Rules, Decrying ‘Accidental Americans’” Forbes (9 September 2014), online: www.forbes.com/sites/robertwood/2014/09/09/canadians-attack-u-s-expat-rules-decrying-accidental-americans/#5ef2b754de71.
- 30.
See 31 USC § 5311. See also Pub L 91-508, Tit II, 84 Stat 1118, 10/26/1970 § 202.
- 31.
See United States v Simonelli, 614 F Supp 2d 241 (D Conn 2008): the defendant failed to file an FBAR in a timely manner, and the Department of the Treasury and the IRS brought suit to collect an assessment made pursuant to 31 USC § 5321(a)(5)(2000); the defendant claimed that the FBAR penalty had been discharged at the time that he had received a general discharge in bankruptcy; holding that the FBAR penalty is a civil penalty and not a tax or a tax penalty, the court found that the FBAR penalty had not been discharged in the defendant’s bankruptcy.
- 32.
See United States, Internal Revenue Service, “Bank Secrecy Act” (last updated 9 November 2015), online: www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bank-Secrecy-Act [IRS, “Bank Secrecy Act”]. The BSA, above note 1, is the first and most comprehensive federal anti–money laundering and counterterrorism financing statute in the United States: see United States, Department of the Treasury, Financial Crimes Enforcement Network, “About FinCEN: What We Do,” online: www.fincen.gov/about_fincen/wwd [FinCEN, “What We Do”]. The IRS is a partner in the US National Money Laundering Strategy, and the FBAR is a report that is part of this strategy: see IRS, “Bank Secrecy Act,” ibid.
- 33.
See Ratzlaf v United States, 510 US 135 at 138 (1994) [Ratzlaf], where the Court held that it was necessary to establish that the defendant had acted with knowledge that the conduct (here structuring) was unlawful to convict the defendant for willfully violating the statutory prohibition against structuring foreign currency transactions. See 31 USCA §§ 5313(a), 5322(a), and 5324(3). See also United States v Clines, 958 F 2d 278 (4th Cir 1992).
- 34.
The form had formerly been known as TD F 90-22.1: see United States, Department of the Treasury, “Report of Foreign Bank and Financial Accounts” (4 April 2014), online: www.treasury.gov/services/Pages/TD-F-90-22.1-Report-of-Foreign-Bank-and-Financial-Accounts.aspx.
- 35.
See United States, Department of the Treasury, Financial Crimes Enforcement Network, “File the Report of Foreign Bank and Financial Accounts (FBAR) as an Individual,” online: http://bsaefiling.fincen.treas.gov/NoRegFilePDFIndividualFBAR.html.
- 36.
See United States, Internal Revenue Service, IR-2008-79, “IRS Reminds Taxpayers to Report Certain Foreign Bank and Financial Accounts by June 30” (17 June 2008), online: www.irs.gov/uac/IRS-Reminds-Taxpayers-to-Report-Certain-Foreign-Bank-and-Financial-Accounts-by-June-30. In 2002, it was estimated that there may be as many as 1 million US taxpayers with FBAR filing requirements and that the FBAR compliance rate was less than 20 percent: see United States, Department of the Treasury, A Report to Congress in accordance with §361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) (Washington, DC: US Department of the Treasury, 2002) at 6, online: www.fincen.gov/news_room/rp/files/ReportToCongress361.PDF [Treasury Report 2002]. From approximately 1993 to 2002, the government considered asserting FBAR penalties in only twelve cases, and in only two of those did taxpayers receive penalties while in four they were issued warning letters (see ibid at 9–10). Criminal indictments were similarly few: see Michael Sardar, “What Constitutes ‘Willfulness’ for Purposes of the FBAR Failure-to-File Penalty?” (2010) 113 Journal of Taxation 183. The lack of enforcement could have been due to a variety of reasons, one of which was the difficulty of obtaining admissible evidence from countries with strong bank secrecy laws and with which the United States did not have a tax treaty: see Treasury Report 2002, ibid at 9. Another reason stemmed from the Department of Justice’s preference for charging the taxpayers with other violations relating to their illegal conduct, such as tax evasion or fraud, as these were easier to sway jurors with (see ibid at 9). Prosecutors also had difficulty meeting the willfulness evidentiary standard (see ibid at 10). In Canada, for example, until the new IRS offshore voluntary disclosure programs drew widespread media coverage, only a handful of accountants working in public accounting had been aware of the FBAR form.
- 37.
