Manafort Indictment Is a Good Reminder of FBAR Disclosure Requirements

On October 30, 2017, Paul Manafort Jr. was indicted for concealing his interests in several foreign bank accounts, as well as tax evasion and a host of other criminal charges.  The indictment reminds us how important it is to follow the strict guidelines of the reporting regime that the Internal Revenue Service (IRS) and the US Department of the Treasury have established to disclose foreign bank accounts.

Pursuant to the Bank Secrecy Act, a US citizen or resident (a US Person) is required to disclose certain foreign bank and financial accounts which he or she has “a financial interest in or signature authority over” annually.  This obligation can be triggered by direct or indirect interests; a US Person is treated as having a financial interest in a foreign account through indirect ownership of more than 50 percent of the voting power or equity of a foreign entity, like a corporation or partnership.  The US Person is required to annually disclose the interest on FinCEN 114, Report of Foreign Bank and Financial Accounts, which is commonly referred to as the FBAR.  The disclosure requirement is triggered when the aggregate value of the foreign account exceeds $10,000.  The form is filed with your federal income tax return.

The civil penalties for failing to timely disclose an interest in a foreign account can be severe, and in the case of willful violations, can reach up to 50 percent of the highest aggregate annual balance of the unreported foreign financial account each year.  The statute of limitations for FBAR violations is six years, and the willful penalty may be assessed for more than one year, creating extreme financial consequences for FBAR reporting failures.

A US person must also disclose the existence of covered foreign accounts in Part III of Schedule B to his or her Form 1040 – US Individual Income Tax Return.  Importantly, by signing the return, a US Person attests—under penalties of perjury—that all information provided on the return is “true, correct and complete.”  Thus, a non-disclosing US Person can be prosecuted for perjury and for filing a false or fraudulent tax return in addition to any financial penalties.

A range of criminal sanctions may apply to US Persons who fail to disclose the existence of—and income from—offshore financial accounts on their annual tax return, FBARs and other IRS forms.  For example, the statutory criminal sanctions for failing to file an FBAR include substantial fines and up to 10 years imprisonment, depending on the type of violation.

Because a substantial number of US Persons failed to disclose their foreign financial accounts, the IRS implemented the Offshore Voluntary Disclosure Program, the Streamlined Offshore Procedures Program, the Delinquent International Information Return Program, and the Delinquent FBAR Submission Procedures to assist taxpayers in becoming compliant with the Bank Secrecy Act.  More information about these programs can be found here. We have previously discussed developments in this area here.

The FBAR charges in the Manafort indictment are notable for a number of reasons.  Typically, investigations for tax crimes take a much longer amount of time to develop and move toward indictment, as attorneys around the US are generally obliged to coordinate their charging decisions with the Department of Justice (DOJ) Tax Division.  This approval procedure offers targets of criminal investigations and their counsel several opportunities to argue for mitigation before charging decisions are made.  News reports over the last few days have suggested that Robert Mueller’s team either bypassed or curtailed the involvement of DOJ in the process of indicting Manafort.

Also, the FBAR charges against Manafort are in some ways a return to form, as the FBAR reporting requirement has its origins as an investigative tool to suss out potential offshore money laundering.  More recently, the government has primarily used FBAR reporting failures to identify potential US tax evasion, and collection of FBAR penalties through the Offshore Voluntary Disclosure Program and other efforts have been a significant source of revenue for the US Treasury in recent years.

Practice Point:  Manafort’s indictment is a reminder to make sure that US Persons understand the complex rules for disclosing interests in foreign accounts and entities. Prior to filing a federal tax return, we suggest US Persons with interests in foreign entities and financial instruments perform a self-audit of their disclosure requirements under these rules.  Of course, voluntary disclosure is a good option for those taxpayers who may have had historical missteps in this area, and the IRS now offers a number of different options for taxpayers to come into compliance.

Laura L. Gavioli, PCLaura L. Gavioli, PC
Laura L. Gavioli, PC, defends individuals and corporations in white-collar prosecutions, civil tax cases, US Internal Revenue Service (IRS) controversies and complex financial litigation. Laura represents numerous taxpayers who are facing civil and criminal issues regarding their reporting of offshore financial accounts and other assets. Laura has also represented clients involved in some of the largest white-collar criminal tax evasion cases ever brought in the United States, and she regularly advises clients regarding the IRS Whistleblower Program. Read Laura Gavioli's full bio.


Kevin SpencerKevin Spencer
Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.


Andrew R. RobersonAndrew R. Roberson
Andrew (Andy) R. Roberson focuses his practice on tax controversy and litigation matters. He represents clients before the Internal Revenue Service (IRS) Examination Division and Appeals Office and has been involved in more than 50 matters at all levels of the federal court system, including the US Tax Court, several US courts of appeal and the Supreme Court. Andy has experience settling tax disputes through alternative dispute resolution procedures, including Fast Track Settlement and Post-Appeals Mediation, and in representing clients in Compliance Assurance Process (CAP) audits. He also represents individuals in Global High Wealth Industry Group audits and in connection with offshore disclosure programs. Read Andy Roberson's full bio.


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Roger J. JonesRoger J. Jones
    Roger J. Jones represents clients in tax controversy and litigation matters at all levels of the federal court system, before the Internal Revenue Service (IRS), and before various state courts and tax agencies. He has represented taxpayers, including numerous Fortune 500 companies, in more than 80 docketed cases before the US Supreme Court, most of the US courts of appeals, federal district courts, the US Court of Federal Claims and the US Tax Court. Read Roger Jones' full bio.

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