Should I Talk to My Accountant About My Late-Filed FBAR?

You and your accountant have been working together for years. You trust your accountant and divulge all sorts of information. What's the worst that could happen? Accountants have privilege with their clients just like attorneys, right? WRONG!

Before you call your accountant, you'll want to know why the limited accountant-client privilege and the seriousness of FBAR violations make a bad combination.

First, the attorney-client privilege and the accountant-client privilege were not created equally. While statements made to your attorney generally cannot be disclosed to anyone else, statements made to your accountant are likely to be disclosed to federal agencies, such as the IRS, under certain circumstances. For example, the accountant-client privilege does not apply if the IRS is investigating you for a criminal tax matter, like fraud. The accountant-client privilege may not apply even in certain civil tax matters.

Next, the filing of a Foreign Bank Account Report ("FBAR") is a big deal. United States citizens and resident aliens who have a financial interest in, signature, or other authority over, a bank, securities or other financial account with a balance exceeding $10,000 in a foreign country must report such accounts. Taxpayers who fail to report foreign accounts will be subject to penalties. The IRS is authorized to assess a penalty equal to 50% of the value of the undisclosed account where the failure to report is "willful." There is no "reasonable cause" exception for a willful violation.

There are no typos--you correctly read that a penalty can potentially be equal to 50% of the account value. But when is the failure to file willful? A person willfully fails to file an FBAR is he or she knows of both the reporting requirement and the existence of the account, but fails to file.

Now imagine you tell your accountant about your late-filed FBAR. You knew about your foreign account and that you had to report it but still failed to do so. You would not expect your communications with your accountant to be used against you, but this is the very thing that happened in one recent case to a taxpayer who willfully failed to disclose a foreign bank account. When the court ruled in favor of the IRS, the taxpayer was subject to penalties of $857,625 against her, plus interest.

When the taxpayer completed and signed her return for 2007, she knew of the existence of her UBS bank account; however, she did not disclose the account or the income from it. In February 2009, the taxpayer received a letter from UBS informing her that UBS had disclosed the existence of the Swiss bank account to the IRS. Four months later, she filed an FBAR disclosing the Swiss bank account and listing its value at $3.8 million.

In court, the taxpayer's post-2007 emails to her accountant were among the evidence of her willfulness in her failure to file an FBAR. After learning that UBS disclosed the account to the IRS, the taxpayer not only made a comment to her account about getting away scot-free, but also continued to explore ways of thwarting the IRS. She inquired on two occasions as to whether she could hide money from IRS collection by putting it in a trust. Her own accountant provided the court with this direct evidence of willfulness!

This case is a quintessential example of why you should not be quick to talk to your accountant--your own accountant might be forced to testify against you as a witness or provide evidence against you. Remember that attorneys and accountants are different and so are their privileges.

Take heed and watch what you say!