Academic journal article Southern Law Journal

Changing the Burden of Proof in Willful Fbar Violation Cases?

Academic journal article Southern Law Journal

Changing the Burden of Proof in Willful Fbar Violation Cases?

Article excerpt


A. The Offshore Tax "Loophole"

In recent years, the Internal Revenue Service (the "Service") has become increasingly convinced that it is losing out on billions of dollars in tax revenue due to U.S. citizens "hiding" money in bank accounts in other countries with more favorable tax regimes. Historically, those other countries with favorable tax rules which have "encouraged" U.S. investments in their country have included Switzerland, the Bahamas, and the Cayman Islands. These foreign banks, unlike U.S. banks, are not required to provide information to the Service on depositors and interest earned; as such, the Service fears that many taxpayers are deliberately not claiming income received in these countries on their individual tax returns. Since 2007, the Service and Congress have stepped up their efforts to find and penalize these taxpayers.

Generally speaking, a taxpayer with a foreign account(s), must do three (3) things to not run afoul of the government and its regulations. First, a taxpayer must claim income earned on any foreign accounts.1 Second, a taxpayer must check the "Yes" box on Schedule B of his or her Form 1040 to acknowledge said accounts.2 Third, if required, based on monetary amounts, the taxpayer must file an FBAR with the Treasury Department by June 30.3 Finally, a taxpayer may have to file Form 8938,4 which is not to be confused with the FBAR.

B. Requirement 1: Taxation of Worldwide Income

Under § 61(a) of the Internal Revenue Code of 1986, as amended ("Code"), "gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.5

Under this broad definition of gross income, a U.S. citizen, resident alien or domestic corporation is taxed on its worldwide income - including income earned or received domestically, as well as income earned or received internationally.6 For example, if a U.S. citizen has bank accounts in the U.S., as well as in Switzerland, he or she must include all interest earned from the U.S. and Swiss banks on his or her Form 1040, line 8a.7 Failure to claim the Swiss interest could lead to penalties and interest being assessed against the taxpayer. Further, the taxpayer is said to have filed a false return which means that there is no limit on the period of assessment; indeed, the Service can assess a tax against the taxpayer at any time and is not subject to the three (3) year statute of limitations.8

C. Requirement 2: Acknowledgement of Foreign Bank Accounts

In addition to the requirements of claiming and paying tax on foreign income, a U.S. citizen must also make disclosures on his or her Schedule B (Interest and Ordinary Dividends) regarding said account(s), which is attached to the individual's Form 1040.9 Specifically, Part III (Foreign Accounts and Trusts) of Schedule B asks "[A]t any time during 2015, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?"10 The taxpayer must then choose the correct box - either "Yes" or "No." If the answer to the foregoing is yes, then the taxpayer is asked if he or she is required to file FinCEN Form 114 (also known as the Report of Financial Accounts or FBAR) and if so, in what country.11

D. Requirement 3: Filing of FBAR

In addition to claiming worldwide income and acknowledging foreign accounts to the Service on the individual tax return, taxpayers with certain foreign accounts must also file Form FinCEN Form 114 (the "FBAR") with the Treasury Department by June 30 of the following year, and no extensions will be given. …

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