“War Stories,” drawn from CAMICO claims files, illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.

Situation

When James Clay, CPA, put together his clients’ tax organizers and questionnaires, he included the question regarding whether the client had “a financial interest in, or signature or other authority over, any financial accounts (including bank, securities, or other financial accounts) in a foreign country, exceeding $10,000 in the preceding calendar year.”

One of his wealthier clients, Silvio Amato, had taken up residency in the United States after immigrating with his wife, Sofia, from Italy. Silvio was still becoming fluent in English and routinely checked the “No” box for the question on foreign accounts when filling out the questionnaire. Consequently, Clay never filed a Report of Foreign Bank and Financial Accounts (FBAR) for the Amatos’ joint tax return. Nor did Clay ever inquire about the possibility of the Amatos having foreign accounts despite the fact that they were Italian.

After three years of having his tax returns prepared by Clay, Amato mentioned to him that Sofia had been working in the import/export business for Italian clients and had a few bank and securities accounts there. This information prompted Clay to request the couple’s Italian account information, which showed account balances of several million dollars, most of which had been inherited by Sofia.

Penalties and interest for the three years of non-filing amounted to over a million dollars. Clay, a CAMICO policyholder, reported the matter to the CAMICO claims department, which gathered the facts and circumstances of the situation and analyzed the various options, including the potential costs and benefits of the offshore voluntary disclosure program. Ultimately, a letter was written to request an abatement of the penalties, due to reasonable cause. The abatement efforts succeeded in substantially lowering the penalties and interest, partly because of the quick response by CAMICO in writing the abatement request.

Loss Prevention Tips

Know your clients well and note any red flags in their background, wealth status and other information indicating they may have financial interests located in other countries. Be sure to include a question pertaining to the Report of Foreign Bank Accounts (FBAR) and Foreign Account Tax Compliance Act (FATCA) in your tax planner, and make inquiries about information not initially provided to you regarding other sources of income. This may help you avoid disruptive disputes with your client and potential liability for tax penalties.

A taxpayer’s obligations to file FATCA and FBAR forms are distinct from each other and may require the same taxpayer to file both Form 8938 under FATCA rules as well as FinCEN Form 114 with the Financial Crimes Enforcement Network for FBARs. Taxpayers who have not filed FATCA or FBAR forms may become subject to the substantial financial and criminal penalties under both measures.