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.