May 02, 2002

Although the provisions of the USA PATRIOT Act will eventually provide the U.S. Treasury with a wealth of new information to support law enforcement, the department isn't waiting around for the new regulations to take effect.

When the IRS issued summonses to credit card processing facilities in the U.S., the resulting information revealed that as many as 1 million U.S. taxpayers may have signature authority or control over a foreign bank account. However, only 117,151 taxpayers had filed the requisite Report of Foreign Bank and Financial Accounts, commonly known as an FBAR.

That's a failure to file beyond all recognition. While overseas accounts may indeed contain the proceeds from criminal activity, that's not the only reason to seek shelter from U.S. tax authorities. "A lot of these funds are flowing offshore are, in all likelihood, legitimate funds," said Don Temple, BSA/AML subject matter expert at Mantas, a Fairfax, Va. provider of behavior detection technology. "It's funds that aren't being taxed."

In response, FinCEN, the IRS and the Department of Justice plan a joint effort to combat the disparity between foreign accounts accessed through U.S. merchant banks and those reported to the IRS.

But even if the IRS suspects that money laundering and tax evasion are involved with some of these cases, it can be difficult to prove willful intent. "During the examination, taxpayers generally assert to the IRS that they were not aware that they were required to file an FBAR," the report said. "Often, the administrative record lacks evidence to the contrary, such as an advice letter from an accountant or financial planner or any witness to testify that the taxpayer knew of the filing requirement."

To eliminate the easy excuse, the Treasury intends to give FBAR compliance a higher profile. By the end of the year, FinCEN, the Treasury's Financial Crimes Enforcement Network, will propose revised forms and instructions for the FBAR, using plain language and an improved design. For its part, the IRS may ask or require accountants, tax practitioners, and tax filing services to inform their clients of the FBAR filing requirement.

At the same time, the Treasury hopes to "raise the cost of being an FBAR scofflaw" through "a series of highly publicized criminal actions against intentional violators."

However, sending a clear message on FBAR compliance might require finding an intentional violator who otherwise walks the straight and narrow path. "Ideally, such cases would be brought not only as adjuncts to other types of criminal conduct such as tax evasion and bankruptcy fraud, but also as stand-alone cases," said the report.

"There are going to be quite a number of criminal tax cases that come out of this," said Mantas' Temple, a former IRS investigator. "The majority of taxpaying citizens should be applauding this little act."

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