See statement of then IRS commissioner Doug Shulman, who remarked, “The information we gather from this action will help us detect wealthy individuals who don’t pay their taxes as well as provide details about how advisors facilitate this abuse”: United States, Department of Justice, News Release 08-579, “Justice Department Asks Court to Serve IRS Summons for UBS Swiss Bank Account Records” (30 June 2008), online: www.justice.gov/archive/opa/pr/2008/June/08-tax-579.html. The marked change in the direction of the US government, toward enforcement of the FBAR reporting requirements to combat criminal and civil tax violations, can be seen in government actions starting in 2008 against UBS (issuance by the district court in Florida of a John Doe summons and other relief) and key UBS executive Bradley Birkenfeld: see Sandra Brown, “IRS & the FBAR: International Focus for U.S. Tax Compliance” (20 November 2008) [unpublished] at 4–9. Birkenfeld pleaded guilty to conspiring to defraud the IRS by helping UBS clients evade US reporting laws: see United States, Department of Justice, News Release 08-850, “Banker Pleads Guilty to Helping American Real Estate Developer Evade Income Tax on $200 Million” (19 June 2008), online: www.justice.gov/archive/opa/pr/2008/June/08-tax-550.html. Additionally, the US Department of the Treasury launched a new round of offshore voluntary disclosure initiatives between 2009 and 2012 that have resulted in approximately 33,000 taxpayer filings and the collection of over $5 billion in taxes, interest, and penalties: see Janet Novack, “IRS Cuts Middle Class Expats Big (and Deserved) Penalty Break” Forbes (26 June 2012), online: www.forbes.com/sites/janetnovack/2012/06/26/irs-cuts-middle-class-expats-big-and-deserved-penalty-break/#28a6ea82434e.
- 38.
See FinCEN, “What We Do,” above note 32. The regulations implementing the BSA, above note 1, appear at 31 CFR Part 103. On 26 October 2010, the Financial Crimes Enforcement Network (FinCEN) issued a final rule, with an effective date of 1 March 2011, reorganizing the BSA regulations and transferring them to a new chapter in the Code of Federal Regulations, from 31 CFR Part 103 to 31 CFR Chapter X — Financial Crimes Enforcement Network. This new structure is intended to organize the BSA regulations by industry, and it does not alter existing BSA regulatory obligations or impose new obligations: see United States, Federal Deposit Insurance Corporation, Financial Institution Letter FIL-15-2011, “Bank Secrecy Act: Reorganization of FinCEN’s Bank Secrecy Act Regulations” (15 March 2011), online: www.fdic.gov/news/news/financial/2011/fil11015.pdf. On 26 February 2010, FinCEN had issued a notice of proposed rulemaking addressing the FBAR rules under the BSA and issues such as the range of individuals and entities required to file the FBAR and the types of accounts required to be reported. Later, on 24 February 2011, FinCEN issued a final rule amending the BSA and implementing regulations regarding FBARs: see United States, Department of the Treasury, Financial Crimes Enforcement Network, News Release, “FinCEN Issues Final Rule on Foreign Bank and Financial Accounts Report (FBAR) Responsibilities” (24 February 2011), online: www.fincen.gov/news_room/nr/pdf/20110224.pdf; 31 CFR Part 1010, amendment to the Bank Secrecy Act Regulations — Reports of Foreign Financial Accounts, 76 Fed Reg No 37 (2011).
- 39.
31 CFR § 103.56(b). While FinCEN (and the US Department of Justice) retain the general authority to enforce the law, under Treasury Directive 15-41 (1992) the Secretary of the Treasury delegated to the IRS the authority to investigate possible FBAR violations, including the review of cases by the IRS Criminal Investigation division: see United States, Department of the Treasury, A Report to Congress in accordance with §361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) (Washington, DC: US Department of the Treasury, 2003) at 4, online: www.fincen.gov/news_room/rp/files/fbar3613.pdf.
- 40.
See United States, Department of the Treasury, Financial Crimes Enforcement Network, “Law Enforcement: Overview,” online: www.fincen.gov/law_enforcement/. FinCEN’s duties and responsibilities include issuing and interpreting regulations; supporting and enforcing compliance with those regulations; coordinating and analyzing data regarding compliance examination functions delegated to other federal regulators; managing the collection, processing, storage, dissemination, and protection of data filed under FinCEN’s reporting rules; maintaining a government-wide access service to FinCEN’s data and networks; supporting investigations and prosecutions by law enforcement; sharing information and coordinating with foreign financial intelligence unit (FIU) counterparts on anti–money laundering and counterterrorism financing efforts; and conducting analysis to support policymakers, law enforcement, regulatory and intelligence agencies, FIUs, and the financial industry: see FinCEN, “What We Do,” above note 32.
- 41.
See United States, Department of the Treasury, Financial Crimes Enforcement Network, “International Programs,” online: www.fincen.gov/international/.
- 42.
See ibid.
- 43.
See Financial Transactions and Reports Analysis Centre of Canada, online: www.fintrac-canafe.gc.ca/fintrac-canafe/1-eng.asp, which is the Canadian national FIU member of The Egmont Group.
- 44.
See Brown, above note 37 at 2–3; 31 CFR Part 103, final rule (RIN 1506-AA45) (15 May 2003). The authority to enforce the provisions of 31 USC § 5314 and 31 CFR §§ 103.24 and 103.32 was redelegated from FinCEN to the commissioner of the IRS by a memorandum of understanding between FinCEN and the IRS, which is referenced in 31 CFR § 103.56(g). The authority redelegated includes that to investigate possible civil violations of these provisions, assess and collect civil FBAR penalties, employ the summons power of Subpart F of Part 103, issue administrative rulings under Subpart G of Part 103, and take any other action reasonably necessary for the enforcement of these and related provisions, including pursuit of injunctions: see 31 CFR § 103.56(g).
- 45.
