Federal Court Provides Relief From FBAR Penalties – What You Must Know About IRS FBAR Penalty Negotiations

Federal Court Provides Relief From FBAR Penalties – What You Must Know About IRS FBAR Penalty Negotiations

In recent years the IRS has made the Report of Foreign Bank and Financial Accounts (FBAR) penalty enforcement a top priority and this is alarming the taxpayers worldwide. Even in the course of every routine domestic IRS audit, IRS agents are looking for undisclosed foreign bank accounts.

The FBAR Penalty

The Bank Secrecy Act (BSA) requires that a Form FinCEN 114 (formerly Form TDF 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. A taxpayer who non-willfully fails to timely file an FBAR can be assessed a penalty of at least $10,000.00 per year of non-compliance. The IRS has taken the position that this non-willful penalty is assessed on an account-by-account basis. For example, a person whose failure to file an FBAR form is non-willful and has three accounts totaling $50,000 could potentially be assessed the maximum $10,000 penalty for each account, for a total of $30,000 per year, while a person with one account with a balance of $300,000 would pay only one $10,000 penalty per year.

Federal Court Applies FBAR Penalty Reduction

In two recent cases, Federal District Courts held that the $10,000 was assessed per form, not per account. See Bittner, 469 FSupp3d 709 (E.D. Tex./2020) and Kaufman, 2021 WL 83478 (Conn. 2021).

Bittner involved non-willful FBAR assessments totaling $2.72 million against the taxpayer for 2007 through 2011. Mr. Bittner is a Romanian-born naturalized U.S. citizen who returned to Romania in 1990, where he became a very successful businessman and had an interest in or signatory authority over more than 50 foreign accounts. He returned to the United States in 2011. Because he had not filed timely FBARs for 2007 through 2011, the IRS assessed the non-willful FBAR penalties. The Government sued to collect the penalties. The Government moved for partial summary judgment as to the penalty assessed for those accounts Bittner admitted to having a financial interest in. The non-willful penalties assessed for those accounts were $1.77 million. Bittner filed a cross-motion for partial summary judgment, claiming that no more than one $10,000 non-willful penalty can be assessed per annual form.

Kaufman, involved similar non-willful FBAR assessments as Bittner.  Mr. Kaufman is a U.S. citizen who has resided in Israel since 1979, where he had multiple financial accounts. His U.S. tax returns were prepared by an American accounting firm. Each year, the accountants would ask if he had any foreign accounts and would advise him that if he did, he may need to file FBAR forms. Each year he told his accountants he did not have any foreign accounts. When asked how he paid his bills, he claimed it was out of a U.S. brokerage account, so they checked the “no” box to the question on the return whether he had foreign accounts. Notwithstanding this evidence, Mr. Kaufman claimed he did not learn of the FBAR filing requirement until September 2011. He also claimed that he suffered a heart attack in late 2010 and was involved in an auto accident in 2011 and that these affected his cognitive abilities.

The Court analyzed the text of the FBAR statute (Code Sec. 5321(a)(5)(A)) recognizing that this provision provides for a penalty “on any person who violates, or causes any violation of, any provision of § 5314”. Query then, what is a “violation” of the statute?

The language of the willful penalty, which bases the amount of the penalty “in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation” seems to infer that Congress intended the willful penalty to be applied on an account-by-account basis.

However, the Court then looked at the language of the non-willful penalty and the reasonable cause exception. While the reasonable cause exception to the non-willful penalty was related to the “balance in the account,” the non-willful penalty itself did not contain any reference to “account” or “balance in the account.” The Court presumed that Congress acted intentionally when it drafted the non-willful penalty language without these references. Further, because the BSA aimed “to avoid burdening unreasonably a person making a transaction with a foreign financial agency,” an individual required to file an FBAR form was only required to file one report for each year. As a result, “it stands to reason that a ‘violation’ of the statute would attach directly to the obligation that the statute creates—the filing of a single report—rather than attaching to each individual foreign financial account maintained.” Additionally, no matter how many foreign accounts a person has, the requirement to file an FBAR is only triggered if the aggregate balance in the accounts is over $10,000. It thus made no sense “to impose per-account penalties for non-willful FBAR violations when the number of foreign financial accounts an individual maintains has no bearing whatsoever on that individual’s obligation to file an FBAR in the first place.”

