Unreported Foreign Bank Accounts: Department Of Justice Rulings


No matter what the IRS says, the punishment does not always match the crime. Sometimes, the penalties for mistakes or simple acts of ignorance are completely baffling in their severity. The FBAR penalty that the IRS seeks to assess on taxpayers failing to report their foreign accounts is one such case. In previous articles, we've taken a look at some instances of staggering FBAR penalties that the IRS has squeezed non-compliant taxpayers into accepting.


With a recent case from Los Angeles, the trend of trampling the taxpayer continues. Those with unreported accounts and income who do not utilize the Offshore Voluntary Disclosure Program (OVDP/OVDI), are treated more harshly than outright thieves, as a pair of recent FBAR cases from California demonstrates.


The Guity Kashfi FBAR plea

According to court documents, Kashfi, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel. The accounts were held in the names of nominees in order to keep them secret from the United States government. Kashfi used the accounts to obtain "back-to-back" loans from a branch of the bank in Los Angeles. Although the loans were secured or collateralized with certificates of deposit held in Kashfi's undeclared offshore accounts, that fact was concealed to keep Kashfi's offshore accounts secret.


Even though this was a complicated transaction and the bank accounts weren't even in her name, it simply wasn't enough to avoid the watchful gaze of the IRS. This is something I learned years back from an IRS Agent – the IRS knows that the majority of foreign accounts intentionally being hidden are using a nominee's name or a controlled company; they are not being held under the individual's own name. This case shows that just having the account in the name of your brother or a shell corporation is not going to be enough to shield your interests, especially when others — those who know about what you've done — start spilling the beans.


According to the plea agreement, Kashfi never told her accountant about her undeclared accounts, and failed to report any income from the accounts on her individual income tax returns that were filed with the IRS. For tax years 2005 through 2011, Kashfi failed to report interest income of approximately $221,306. The highest balance in Kashfi's undeclared accounts was approximately $2,501,469.


I see these kinds of missteps from my own clients all the time. Many of those with assets in foreign accounts fail to tell their CPAs about these offshore dealings. There are many reasons for this, some involving intentional concealment, some because the CPA didn't ask, and for many, they don't say anything because they didn't think that their foreign accounts were relevant for US taxes. Regardless of intent, many people find themselves in this scenario. So, if you find yourself in a similar set of circumstances, know that you are not alone.


Guity Kashfi's effective FBAR penalty rate

Assume that the $221,306 of income earned by Kashfi was taxed at the then-highest marginal rate of 35%. That means the total taxes unpaid were no more than $77,457.10. A pretty hefty sum, sure, but it doesn't seem entirely far-fetched.


In recent years, the IRS has been determined to link FBAR non-reporting with tax evasion. For some reason, they are hellbent on believing that failure to report foreign accounts on one's FBAR is in and of itself an indicator of wrongdoing. This was clear in the McBride case as well; the current angle on FBAR reporting/penalties is to link it with tax evasion. As such, let's take a look at how the unpaid tax amount calculated above relates to the penalty:


The FBAR penalty — which can be up to 50% of the highest account value — is 50% of $2,501,469.00. That's a staggering $1,250,734.50. Over one million dollars. This means that the FBAR penalty rate is more than 16 times the evaded tax.


At this point, I have to throw my hands up in the air. How in blazes does that make any sense? 16 times the evaded tax is beyond reason. In addition, Kashfi is still subject to criminal penalties of up to $250,000 and imprisonment. 


Had Kashfi utilized the 2009 Offshore Voluntary Disclosure Initiative, she would have paid a maximum FBAR penalty of $500,293.80 (20% of highest account value) and would not have been subjected to any criminal penalties or charged with any crimes. If she used the 2012 Offshore Voluntary Disclosure Program (the current rules) she would have been assessed a maximum FBAR offshore penalty of $687,903.96 (27.5% of highest account value). This is all in addition to the accrued unpaid taxes and related penalties/interest, which are — of course — nonnegotiable.


So for not using the program, and having avoided taxes, the IRS dropped the hammer on Kashfi.


Zvi Sperling FBAR plea

Kashfi's co-conspirator also plead guilty and agreed to a huge FBAR penalty:


Zvi Sperling of Beverly Hills, Calif., appearing before United States District Judge John F. Walter, pleaded guilty to conspiring to defraud the United States in connection with back-to-back loans obtained in Los Angeles that were secured by funds in undeclared bank accounts in Israel. For tax years 2005 through 2008, Sperling failed to report income of approximately $381,563. The highest balance in Sperling's undeclared accounts was approximately $4 million.


Zvi Sperling effective FBAR penalty rate

Assume that the $381,563 of his unreported income was taxed at the then-highest marginal tax rate of 35% and that would mean he failed to pay the $133,547.05 in taxes he owed to the government. For evading $133,547.05 in taxes associated with income from unreported foreign accounts, he agreed to a penalty of $2 million — 50% of his highest account value of $4 million.


Once again, we see the FBAR penalty hovering around 15-16 times the amount of tax evaded. And, just like Kashfi, he is subject to criminal penalties and jail time. If he used the 2009 program, he would have had an FBAR offshore penalty of $800,000. And, if he were to use the current rules (those implemented under the 2012 OVDP), his maximum FBAR penalty would have been $1.1 million and he would not be subject to any criminal penalties.


One last observation

While these numbers are staggering and don't seem entirely reasonable, things could have been even worse. The IRS could have sought even bigger FBAR penalties than these. The mentioned FBAR penalty rates, while exorbitant, were not the maximum available under the law. Believe it or not, they gave this California duo a break. The IRS could have assessed a penalty of 50% of the highest value of each account for each year. Meaning, the final penalty amount would have easily exceeded their net worth.


The press release does not mention which banks in Israel and Luxembourg were involved. Why is this? My speculation is that there are a LOT of pending investigations that the IRS is going to unleash for bank accounts in Israel and Luxembourg and the last thing they want is to tip their hand. These aren't just criminal investigations, but also a means to give the auditors at the new IRS offshore super-centers in California, New York, and Florida something to do. Like impose 50% FBAR penalties… for each year of unfiled FBARs.


My question is, did Kashfi & Sperling give up information on others for a reduced FBAR penalty?


And finally, some great advice from a great Californian

It's kind of sad that this is what tax compliance has come to. We've had 100 years of the 16th Amendment, and now the IRS is imposing penalties of 1,500% just because they can. The IRS wants money and is getting it by confiscatory penalty schemes vastly out of proportion with the crimes being committed. So, what's the best solution to this rampant problem?


We must get rid of the IRS. It’s a bureaucracy fraught with totalitarianism.

— Sonny Bono