31 USC § 5314(a). See 31 CFR § 1010.350(a). For additional background on the FBAR, see also Hale E Sheppard, “Evolution of the FBAR: Where We Were, Where We Are, and Why It Matters” (2006) 7 Houston Business and Tax Journal 1; Kevin E Packman & Andrew H Weinstein, “FBAR — Foreign Bank Account Reporting Obligations: A Primer for the Practitioner” (2007) 106 Journal of Taxation 44.
- 46.
31 CFR § 1010.350(a); United States, Department of the Treasury, Financial Crimes Enforcement Network, BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (FinCEN Form 114) (June 2014) at 4 and 8, online: www.fincen.gov/forms/files/FBAR Line Item Filing Instructions.pdf [FinCEN Form 114 Instructions].
- 47.
31 CFR § 1010.306(c); FinCEN Form 114 Instructions, above note 46 at 8. Note that certain filing exceptions may apply (see ibid at 6). See, generally, United States, Department of the Treasury, Financial Crimes Enforcement Network, “BSA Forms: Filing Information,” online: www.fincen.gov/forms/bsa_forms/.
- 48.
See FinCEN Form 114 Instructions, above note 46 at 5–6.
- 49.
See note 38, above in this chapter. “Person” refers to an individual or a legal entity including but not limited to a limited liability company, corporation, partnership, trust, and estate: 31 CFR § 1010.350(a); FinCEN Form 114 Instructions, above note 46 at 5–6. A US person means a US citizen, US resident under the definition in § 7701(b) of the Internal Revenue Code, USC 26 (1986) of 1986, as amended, and the Treasury Regulations issued thereunder at Chapter 4 [Code], or entity including but not limited to a corporation, partnership, or limited liability company created or organized in the United States or under the laws of the United States and a trust or estate formed under the laws of the United States: 31 CFR § 1010.350(a); FinCEN Form 114 Instructions, above note 46 at 5–6.
- 50.
75 Fed Reg 8844 (2010). The determination of whether an individual is a resident of the United States will now be made under the rules of the Code, above note 49, specifically § 7701(b) and the regulations thereunder: 31 CFR § 1010.350(a). Previously, only individuals who normally resided in the United States without any intention to move to another country were considered resident for purposes of the FBAR filing requirements: see United States, Internal Revenue Service, Internal Revenue Manual (Washington, DC: US Department of the Treasury, 2008) at § 4.26.16.3.1.1 — the definition of “resident alien” found in the Code, above note 49, § 7701(b) is not applicable for FBAR purposes; the plain meaning of the term “resident,” in this context, someone who is living in the United States and not planning to permanently leave the United States, should be used for FBAR examination purposes. Accordingly, green card holders (permanent residents) and individuals who were previously considered resident in the United States under the substantial presence test in § 7701(b) but who are not ordinarily resident in the United States are, for 2010 and afterwards, now subject to the FBAR filing requirements. Moreover, the final regulations confirm that where an individual is resident under § 7701(b) and also a resident of another country with which the United States has a tax treaty, that person may not rely on the tiebreaker rules in the residence article of the treaty to avoid the FBAR reporting requirements: 76 Fed Reg 10234 No 37 (2011).
- 51.
Code, above note 49, § 877A.
- 52.
31 CFR § 1010.350(c): “bank account” includes a savings deposit, demand deposit, chequing, or other similar account held by a firm engaged in the banking business.
- 53.
31 CFR § 1010.350(c): “securities account” means an account held with a firm engaged in the business of buying, selling, holding, or trading stock or other securities.
- 54.
31 CFR § 1010.350(c); FinCEN Form 114 Instructions, above note 46 at 4: other types of financial accounts that may be reportable under the FBAR rules include accounts held by a firm that is in the business of accepting deposits as a financial agency, insurance (e.g., whole life) or annuity policies with a cash value, accounts with a firm that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association, an account with a mutual fund or similar pooled fund that issues shares available to the general public that have a regular net asset value determination and regular redemptions. Exceptions are permitted for certain government-held accounts and correspondent accounts for bank-to-bank settlements.
- 55.
31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5.
- 56.
31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5.
- 57.
31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5. With respect to corporations, a US person must own directly or indirectly more than 50 percent of the total value of shares of stock or more than 50 percent of the voting power of all shares of stock, and with respect to partnerships, a US person must own directly or indirectly an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or an interest in more than 50 percent of the partnership capital: 31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5.
- 58.
31 CFR § 1010.350(e); FinCEN Form 114 Instructions above note 46 at 5. To be regarded as having a financial interest in a trust, a US person must be regarded as the trust grantor and have an ownership interest in the trust under the grantor trust rules in Code, above note 49, §§ 671–679, or a US person must have a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year: 31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5.
- 59.
31 CFR § 1010.350(e); FinCEN Form 114 Instructions, above note 46 at 5.
- 60.
31 CFR § 1010.350(f); FinCEN Form 114 Instructions, above note 46 at 7. There are exceptions for certain prescribed officers and employees: 31 CFR § 1010.350(f).
- 61.
31 CFR § 1010.420; FinCEN Form 114 Instructions, above note 46 at 8.
- 62.
See FATCA, above note 3, § 511, which amended the Code, above note 49, by adding new § 6038D.