The Court rejected the government’s arguments that since the reasonable cause exception relates to the “balance in the account” the penalty must apply per account and that since the willful penalty applies on a per-account basis, so must the non-willful penalty. While Congress may have had good reason to assess the willful penalty on a per-account basis, looking to the balance in the account to determine the applicability of the reasonable cause exception did not support the conclusion that Congress meant for the non-willful penalty to apply for a per-account basis given the statutory language.

What You Must Know About IRS FBAR Penalty Negotiations

  1. The penalties for noncompliance in FBAR enforcement are staggering.

FBAR penalties can be unfair as the penalties are based on the account size and not on how much tax you avoided. This is a stark contrast to other IRS penalties which are based on how much additional tax is owed.  Given this difference you will always have a bigger risk and more to lose when dealing with FBAR penalties.

  1. The two types of FBAR penalties.

The “get off gently FBAR penalty” – If the IRS feels that you made an innocent mistake and “not willfully” ignored to file your FBAR, your “get off gently penalty” will be $10,000 per overseas account per year not reported. To illustrate, if you have five foreign accounts that you failed to report on your FBAR in each of five years, the IRS can penalize you $50,000 per form (as supported by the Bittner and Kaufman cases) or $250,000 if imposed by account regardless of whether you even have that amount sitting in your foreign accounts.

The “disastrous FBAR penalty” – If the IRS can show that you “intentionally” avoided filing your FBAR’s, your minimum “disastrous FBAR penalty” will be 50% of your account value.   Additionally, the IRS may also press for criminal charges and if convicted of a willful violation, this can also lead to jail time. The “disastrous FBAR penalty” can also be assessed multiple times thus wiping out your entire savings.

Under both willful and non-willful penalties “the violation flows from the failure to file a timely and accurate FBAR.

  1. The taxpayer’s burden of proving “reasonable cause”

You are obligated to pay the penalty the IRS deems necessary. The IRS can assume the “disastrous FBAR penalty” and they are not required to prove willfulness. It will be the taxpayer that bears the heavy burden of proving that the taxpayer’s failure to comply was due to reasonable cause and not from “willful neglect”.

  1. Your appeal option.

Having exhausted all administrative remedies within the IRS first, you can then appeal the proposed FBAR penalties to a Federal District Court but for that court to have jurisdiction you must pay the assessments in full and then sue the IRS in a district court for refund. Since coming up with the money may be impossible for most taxpayers, consider hiring an experienced tax attorney to make the most of the IRS appeals process and perhaps avoid the need for litigation.  Keep in mind that in the appeals process, you do not have to pay any FBAR penalty until the end. Second, you can be successful if IRS remedies itself thus making court filings unnecessary. And third, even if the administrative remedies do not yield you success, your tax attorney can attempt to negotiate with the IRS to lower your FBAR penalties without going for a trial.

  1. The Voluntary DisclosureRoute.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.

Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures”) may still use the streamlined procedures.

What Should You Do?

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider making a voluntary disclosure to the IRS. Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Businessman Indicted For Not Reporting Foreign Bank Accounts And Filing False Documents With The IRS

Businessman Indicted For Not Reporting Foreign Bank Accounts And Filing False Documents With The IRS

In recent years the IRS has made the Report of Foreign Bank and Financial Accounts (FBAR) penalty enforcement a top priority and this is alarming the taxpayers worldwide. Even in the course of every routine domestic IRS audit, IRS agents are looking for undisclosed foreign bank accounts.

On March 3, 2021 the Department Of Justice (DOJ) issued a press release of a federal grand jury in Alexandria, Virginia, returning an indictment, charging a Virginia man with failing to file Reports of Foreign Bank and Financial Accounts (FBAR’s) and filing false documents with the IRS.

Indictment Details

According to the indictment, Azizur Rahman of Herndon, Virginia, had a financial interest in and signature authority over more than 20 foreign financial accounts, including accounts held in Switzerland, the United Kingdom, the Republic of Singapore, and Bangladesh. From 2010 through 2016, he allegedly did not disclose his interest in all of his financial accounts on annual FBARs, as required by law. Mr. Rahman also allegedly filed false individual tax returns for the tax years 2010 through 2016 that did not report to the IRS all of his foreign bank accounts and income.

