Tax trouble for Beanie Babies tycoon

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Ty Warner got rich thanks to the collectors of the Beanie Babies he created, but he should have been collecting something, too: money to pay his taxes.

Federal officials revealed this week that the Chicago-area billionaire has been charged with felony tax evasion and has agreed to plead guilty and pay a $53.5 million penalty.

Warner’s attorney confirmed that his client has reached an agreement to resolve the investigation and will pay the civil penalty for failure to file a foreign bank account report.

Tax watchers say the almost $54 million fine could be the largest offshore account penalty ever publicly reported.

Hidden Swiss cash

Warner, whose stuffed toys set off the Beanie Baby craze in the 1990s, allegedly hid more than $3.1 million in foreign income generated in a secret Swiss account. “Such conduct invites federal prosecution,” said Gary S. Shapiro, United States Attorney for the Northern District of Illinois, in a statement announcing the case against Warner.

No, uh, kidding, Sherlock.

According to the charging documents against Warner, he set up an account at the giant Swiss national bank UBS in 1996. In 2002, when the account was worth around $94 million, he allegedly moved it to Zurcher Kantonalbank, another Swiss bank, where the money was held under the name Molani Foundation to hide Warner’s role.

The charge states Warner initially failed to pay almost $1.3 million in income tax on the unreported income, but his amended 2002 return reduced the amount of additional tax that he failed to pay to $885,300.

Penalty more costly than tax

I’m not a math whiz, but even I can see that there’s a big difference between $885,300 and $53.5 million. And that underscores why it’s crucial to always accurately pay what you owe the Internal Revenue Service when it’s due.

The IRS has been particularly focused on foreign accounts held by U.S. taxpayers since the Foreign Account Tax Compliance Act, or FATCA, became law in March 2010.

Under the law, taxpayers with a total value of specified foreign financial assets must file reports with the IRS revealing the offshore holdings. If you don’t comply, the IRS can assess what it calls “serious” penalties.

How serious? There’s a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification and a 40 percent penalty on an understatement of tax that should have been paid on the undisclosed assets.

The reports are due each year and the penalties are assessed on the annual missing filings, not just on the account to which the information applies. So if you go a while without filing, the fees could quickly add up.

File, file, file!

Now most of us don’t have foreign accounts of sufficient worth to worry about FATCA, but the lesson is the same for all tax filings. The penalties for not filing your basic annual Form 1040, for example, are tougher than those for not paying what you owe.

Basically, the IRS wants to know that we know our tax responsibilities. And the way the IRS knows that is by our submission of returns or other required documents.

Even if we don’t or can’t pay what we owe with those filings, it at least provides Uncle Sam some assurance that we’re trying to be responsible taxpayers. Hence, the tougher penalties to make sure we file.

So learn from Warner’s oversight. File your returns!

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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and a co-author of the e-book “Future Millionaires’ Guidebook.”