- 63.
See Code, above note 49, § 6038D(a) and the regulations thereunder. See also United States, Department of the Treasury, Internal Revenue Service, Instructions for Form 8938: Statement of Specified Foreign Financial Assets (November 2015), online: www.irs.gov/pub/irs-pdf/i8938.pdf [Form 8938 Instructions], which detail the class of individuals to which the new reporting obligation applies, including special exemptions for certain categories of US persons living abroad who fall below certain financial-reporting thresholds.
- 64.
See Form 8938 Instructions, above note 63.
- 65.
31 USC §§ 5321(a)(5)(C)(i) and (5)(D)(ii).
- 66.
For example, a taxpayer who was discovered by the IRS with $1 million in an offshore account that had earned interest income of $50,000 a year from 2003 to 2010 could face up to $4,543,000 in tax, accuracy-related penalties, and FBAR penalties: see United States, Internal Revenue Service, “Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2012” at Q8, online: www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers [“2012 OVDP FAQ”]. Regarding transferee liability for the FBAR penalty, see David S Kerzner, “Advising the Delinquent U.S. Client: What Are Your Strategies? Also, IRS’s New Program for Delinquent Filers” (2012) 5 It’s Personal 14 [Kerzner, “Advising the Delinquent U.S. Client”].
- 67.
See United States, Department of the Treasury, “Memorandum for All LB&I, SB/SE, and TE/GE Employees: Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties” (13 May 2015), online: www.irs.gov/pub/foia/ig/spder/SBSE-04-0515-0025[1].pdf [“Guidance for FBAR Penalties”].
- 68.
The IRS may impose various harsh penalties including penalties for negligence, substantial understatement, and fraud, for example, penalties for fraud under Code, above note 49, §§ 6651(f) and 6663 (which may apply where an underpayment of tax or a failure to file a tax return is due to fraud; the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax), penalties for failing to file a tax return under § 6651(a)(1) (taxpayers are generally required to file income tax returns, and if a taxpayer fails to do so, a penalty of 5 percent of the balance due plus an additional 5 percent for each month or fraction thereof that the failure continues not exceeding 25 percent may be imposed), penalties for failing to pay the amount of tax shown on the return under § 6651(a)(2) (if a taxpayer fails to pay the amount of tax shown on the return, a penalty of 0.5 percent of the amount of tax shown on the return plus an additional 0.5 percent for each month or fraction thereof that the amount remains unpaid not exceeding 25 percent may be imposed), and accuracy-related penalties for underpayments under § 6662 (a 20 or 40 percent penalty may apply depending on which component of the accuracy-related penalty is applicable). See also Scott D Michel, “Advising a Client with Secret Offshore Accounts — Current Filing and Reporting Problems” (1999) 91 Journal of Taxation 158.
- 69.
Criminal charges relating to tax returns that may apply include tax evasion (Code, above note 49, § 7201), filing a false return (§ 7206(1)), and failure to file an income tax return (§ 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 USC § 5322 and are discussed below.
- 70.
See 31 USC § 5321(a)(5)(C)(i).
- 71.
See Cheek v United States, 498 US 192 [Cheek]; Ratzlaf, above note 33; United States v Sturman, 951 F 2d 1466 (6th Cir 1991) [Sturman]; United States v Pomponio, 429 US 10 (1976); United States v Bishop, 412 US 346 (1973) [Bishop]; Hale E Sheppard, “District Court Rules That Where There’s No Will, There’s a Way to Avoid FBAR Penalties” (2010) 113 Journal of Taxation 293 [Sheppard, “FBAR Penalties”]. In United States, Internal Revenue Service, Office of the Chief Counsel, Memorandum 200603026, “Foreign Bank and Financial Accounts Report (FBAR) Penalty, November 23, 2004” (20 January 2006), online: www.irs.gov/pub/irs-wd/0603026.pdf, the IRS favoured Blackman J’s lower standard of willfulness in the dissenting opinion in Ratzlaf, above note 33. The willfulness standard in the CCA nevertheless provided that there is no willfulness where the account holder had no knowledge of the duty to file an FBAR.
- 72.
See Ratzlaf, above note 33 at 149; Spies v United States, 317 US 492 at 499–500 (1943) [Spies], illustrating conduct that can support the permissible inference of an “affirmative willful attempt” to evade a tax; United States v Bank of New England, NA, 821 F 2d 844 at 854 (1st Cir 1987) [Bank of New England]: willfulness “is usually established by drawing reasonable inferences from the available facts”; Rykoff v United States, 40 F 3d 305 at 307 (9th Cir 1994); United States v Gormley, 201 F 3d 290 at 294 (4th Cir 2000): “the question of willfulness is essentially a finding of fact.” Under the language of the statute, the IRS has the burden of proving by a preponderance of the evidence that the taxpayer had knowledge of the requirement to file the FBAR form but intentionally chose to ignore that legal obligation: United States v Williams, 106 AFTR 2d 6150 (ED Va 2010) [Williams 2010].
- 73.
Cheek, above note 71.
- 74.
Ibid at 202.
- 75.
Ibid.
- 76.
Ibid at 204–5.