Mr. Rahman is also charged with filing a false “Streamlined Submission” in conjunction with the IRS Streamlined Domestic Offshore Procedures. Those procedures allowed eligible taxpayers residing within the United States, who failed to report gross income from foreign financial accounts on prior tax returns, failed to pay taxes on that gross income, or who failed to submit an FBAR disclosing foreign financial accounts, to voluntarily disclose their conduct to the IRS and to pay a reduced penalty if their conduct was non-willful. The indictment alleges that Mr. Rahman’s Streamlined Submission did not truthfully disclose all the foreign bank accounts in which he had an interest, and falsely claimed that his failure to report all income, pay all tax, and submit all required information returns, such as FBARs, was non-willful.

If convicted, Mr. Rahman faces a maximum sentence of three years in prison for each of the counts related to filing false tax documents. He also faces a maximum sentence of five years in prison for each count relating to his failure to file an FBAR or filing a false FBAR.

The legal proceedings are expected to be conducted by the U.S. District Court for the Eastern District of Virginia.

An indictment is merely an allegation and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

What You Must Know About IRS FBAR Penalty Negotiations

  1. The penalties for noncompliance in FBAR enforcement are staggering.

FBAR penalties can be unfair as the penalties are based on the account size and not on how much tax you avoided. This is a stark contrast to other IRS penalties which are based on how much additional tax is owed.  Given this difference you will always have a bigger risk and more to lose when dealing with FBAR penalties.

  1. The two types of FBAR penalties.

The “get off gently FBAR penalty” – If the IRS feels that you made an innocent mistake and “not willfully” ignored to file your FBAR, your “get off gently penalty” will be $10,000 per overseas account per year not reported. To illustrate, if you have five foreign accounts that you failed to report on your FBAR in each of five years, the IRS can penalize you $250,000 regardless of whether you even have that amount sitting in your foreign accounts.

The “disastrous FBAR penalty” – If the IRS can show that you “intentionally” avoided filing your FBAR’s, your minimum “disastrous FBAR penalty” will be 50% of your account value.   Additionally, the IRS may also press for criminal charges and if convicted of a willful violation, this can also lead to jail time. The “disastrous FBAR penalty” can also be assessed multiple times thus wiping out your entire savings.

  1. The taxpayer’s burden of proving “reasonable cause”

You are obligated to pay the penalty the IRS deems necessary. The IRS can assume the “disastrous FBAR penalty” and they are not required to prove willfulness. It will be the taxpayer that bears the heavy burden of proving that the taxpayer’s failure to comply was due to reasonable cause and not from “willful neglect”.

  1. Your appeal option.

Having exhausted all administrative remedies within the IRS first, you can then appeal the proposed FBAR penalties to a Federal District Court but for that court to have jurisdiction you must pay the assessments in full and then sue the IRS in a district court for refund. Since coming up with the money may be impossible for most taxpayers, consider hiring an experienced tax attorney to make the most of the IRS appeals process and perhaps avoid the need for litigation.  Keep in mind that in the appeals process, you do not have to pay any FBAR penalty until the end. Second, you can be successful if IRS remedies itself thus making court filings unnecessary. And third, even if the administrative remedies do not yield you success, your tax attorney can attempt to negotiate with the IRS to lower your FBAR penalties without going for a trial.

  1. The Voluntary Disclosure Route.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.

Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures”) may still use the streamlined procedures.

What Should You Do?

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider making a voluntary disclosure to the IRS. Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Federal Government Extends 2019 FBAR Filing Deadline For Certain Taxpayers Involved In Offshore Accounts

Federal Government Extends 2019 FBAR Filing Deadline For Certain Taxpayers Involved In Offshore Accounts

If you did not report your offshore accounts before 2019, beware of criminal and civil penalties that could be imposed on you.

An extension is your way of asking the IRS for additional time to file your tax return. The IRS will automatically grant you an additional time to file your return. While State Tax Agencies will also provide the same extension period, you need to check with your State to see if an extension must be filed with the State as well.  For example, California does not require that a State extension be filed as long as you timely file the Federal extension AND you will not owe any money to the State.

The deadline to file your 2019 individual income tax returns or request an extension of time to file the tax return was Wednesday, July 15, 2020 (normally would have been April 15th but extended due to COVID-19).  A timely filed extension extended the filing deadline to Thursday, October 15, 2020 thus giving you an extra three months to meet with tax counsel and determine how to address your pre-2019 tax reporting delinquencies and/or exposure and how to present your situation on your 2019 tax return.

In the past, a Report of Foreign Bank and Financial Accounts (FBAR), was due June 30th regardless of whether the Federal Individual Income Tax Return was put on extension.  An FBAR is e-filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) Form 114.  The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, changed FinCEN Form 114’s due date to April 15th to coincide with the due date for filing Federal income tax returns. The act changing the FBAR due date also allows for a six-month extension of the filing deadline which is automatic when filing an extension to file your Federal Individual Income Tax Return.

