The U.S. District Court for the Western District of Washington has upheld FBAR penalties of $10,000 for tax years 2005 through 2008, but admonished the IRS for what it said was "arbitrary" and "capricious" conduct. As a result, the court ordered that any additional interest or late payment penalties are void.
James Moore, a U.S. citizen, relocated to the Bahamas in 1989. While there, he transferred approximately $300,000 of post-tax U.S. income to the Bahamas, with the intention of developing a hotel or resort there. The following year, Mr. Moore faced health problems and was forced to move back to the United States. Before moving back, he met with the general manager of his bank in the Bahamas, who advised him to transfer his funds to Swiss bank UBS. Moore was unaware of the reporting requirements for foreign accounts.
For those who hold more than $10,000 in foreign bank accounts at any time during the year, the failure to file an FBAR (FinCEN Form 114) can lead to huge civil penalties, as well as the risk of criminal prosecution. In 2009, the IRS announced an amnesty program, the Offshore Voluntary Disclosure Initiative (OVDI), which allowed taxpayers to voluntarily disclose their accounts and pay taxes and penalties, in exchange for immunity from criminal prosecution.
Moore participated in the 2009 OVDI, and the applicable 20% offshore penalty was calculated to be $100,218. Rather than pay this penalty, Moore exercised his right to "opt out" of the OVDI penalty framework in favor of having his penalty amount determined under traditional audit procedures. Taxpayers who do this can potentially come away with a much lower penalty amount, or even just a warning letter in certain cases. However, there is also a risk that the IRS could determine the taxpayer's failure to file FBARs was willful, which could result in much higher penalties than the 20% OVDI penalty. Those who opt out are still immune from criminal prosecution, provided they continue to be cooperative and truthful.
After opting out, the case was assigned to a Revenue Agent who assessed non-willful penalties for 2005-2008 in the amount of $10,000 per year. However, no explanation was given as to why penalties were assessed. Moore appealed the assessment to the IRS Office of Appeals, where Appeals Officer Daisy Batman upheld the assessment, without even allowing Moore an opportunity to have a hearing or present any evidence. The Appeals Officer also refused to provide any explanation for why she upheld the penalties. In its decision, the District Court held that Moore's Fifth Amendment due process rights were violated because the penalties were assessed without them being afforded an opportunity to have a hearing in front of an impartial tribunal or to present evidence.
With the announcement of the new Streamlined Procedures a year ago, opt outs are becoming increasingly rare. Those who traditionally would have opted out of the OVDP civil penalty structure will now typically avoid the OVDP altogether, in favor of using the simplified Streamlined Procedures. Under the Streamlined Procedures, taxpayers are only required to file amended tax returns for three years, as opposed to the eight years required under the OVDP. The Streamlined Procedures also offer a lower penalty of 5%, compared to the OVDP penalty which is currently either 27.5% or 50%, depending on which foreign banks were used. . It is crucial to consult with an experienced tax attorney prior to going this route, however, as the Streamlined Procedures offer no assurance against criminal liability.