- 77.
Ibid at 205, citing Bishop, above note 71 at 360–61, quoting Spies, above note 72 at 496 [emphasis added].
- 78.
Ratzlaf, above note 33 at 136.
- 79.
Ibid at 140.
- 80.
Ibid at 138.
- 81.
Ibid at 141, citing Bank of New England, above note 72: a “willful violation” of the reporting requirement in Code, above note 49, § 5313 for cash transactions over $10,000 requires “voluntary, intentional, and bad purpose to disobey the law”; United States v Eisenstein, 731 F 2d 1540 at 1543 (11th Cir 1984), quoting United States v Granda, 565 F 2d 922 at 926 (5th Cir 1978): a “willful violation” of the reporting requirement in Code, above note 49, § 5313 for cash transactions over $10,000 requires “proof of the defendant’s knowledge of the reporting requirement and his specific intent to commit the crime.”
- 82.
Ratzlaf, above note 33 at 141–42, citing, for example, Sturman, above note 71 at 1476–77, quoting Cheek, above note 71 at 201: a “willful violation” of the reporting requirement in Code, above note 49, § 5314 for foreign financial transactions requires proof of a “‘voluntary, intentional violation of a known legal duty’”; United States v Warren, 612 F 2d 887 at 887 (5th Cir 1980): a “willful violation” of the reporting requirement in Code, above note 49, § 5316 for transportation of currency across international boundaries requires a defendant to “have actually known of the currency reporting requirement and have voluntarily and intentionally violated that known legal duty.”
- 83.
Ratzlaf, above note 33 at 149.
- 84.
110 AFTR 2d 5298 (4th Cir 2012) [Williams 2012], which reversed the judgment of the District Court: Williams 2010, above note 72. The Court of Appeals in Williams 2012, ibid at 5301, found that the district court had clearly erred in finding that willfulness had not been established.
- 85.
Williams 2012, above note 84, citing Safeco Ins Co of America v Burr, 551 US 47 at 57 (2007). See BSA, above note 1, § 5314. The court in Williams 2012, above note 84 at 5301, observed, “‘A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.’ Greer v. Commissioner of Internal Revenue, 595 F.3d 338, 347 (6th Cir. 2010).” The court, ibid, further observed, “Williams’s signature is prima facie evidence that he knew the contents of the return, United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991).” In reference to Schedule B (Form 1040) of individuals’ tax returns, the court, ibid, observed, “at a minimum line 7a’s directions to ‘[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1’ put Williams on inquiry notice of the FBAR requirement.” The court, ibid, also noted that Williams had not read line 7a of his return and had not consulted the FBAR form or its instructions and, as a result, concluded, “Williams made a ‘conscious effort to avoid learning about reporting requirements,’ Sturman, 951 F.2d at 1476.” Additionally, the court, ibid, noted that Williams’ guilty plea allocution further confirmed that his violation of § 5314 was willful.
- 86.
Williams 2012, above note 84 at 5301. See also BSA, above note 1, § 5321(a)(5).
- 87.
See Williams 2012, above note 84 at 5301, quoting Sturman, above note 71 at 1476. See also BSA, above note 1, § 5314.
- 88.
Ratzlaf, above note 33; Cheek, above note 71. See also Hale E Sheppard, “Third Time’s the Charm: Government Finally Collects ‘Willful’ FBAR Penalty in Williams” (2012) 117 Journal of Taxation 13.
- 89.
31 USC § 5321(a), 31 USC § 5322(b), or 18 USC § 1001; FinCEN Form 114 Instructions, above note 46 at 22. A person who willfully violates the FBAR filing requirement could face a fine of up to $250,000, imprisonment for up to five years, or both: 31 USC § 5322(a). The fine and imprisonment term increase to $500,000 and ten years if the failure to file the FBAR occurs during the violation of another law or is part of certain illegal activity: 31 USC § 5322(b).
- 90.
For example, for falsely answering a question on Schedule B (Form 1040), Part III, relating to foreign accounts, under the penalties of perjury (or even for omitting to answer a question), a person may be prosecuted under Code, above note 49, § 7206(1). Other applicable offences may arise under § 7206(1) for omission of earnings on Schedules B or D and under § 7201 for tax evasion. See United States v Simon, 106 AFTR 2d 6739 (ND Ind 2010) [Simon]: taxpayer received $1.8 million from businesses that was not reported as taxable income, did not disclose accounts on Schedule B, and was indicted for filing false income tax returns and for failure to file FBAR forms. See also Michel, above note 68 at 160.
- 91.
31 USC § 5321(a)(5)(A). This penalty was enacted by Congress in 2004 as part of the American Jobs Creation Act, Pub L 108-357, 118 Stat 1418 (2004), to address the difficulties confronting the government in asserting a civil penalty for willfulness: see Sheppard, “FBAR Penalties,” above note 71 at 294. As an example of the unfairness of the voluntary disclosure programs, some agents will threaten taxpayers who seek to opt out for reasonable cause or non-willfulness by calculating what is supposed to be a one-time per year penalty of $10,000 with a $10,000 per unreported account hit per year. Hence, if Susan, a wife who recently moved from India to Indiana with her husband, had eight accounts in her former country, she could be hit with $80,000 in non-willful penalties per year instead of with the correct amount of $10,000 per year. See also United States, Internal Revenue Service, Internal Revenue Manual (Washington, DC: US Department of the Treasury, 2015) at § 4.26.16, online: www.irs.gov/irm/ [IRM 2015], for details regarding FBAR penalties.
