Let’s talk about the FBAR (Report of Foreign Bank and
Financial Accounts). It currently goes by the name “FinCen Form 114.”
This thing has been with us since 1970. It came to life as an effort to identify foreign financial transactions that might indicate money laundering or tax evasion.
Sounds benign.
The filing requirement applies to a United States
person, defined as
· A
citizen or resident of the U.S.
· A
domestic partnership
· A
domestic corporation
· A
domestic trust or estate
We’ll come back
that first one in a moment.
Next, one needs a financial interest or signature
authority in a foreign financial account to trigger this thing.
A foreign financial account includes a bank account,
which is easy enough to understand. It would also include a broker account
(think Charles Schwab, but overseas). Some are not so intuitive, though.
· A
foreign insurance policy with cash value is reportable.
· A
foreign hedge fund is not.
· A
foreign annuity policy is reportable.
· A
foreign private equity fund is not.
· A
foreign cryptocurrency account is not reportable.
Some require a google search to understand what is
being said.
· A
Canadian registered retirement savings plan is reportable.
· A
Mexican fondo para retiro is reportable.
Next, the foreign financial account has to exceed a certain
dollar balance ($10,000) at some point during the year.
That $10,000 balance has been there for as long as I
can remember. You will have a hard time persuading me that $10,000 in 1986 is
the same as $10,000 now, but that number is apparently eternal and unchanging.
The $10,000 is tested across all foreign financial
accounts. If it takes your fourth foreign account to put you over $10 grand,
then you are over. Testing is done. All your accounts are reportable on a FBAR.
Like so many things, the FBAR started with reasonable
intentions but has morphed into something near unrecognizable.
Fail to file an FBAR and the standard penalty is $10
grand. Fail to file for two years and the penalty is $20 grand. Have two
foreign accounts and fail to file for two years and the penalty is $40 grand.
And that is assuming the error is unintentional. Do it
on purpose and I presume they will execute you.
I exaggerate, of course. They will just bankrupt you.
It puts a lot of pressure on defining “on purpose.”
Let’s look at Osamu Kurotaki (OK).
OK was born in Japan and lives in Japan. He obtained a
U.S. green card, making him a U.S. permanent resident. One of the pleasures of
being a permanent resident is filing an annual tax return with the United
States, irrespective of whether you live in the U.S. or not. One can talk about
a foreign income exclusion or foreign tax credit – which is fine – but that
annual filing makes sense only if someone intends to eventually return to the U.S.
It does not make as much sense if someone does not intend to return, someone
like OK.
OK paid someone to prepare his annual U.S. tax
return. He found a CPA who was bilingual.
In 2021 the U.S. Treasury assessed civil penalties
against OK for more than $10 million. His footfall? He failed to file FBARs.
Treasury also upped the ante by saying that his failure was “willful.”
Huh?
Treasury is requesting summary judgement that OK
willfully failed to file FBARs, prefers waffle over sugar cones and rooted for
the Diamondbacks in the World Series.
The Court wanted to know how Treasury climbed the ladder to get to that “willful” step.
So do I.
Here is what the Court saw:
· OK
is a Japanese speaker and does not speak English “at all.”
· OK
relied on his bilingual CPA to make sense of U.S. tax filing obligations.
· His
CPA provided annual tax questionnaires in both English and Japanese. The
English was for theater, I suppose, as OK could not read English.
· The
CPA’s translation now becomes critical. Here are instructions to the FBAR in
English:
U.S. taxpayers
are required to report their worldwide income; that is, income from both U.S.
and foreign sources.”
· Here
is the Japanese translation:
U.S. resident taxpayers
are required to report their worldwide income, that is, income from both US. and
foreign sources."
OK told the Court that he did not think he had a
filing obligation because he was not a “U.S. resident.”
I get it. He lives in Japan. He works in Japan. His
kids go to school in Japan. He is as much a “U.S. resident” as I am a Nepalese
Sherpa.
Except …
OK was green card – that is, a “permanent” resident of
the U.S.
Technically …
The Court cut OK some slack. Technically - and in a
law school vacuum - he was a “resident.” Meanwhile - in the real world – no one
would think that. Furthermore, OK hired a CPA who made a mistake. Even a trained
professional erred interpreting the Treasury’s word salad.
The Court said “no” to summary judgement.
Treasury will have to argue its $10 million-plus proposed
penalty.
And I believe the Court just outlined reasonable
cause.
Perhaps OK should consider turning in that green card.
Our case this time was Osamu Kurotaki v United
States, U.S. District Court, District of Hawaii.
