A press release from the US Department of Justice:
"Saul Hyatt, 53, pleaded guilty today before U.S. District Judge Freda L. Wolfson of the District of New Jersey to an Information charging him with conspiracy to conceal assets in an undeclared bank account held in Panama for his benefit. According to documents filed with the court, Hyatt conspired with another individual in the United States and others to conceal his assets and income derived from the sale of duty-free alcohol and tobacco products. To execute the scheme, Hyatt used a registered Panamanian corporation, Centennial Group, to buy and sell the duty-free products.
The alcohol shipped through a customs-bonded warehouse in the Foreign Trade Zone in Fort Lauderdale, Florida. The tobacco products, Chinese-brand cigarettes sold under the names “Chung Hwa” and “Double Happiness,” passed through a customs-bonded warehouse in North Bergen, New Jersey. From 2006 to 2012, Hyatt directed that $1,627,832 in profits from the sale of duty-free alcohol and tobacco products be wired to his undeclared bank account in Panama. Hyatt repatriated money from the Panamanian bank account to buy a Mercedes Benz SL 550R automobile and to pay for $19,000 in interior design goods and services."
Sounds like an interesting case. I don't know what the relevance of a Mercedes Benz SL 550R or an expense of $19,000 in interior design goods is all about. I guess the worst the DOJ could claim about Mr. Hyatt (aside from the plea to the felony charge, of course) was him purchasing a fancy car and fancy drapes. But this is Weston, Connecticut, in Fairfield County, which enjoys a median family income of just over $200,000. So $19,000 on interior design goods? I guess that will buy you a couple Ekornes sofas, but that's about it. And while a Mercedes Benz SL 550R is certainly a nice car, it is not anything your neighbors wouldn't use as a daily driver, or offer as a hand-me-down to their teenage children.
Whatever. Nice car and nice house, but that's not the point. The point of this article is to demonstrate how impossible it is for anyone to be completely correct about the US tax code and Bank Secrecy laws — including the Department of Justice, whose attorneys are responsible for imprisoning those people who break some of the rules. Anyone can make a mistake with the US tax code.
To further evidence to this proposition, the next paragraph (bold for emphasis (underlined for extra emphasis)) of the press release:
"U.S. persons are required to report to the IRS on Schedule B of a U.S. Individual Income Tax Return any financial interest in, or signature authority over, a financial account in a foreign country by checking “Yes” or “No” in and identifying the country where the account was maintained. U.S. persons also must report all income earned from foreign financial accounts and, if the accounts have an aggregate value of more than $10,000 at any time during the calendar year, file with the Department of the Treasury a Report of Foreign Bank and Financial Accounts (FBAR)."
What is in bold in incorrect. You only need to check "yes" in Part III Line 7a of Schedule B if you have a Schedule B filing requirement in the first place. If you do not need to file a Schedule B, you aren't required to check anything on a Schedule B at all. It is incorrect to say U.S. persons are required to report on Schedule B. If a Schedule B is required, then the requirement to report a foreign interest in a foreign account is triggered.
See? Even if you have interest or dividends, you only have to fill out Part III if your interest and dividends exceeded $1500. Source: IRS Form Schedule B 2015.
The other issue I have with the quoted paragraph above is the claim that taxpayers must "identify the country where the account was maintained." But this is only true if the FBAR (FinCEN Form 114) filing amount was triggered in the first place. If your foreign bank accounts never exceeded $10,000 in the aggregate, then you don't have to identify the country where the account was maintained. In support of this conclusion, again I would refer you to the screen shot of Part III of Schedule B above.
This may sound pedantic (and it probably is), but I assure you that these kind of distinctions can make a big difference when we are talking about high-stakes international tax penalty cases. Also, even when required, a failure to check the appropriate box in Part III Line 7a is not by itself indicative of fraud. Here's an article we wrote on the subject (BTW, the IRS agrees with us on the subject).
For example:
Suppose in this case, the $1.6 million claimed as deposited by Mr. Hyatt went into a non-interest bearing Panamanian account. Let us suppose Mr. Hyatt has no other interest or dividends earned. In that case, with or without the Panamanian account there would be no Schedule B Part III line 7a requirement to check yes, as there would be no Schedule B requirement in the first place.
Of course, with an account value over $10,000 in the aggregate there is an FBAR filing requirement regardless if it earns interest or not (the account could even lose money), but an FBAR requirement may not necessarily trigger a Schedule B requirement. I just got myself dizzy.
Yet, perhaps the most fascinating aspect (at least for me) about this press release is what is missing. There is also the Foreign Account Tax Compliance (FATCA) Form 8938 that would have been required in Mr. Hyatt's case. He easily hits the $50,000/100,000 threshold in foreign assets overseas. This has been a huge story and has far more consequential penalties. Here is an article we wrote on all the FATCA penalties applicable to individuals. This is kind of a big deal. I would think the government would want to mention something about this gargantuan new law.
My point is not to harp or to belittle the DOJ for making what I look at as mistakes in explaining the current state of the law (and I would be foolish to take pot shots at such a wise agency full of attractive people). My point is that international tax compliance is so difficult that not even the government agency entrusted with criminal enforcement, with its terrific resources and manpower, can describe it correctly all the time. When it comes to IRS tax compliance, anybody can make mistakes. That is the standard everyone should be aware of when negotiating penalties, criminal or civil.
