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FBAR Penalty Can Run Into Millions

No matter how old you are, the IRS isn't likely to show you any mercy, especially if you're trying to hide funds in offshore accounts without paying the required taxes. This has been demonstrated, in dramatic fashion, in a case involving an 87-year-old retiree who earned a fortune as a specialty-glass importer. Carl Zwerner, who lives in Florida, has been hit with penalties equaling 150% of the value of his foreign bank account, for a staggering total of $2.24 million.

Over the past decade, the IRS has ramped up its efforts to uncover tax cheats who are stashing cash in foreign accounts that were protected previously by privacy laws. Significantly, U.S. taxpayers are required to file a Report of Foreign Bank and Financial Accounts (FBAR). The penalty for failing to file the FBAR can equal 50% of the value of the unreported assets.

The IRS has joined forces with the Justice Department in using this weapon to ferret out tax cheats. Dozens of high-profile cases during the past few years have resulted in fines reaching into the millions.

The threat of paying excessive penalties has driven some tax evaders into an IRS-sponsored amnesty program. Under the program, taxpayers must fork over back taxes, fines, and penalties, in addition to providing information to the IRS about their foreign accounts. Since the program was authorized in 2009, more than 43,000 taxpayers have paid about $6 billion into government coffers.

Zwerner was a unique case. He said he didn't know he had to file FBARs for his account at ABN Amro Group N.V., one of the Netherlands' largest banks, until 2008. At that time, he couldn't enter the amnesty program due to income limits, so he amended his 2008 return. The IRS went after him for failing to file FBARs for four years--from 2004 through 2007--and sought the 50% penalty for each year. The jury in his trial handed down a verdict for the first three years.

For 2004, Zwerner's account was valued at $1.48 million; $1.49 million for 2005; and $1.55 million for 2006. The FBAR penalties assessed were $723,762, $745,209, and $772,838, respectively, adding up to a total of $2.24 million.

In another publicized recent case, H. Ty Warner, the billionaire founder of the Beanie Babies toy empire, pleaded guilty to evading taxes on assets of up to $107 million hidden in Swiss bank accounts. Warner ended up paying an FBAR penalty of $53.6 million.

The message is clear: The IRS will show no quarter. However, at least the income limits that barred Zwerner and others from entering the amnesty program have been removed, giving some wealthy U.S. taxpayers another option.