While an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax and if you do not pay what you owe with the extension, you will still be ultimately charged with late payment penalties when you file your tax return.

Certain Taxpayers Now Have Until December 31, 2020 To File A 2019 FBAR

In a notice recently posted by FinCEN, the government announced that this year’s deadline to e-file FinCEN Form 114 on the Bank Secrecy Act (BSA) E-Filing System had been extended from October 15, 2020, to December 31, 2020) for taxpayers who are victims of recent natural disasters, specifically: the California Wildfires, the Iowa Derecho, Hurricane Laura, the Oregon Wildfires, and Hurricane Sally.

Penalties for Non-Compliance

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – Any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

Additionally, the penalties for FinCEN Form 114 noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations, it is $10,000 per account per year going back as far as six years. For willful violations, the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Since 2009, the IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

Voluntary Disclosure

Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure.   The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income or any unreported income whether it be domestic or foreign. In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period. Click here for more information on available Voluntary Disclosure Programs.

What Should You Do?

Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.

We encourage taxpayers who are concerned about their undisclosed offshore accounts or who have unreported crypto currency transactions to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid criminal prosecution or programs with reduced civil penalties. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California help ensure that you are in compliance with federal tax laws. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

FBAR Penalties Survive Taxpayer’s Death – What You Must Know About IRS FBAR Penalty Negotiations

FBAR Penalties Survive Taxpayer’s Death – What You Must Know About IRS FBAR Penalty Negotiations

In recent years the IRS has made the Report of Foreign Bank and Financial Accounts (FBAR) penalty enforcement a top priority and this is alarming the taxpayers worldwide. Even in the course of every routine domestic IRS audit, IRS agents are looking for undisclosed foreign bank accounts.

Death Of A Taxpayer Does Not Terminate FBAR Penalties 

A Federal district court held that the IRS could recover unpaid financial penalties imposed on a taxpayer, who subsequently died, for willfully failing to timely file accurate FAR’s (formerly Forms TDF 90-22.1, now FinCEN Form 114) for years 2010 and 2011. U.S. v. Green, 2020 PTC 137 (S.D. Fla. 2020).  The court rejected arguments by the taxpayer’s children that the FBAR penalties abated upon the taxpayer’s death and stated that granting a windfall to estates of violators of the FBAR requirements because the violator suffered the paradoxical fortune and misfortune of passing away after the violation occurred and before the government filed suit against him for FBAR violations contradicts the remedial purpose of the FBAR filing requirements.

What You Must Know About IRS FBAR Penalty Negotiations:

  1. The penalties for noncompliance in FBAR enforcement are staggering.

FBAR penalties can be unfair as the penalties are based on the account size and not on how much tax you avoided. This is a stark contrast to other IRS penalties which are based on how much additional tax is owed.  Given this difference you will always have a bigger risk and more to lose when dealing with FBAR penalties.

  1. The two types of FBAR penalties.

The “get off gently FBAR penalty” – If the IRS feels that you made an innocent mistake and “not willfully” ignored to file your FBAR, your “get off gently penalty” will be $10,000 per overseas account per year not reported. To illustrate, if you have five foreign accounts that you failed to report on your FBAR in each of five years, the IRS can penalize you $250,000 regardless of whether you even have that amount sitting in your foreign accounts.

The “disastrous FBAR penalty” – If the IRS can show that you “intentionally” avoided filing your FBAR’s, your minimum “disastrous FBAR penalty” will be 50% of your account value.   Additionally, the IRS may also press for criminal charges and if convicted of a willful violation, this can also lead to jail time. The “disastrous FBAR penalty” can also be assessed multiple times thus wiping out your entire savings. 

  1. The taxpayer’s burden of proving “reasonable cause”

You are obligated to pay the penalty the IRS deems necessary. The IRS can assume the “disastrous FBAR penalty” and they are not required to prove willfulness. It will be the taxpayer that bears the heavy burden of proving that the taxpayer’s failure to comply was due to reasonable cause and not from “willful neglect”. 

