How does the IRS find undisclosed foreign accounts?

One way is prosecuting banks that have allegedly helped taxpayers avoid their U.S. tax liabilities. For instance, the Swiss Bank Program required banks to pay hefty fines and disclose information on accounts held by U.S. persons as part of non-prosecution agreements.

Whistleblowers are another. Since 1867, the Treasury Secretary has had the authority to pay people who help the IRS detect tax underpayments. In 2006, Congress even mandated awards of 15 to 30 percent of “collected proceeds” to whistleblowers in certain cases.

These whistleblower payments only come up when the “tax, penalties, interest, addition to tax and additional amounts in dispute” are more than $2 million.

FBAR penalties excluded from threshold

With the focus on offshore accounts, have awards been paid to whistleblowers? Possibly on a discretionary basis, but it is questionable whether mandatory award will ever be available.

Penalties for failing to report foreign assets can add up quickly. The penalty for a non-willful failure to file a Report of Foreign Bank and Financial Account (FBAR) can be as high as $10,000 for each year a taxpayer was noncompliant. With willful violations, the maximum annual penalty is the greater of $100,000 or half the value of an account.

Forbes summarized the facts of a recent case on the issue. The whistleblower sought a mandatory award based on aggregate penalties stemming from the prosecution of Swiss banker Renzo Gadola. Just one of his former clients had paid $6.8 million as part of a guilty plea deal.

The court agreed with the government finding the text of the 2006 statute excluded FBAR penalties. Without those penalties the total amount in dispute was less than $50,000, which didn’t qualify for a mandatory award.

With this ruling, whistleblowers will not likely be running out to report FBAR violations.