- 92.
31 USC § 5321(a)(5)(B)(ii). See also IRM 2015, above note 91 at § 4.26.16.
- 93.
Code, above note 49, reg § 301.6651-1(c)(1). See also West Coast Ice Co v Commissioner of Internal Revenue, 49 TC 345 (1968); Boyle v United States, 469 US 241 (1985). For a discussion of the reasonable cause exception, see Michael Saltzman & Leslie Book, IRS Practice and Procedure (Thomson Reuters/WG&L, 2012) (Checkpoint) at “Penalties 4.06.”
- 94.
A taxpayer generally loses the right to request a waiver of penalties for reasonable cause when the IRS initiates an examination or audit of the taxpayer for the years in question: see Saltzman & Book, above note 93 at “Penalties 4.06.”
- 95.
See “Guidance for FBAR Penalties,” above note 67, Attachment 1 at 2. In no event will the total amount of the penalties for non-willful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination (see ibid, Attachment 1 at 3). A non-willful penalty will not be recommended if the examiner determines that the FBAR violations were due to reasonable cause and if the person failing to file correct and complete FBARs in a timely manner later files correct and complete FBARs (see ibid).
- 96.
A person who is found to willfully violate the FBAR filing requirements could face the following penalties: a fine of up to $250,000, imprisonment for up to five years, or both. The fine and prison sentences may be doubled under certain circumstances involving illegal activities. See above note 89.
- 97.
A taxpayer may face criminal prosecution for willfully failing to report his earnings arising from such an account and such evidence may be taken from information on the taxpayer’s Form 1040. Criminal issues facing a taxpayer could potentially involve tax evasion and making a false statement, amongst others. See, for example, above note 90.
- 98.
Another objective of the offshore voluntary disclosure program is to use the information gathered from taxpayers making voluntary disclosures to further the IRS’s understanding of how foreign accounts and foreign entities are promoted to US taxpayers as ways to avoid or evade tax and to develop additional strategies to inhibit promoters and facilitators from soliciting new clients: see United States, Internal Revenue Service, “Voluntary Disclosure: Questions and Answers” at Q1 & Q2, online: www.irs.gov/uac/Voluntary-Disclosure:-Questions-and-Answers [“2009 OVDP FAQ”]. The IRS initiated an offshore voluntary disclosure program in May 2009 that ran until 15 October 2009: see United States, Internal Revenue Service, “2009 Offshore Voluntary Disclosure Program,” online: www.irs.gov/uac/2009-Offshore-Voluntary-Disclosure-Program. Then IRS commissioner Doug Shulman announced, “My goal has always been clear — to get taxpayers hiding assets offshore back into the system.” He went on to warn, “For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government”: United States, Internal Revenue Service, “Statement from IRS Commissioner Doug Shulman on Offshore Income” (26 March 2009), online: www.irs.gov/uac/Statement-from-IRS-Commissioner-Doug-Shulman-on-Offshore-Income. Another offshore voluntary disclosure initiative was announced on 8 February 2011 and ran until September 2011: see United States, Internal Revenue Service, “2011 Offshore Voluntary Disclosure Initiative,” online: www.irs.gov/uac/2011-Offshore-Voluntary-Disclosure-Initiative. A 2012 offshore voluntary disclosure program has the same objectives as the 2009 and 2011 programs, but it does not yet have an announced termination date: see “2012 OVDP FAQ,” above note 66 at Q1 & Q2, regarding the objectives of the program.
- 99.
See United States, Internal Revenue Service, “Hiding Money or Income Offshore Resides on the ‘Dirty Dozen’ List of Tax Scams for the 2016 Filing Season” IR-2016-17 IRS Newswire (5 February 2016) online: content.govdelivery.com/accounts/USIRS/bulletins/134bd2c.
- 100.
See “2012 OVDP FAQ,” above note 66 at Q1.
- 101.
See Federal Taxes Weekly Alert Newsletter, “National Taxpayer Advocate Suggests Changes to Offshore Voluntary Disclosure Initiative” Federal Taxes Weekly Alert Newsletter (21 November 2012).
- 102.
See IRM 2015, above note 91 at § 9.5.11.9.
- 103.
See “2012 OVDP FAQ,” above note 66 at Q5 & Q6, for an explanation of the potential civil and criminal penalties that a taxpayer may face if she does not come forward. For example, a taxpayer with $1 million in an offshore account that had earned interest income of $50,000 a year from 2003 to 2010 who came forward and entered the program would pay tax, interest, an accuracy penalty, and an additional penalty in lieu of the FBAR penalty of approximately $518,000 compared to the $4,543,000 that a taxpayer in the identical situation who did not come forward and who was discovered by the IRS would pay (see ibid at Q8). The programs also shield taxpayers from a large number of penalties that may otherwise be assessed under various foreign-reporting obligations, including those related to interests in or transactions with foreign entities such as corporations, partnerships, and trusts (see, for example, ibid at Q5).
