What caught
my attention was the size of the penalty.
The story
involves Letantia Russell, a dermatologist from California who has been in the
professional literature way too much over too many years. The story started
with her attorneys reorganizing her medical practice into a three-tiered
structure and concealing ownership through use of nominees. Then there was the offshore bank account.
Let’s talk
about that offshore account.
Back when I came
out of school, one had to report foreign accounts above a certain dollar
balance. The form was called the “TD 90-22.1.” I remember accountants who had
never heard of it. It just wasn’t a thing.
The requirement
hasn’t changed, but the times have.
If you have
an overseas bank account, you are supposed to disclose it. The IRS has a question
on Schedule B (where you report interest and dividends) whether you have a
foreign bank account. If you answer yes, you are required to file that TD
90-22.1. The form does not go to the IRS; it instead goes to the Treasury
Department. Mind you, the IRS is part of Treasury, but there are arcane rules
about information sharing between government agencies and whatnot. Send to
Treasury: good. Send to IRS: bad.
The rules
were fairly straightforward: bank account, balance over $10 grand, own or able to
sign on the account, required to file. There was no rocket science here.
Don’t play
games with account types, either. A checking account is the same as a savings account
which is the same as a money market and so on. Leave that hair-splitting stuff
to the lawyers.
About a
decade or so ago, the government decided to pursue people who were hiding money
overseas. Think the traditional Swiss bank account, where the banker would risk
jail rather than provide information on the ownership of an account. That Swiss
quirk developed before the Second World War and was in response to the unstable
Third Republic of France and Weimar government of Germany. Monies were moving
fast and furious to Switzerland, and Swiss bankers made it a criminal offense
to break a strict confidentiality requirement.
Thurston
Howell III joked about it on Gilligan’s Island.
Travel forward
to the aughts and the UBS scandal and the U.S. government was not laughing.
Swiss banks eventually
agreed to disclose.
The IRS
thundered that those who had … ahem, “underreported” … their foreign income in
the past might want to clean-up their affairs.
The
government dusted-off that old 90-22.1 and gave it a new name: FinCen 114 Report of Foreign Bank and Financial Accounts.
The IRS was
still miffed about that government-agency-sharing thing, so it came up with its
own form: Form 8938 Statement of Foreign
Financial Assets.
So you had
to report that bank account to Treasury on the FinCen and to the IRS on Form
8938. Trust me, even the accountants
were trying to understand that curveball.
Resistance
is futile, roared the IRS.
Many
practitioners, me included, believed then and now that the IRS went fishing with
dynamite. The IRS seemed unwilling to distinguish someone who inherited his/her
mom’s bank account in India from a gazillionaire hedge-fund manager who knew
exactly what he/she was doing when hiding the money overseas.
And you
always have … those people.
Letantia
Russell is one of those people.
The
penalties can hurt. Fail to fail by mistake and the penalty begins at $10,000. Willfully
fail to file and the penalty can be the greater of
· $100,000 or
· ½ the balance in the account
Letantia dew
a $1.2 million penalty on her 2006 tax return. I normally sympathize with the
taxpayer, but I do not here. One has to be a taxpayer before we can
have that conversation.
It went to
District Court. It then went to Appeals, where her attorneys lobbed every
possible objection, including the unfortunate trade of Jimmy Garappolo from the
New England Patriots to the San Francisco 49ers.
It was to no
avail. She gets to pay a penalty that would make a nice retirement account for many
of us.
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