- 104.
A taxpayer’s experience in a program culminates with the IRS and the taxpayer signing a closing agreement for the years included in the program: see United States, Internal Revenue Service, Form 906, “Closing Agreement on Final Determination Covering Specific Matters,” online: www.irs.gov/pub/irs-utl/form_906.pdf. The goal in the closing agreement, where possible, is to not leave prior years open for examination.
- 105.
For details on the penalty, see, for example, “2012 OVDP FAQ,” above note 66 at Q8.
- 106.
Taxpayers that may qualify for a 5 percent FBAR penalty under the programs include persons who were unaware that they were US citizens and persons who lived abroad, were tax compliant in their foreign country of residence, and for each of the years in the program had less than $10,000 of US sourced income (see ibid at Q52). Persons who had balances in their offshore accounts of less than $75,000 in each of the program years may qualify for a 12.5 percent penalty (see ibid at Q53). The 2012 offshore voluntary disclosure program provides a mechanism for taxpayers to opt out of the program by irrevocable election if they disagree with the application of the offshore penalty (see ibid at Q51ff). Taxpayers opting out are subject to full civil examination and possible penalties, including FBAR penalties, and remain within IRS Criminal Investigation’s voluntary disclosure practice requirements relating to cooperation and full disclosure (see ibid). From a practical perspective, the professional fees incurred in opting out, especially for retired seniors in Canada who are not willful but who do not have a letter of support for reasonable cause from their accountant can be monumental.
- 107.
The United States Taxpayer Advocate, Nina Olson, has been highly critical of the offshore voluntary disclosure programs. She advocates not imposing an FBAR penalty if the willfulness standard as described in Ratzlaf, above note 33, is not met: see Federal Taxes Weekly Alert Newsletter, above note 101. She has also remarked, “One basic problem with the OVDP [offshore voluntary disclosure program] is that it assumes all participants are tax evaders hiding money overseas, when in fact, the IRS has steered many people into the program who made honest mistakes”: United States, National Taxpayer Advocate, 2011 Annual Report to Congress (Washington, DC: US Department of the Treasury, 2011) vol 1 at 243, online: www.taxpayeradvocate.irs.gov/userfiles/file/2011-annual-report/IRS%20TAS%20ARC%202011%20VOL%201.pdf [2011 Annual Report], citing her memo dated 22 September 2011 to the deputy commissioner, Services and Enforcement. In her 2011 Annual Report, ibid, Ms Olson also focuses her concern on the “2009 OVDP FAQ,” above note 98 at Q35, which advises taxpayers coming into the program that “[u]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.” She criticizes the IRS for later taking the position, in an internal memo dated 1 March 2011, that it will no longer consider whether a taxpayer would pay less under existing statutes, as undermining the IRS’s reputation for fair dealing (2011 Annual Report, ibid, vol 1 at 258–65).
- 108.
See Code, above note 49, §§ 911 and 901.
- 109.
See Federal Taxes Weekly Alert Newsletter, above note 101.
- 110.
See The Canadian Press, “Americans in Canada Told Not to Fear IRS” CBC News (18 October 2011), online: http://www.cbc.ca/1.1060577.
- 111.
See Suzanne Steel, “Read Jim Flaherty’s Letter on Americans in Canada” Financial Post (16 September 2011), online: http://natpo.st/1Zsirt1: then Canadian finance minister remarked that most dual citizens in Canada were unaware of their obligations to file with the IRS, paid taxes in Canada, and had no US liability but still faced the threat of prohibitive FBAR fines. It is not just the threat or application of an FBAR penalty that causes financial distress among Canadian citizens and residents caught in the crossfire of the US fiscal crisis but also the enormous burden of having to comply with the onerous and often very costly compliance and reporting rules under the Code, above note 49, and to navigate the many anomalies between the Code and the Act, above note 5: see, for example, David S Kerzner, “Saving Your Clients from U.S. ‘Tax Cancer’: Passive Foreign Investment Companies and Other Tax Troubles” (2012) 5 It’s Personal 5.
- 112.
See United States, Internal Revenue Service, “New Filing Compliance Procedures for Non-resident U.S. Taxpayers” (last updated 6 July 2015), online: www.irs.gov/Individuals/International-Taxpayers/New-Filing-Compliance-Procedures-for-Non-Resident-U.S.-Taxpayers; Kerzner, “Advising the Delinquent U.S. Client,” above note 66.
- 113.
See United States, Internal Revenue Service, “Streamlined Filing Compliance Procedures” (last updated 6 August 2015), online: www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures [“Streamlined Foreign Offshore Procedures”].
- 114.
See United States, Internal Revenue Service, “U.S. Taxpayers Residing in the United States” (last updated 25 September 2015), online: www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States [“Streamlined Domestic Offshore Procedures”].
- 115.
See United States, Internal Revenue Service, “Delinquent FBAR Submission Procedures” (last updated 14 May 2015), online: www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures: taxpayers who do not need to use either the offshore voluntary disclosure program or the streamlined filing compliance procedures to file delinquent or amended tax returns to report and pay additional tax but who have not filed a FinCEN Form 114 (previously Form TD F 90-22.1) and who are not under civil examination or criminal investigation by the IRS and have not already been contacted by the IRS about the delinquent FBAR may file under these procedures.
- 116.
See United States, Internal Revenue Service, “Delinquent International Information Return Submission Procedures” (last updated 25 September 2015), online: www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures: taxpayers who do not need to use either the offshore voluntary disclosure program or the streamlined filing compliance procedures to file delinquent or amended tax returns to report and pay additional tax but who have not filed one or more required international information returns and who have reasonable cause for not filing the information returns in a timely manner, are not under civil examination or criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns may file under these procedures.
- 117.
See United States, Internal Revenue Service, “2012 Offshore Voluntary Disclosure Program” (last updated 10 March 2016), online: www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program.
- 118.
See sources cited at note 93, above in this chapter.
- 119.
See “Streamlined Foreign Offshore Procedures,” above note 113.
- 120.
See “Streamlined Domestic Offshore Procedures,” above note 114.
- 121.
See ibid.
- 122.
See “Streamlined Foreign Offshore Procedures,” above note 113. For more details about the offshore voluntary disclosure program, including the potentially very high penalties, see United States, Internal Revenue Service, “Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014,” online: www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised [“2014 OVDP FAQ”].
- 123.
See “Streamlined Foreign Offshore Procedures,” above note 113.
- 124.
United States, Internal Revenue Service, Form 14653, “Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures” (February 2016), online: www.irs.gov/pub/irs-pdf/f14653.pdf.
- 125.
Code, above note 49, § 877A.
- 126.
See “2014 OVDP FAQ,” above note 122 at Q7 and Q7.2.
- 127.
For an in-depth examination of the legal principles surrounding cross-border collections enforcement between Canada and the United States, see David S Kerzner, Vitaly Timokhov, & David W Chodikoff, eds, The Tax Advisor’s Guide to the Canada–U.S. Tax Treaty (Toronto: Thomson Reuters Carswell, 2008) (loose-leaf) ch 26A. See also Andrew Bonham, “FATCA and FBAR Reporting by Individuals: Enforcement Considerations from a Canadian Perspective” (2012) 60:2 Canadian Tax Journal 305; Vitaly S Timokhov, “Enforcing Tax Judgments across Borders: How Collection Assistance Can Overcome Limitations of the ‘Revenue Rule’” (2003) 6 Journal of International Taxation 36.
- 128.
Article 15 of the Third Protocol (1995) added Article XXVI-A (Assistance in Collection) to the Canada–US Tax Treaty, above note 4, ibid, at Technical Explanation to Art 26A. Historically, states have been reluctant to enforce the revenue laws of other states: see United States v Harden, [1963] SCR 366.
- 129.
See, for example, Kerzner, Timokhov, & Chodikoff, above note 128, ch 26A.
- 130.
Canada–US Tax Treaty, above note 4 at Art XXVI-A(1).
- 131.
Ibid at Arts XXVI-A(1) and (9).
- 132.
Ibid at Art XXVI-A(2). Under ibid, Art XXVI-A(3), the requested state has limited discretion as to whether or not to accept the application for assistance.
- 133.
Ibid at Art XXVI-A(4).
- 134.
Ibid at Art XXVI-A(5).
- 135.
Ibid at Art XXVI-A(8): where a taxpayer became a citizen of the requested state before 9 November 1995 and is still a citizen of that state when the application for assistance is made, no assistance may be provided for taxable periods ending before 9 November 1995. See also Chua v Canada (MNR), [2001] 1 FC 608 (TD), dealing with a judicial review of an IRS request for assistance.
- 136.
Canada, Canada Revenue Agency, “Frequently Asked Questions” (last updated 23 December 2014) at Q23, online: www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/fq-eng.html. In light of the legal warfare, described in Chapter 5, that the IRS can unleash against a non-cooperative US taxpayer, CRA’s statement should not provide delinquent taxpayers, their executors, or their heirs with any degree of peace of mind.
Further Readings
Chodikoff, David W, & James L Horvath, eds. Advocacy & Taxation in Canada (Toronto: Irwin Law, 2004).
Kerzner, David S. “Advising the Delinquent U.S. Client: What Are Your Strategies? Also, IRS’s New Program for Delinquent Filers” (2012) 5 It’s Personal 14.
Kerzner, David S, Vitaly Timokhov, & David W Chodikoff, eds. The Tax Advisor’s Guide to the Canada–U.S. Tax Treaty (Toronto: Thomson Reuters Carswell, 2008) (loose-leaf).
Michel, Scott D. “Advising a Client with Secret Offshore Accounts — Current Filing and Reporting Problems” (1999) 91 Journal of Taxation 158.
Timokhov, Vitaly S. “Enforcing Tax Judgments across Borders: How Collection Assistance Can Overcome Limitations of the ‘Revenue Rule’” (2003) 6 Journal of International Taxation 36.
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Kerzner, D.S., Chodikoff, D.W. (2016). International Collections Enforcement and Voluntary Disclosures. In: International Tax Evasion in the Global Information Age. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-40421-9_10
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