  1. Your appeal option.

Having exhausted all administrative remedies within the IRS first, you can then appeal the proposed FBAR penalties to a Federal District Court but for that court to have jurisdiction you must pay the assessments in full and then sue the IRS in a district court for refund. Since coming up with the money may be impossible for most taxpayers, consider hiring an experienced tax attorney to make the most of the IRS appeals process and perhaps avoid the need for litigation.  Keep in mind that in the appeals process, you do not have to pay any FBAR penalty until the end. Second, you can be successful if IRS remedies itself thus making court filings unnecessary. And third, even if the administrative remedies do not yield you success, your tax attorney can attempt to negotiate with the IRS to lower your FBAR penalties without going for a trial. 

  1. The Voluntary Disclosure Route.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.

Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures”) may still use the streamlined procedures.

What Should You Do?

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider making a voluntary disclosure to the IRS. Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Global Tax Chiefs Meet To Tackle International Tax Evasion

Global Tax Chiefs Meet To Tackle International Tax Evasion

The Joint Chiefs of Global Tax Enforcement, known as the J5, which was formed in mid-2018 to lead the fight against international tax crime and money laundering met this week. This group brings together leaders of tax enforcement authorities from Australia, Canada, the United Kingdom, the United States and the Netherlands.

These tax authorities believe that people may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime.

The IRS announced that significant information was obtained as a result and investigations are ongoing. It is expected that further criminal, civil and regulatory action will arise from these actions in each country.

For the United States: Don Fort, U.S. Chief, Internal Revenue Service Criminal Investigation, stated:

This is the first coordinated set of enforcement actions undertaken on a global scale by the J5 – the first of many. Working with the J5 countries who all have the same goal, we are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration. Tax cheats in the US and abroad should be on notice that their days of non-compliance are over.”

Penalties for Non-Compliance.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – Any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

Additionally, the penalties for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations, it is $10,000.00 per account per year going back as far as six years. For willful violations, the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Voluntary Disclosure

Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure.   The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income. In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period. Click here for more information on available Voluntary Disclosure Programs.

What Should You Do?

Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid criminal prosecution or programs with reduced civil penalties. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California help ensure that you are in compliance with federal tax laws. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

I need to report foreign income? FBAR

Federal Court Of Appeals For The Third Circuit Clarifies Standard for Proving a “Willful” FBAR Violation

Federal Court Of Appeals For The Third Circuit Clarifies Standard for Proving a “Willful” FBAR Violation

Not much has come out of the Courts defining that line between nonwillful and willful when it comes to not filing Foreign Bank and Financial Accounts Reports (“FBAR”) but now we have a recent U.S. Federal Circuit Of Appeals case out of the Third District which has vast repercussions on anyone who has undisclosed foreign bank accounts regardless of whether they came forward in a Voluntary Disclosure Program or the Streamlined Procedures.

Bedrosian v. U.S.

In December 2018 the Federal Circuit Court Of Appeals for the Third District (the “Appeals Court”), Bedrosian v. U.S., 2018 PTC 427 (3rd Cir. 2018), on an appeal by the IRS issued its opinion determining that the taxpayer’s failure to timely file an FBAR was nonwillful. The tax law provides that U.S. citizens with accounts outside the U.S. must disclose those accounts on an FBAR if the aggregate amount is at least $10,000. 31 U.S.C. 5314. The reason the term “willful” is important is that if the failure is not willful, the penalty is set at $10,000 per violation but if the failure to disclose is considered “willful”, the penalty goes up to the greater of $100,000 or 50% of the highest account value for the year.

In the case of Arthur Bedrosian the IRS in January 2015 assessed a willful FBAR penalty for tax year 2007 of approximately $975,000, which was 50% of the undisclosed account. Mr. Bedrosian paid 1% of the penalty and then sued in Federal District Court to recover the payment as an unlawful exaction. The government counterclaimed for the full penalty amount plus interest and a late payment penalty.

Facts

Mr. Bedrosian worked in the pharmaceutical industry eventually rising to the level of CEO at Lannett Company, Inc., a company that manufactures generic medications. He had to travel abroad for business and so for convenience by 1973 had established a bank account with Swiss Credit Corporation in Switzerland (now UBS) by which he could access funds instead of paying for expenses with traveler’s checks. Eventually he started using it as a savings account and in 2005 he was approached by the bank representatives who offered him 750,000 Swiss Francs if he converts his account into an investment account. Mr. Bedrosian agreed and as a result of this transaction, another account was created under his name.

It was not until tax year 2007 that Mr. Bedrosian included, for the first time, an affirmative answer to the question on his Form 1040 Schedule B asking whether “[a]t any time during 2007, [he had] an interest in or signature or other authority over a financial account in a foreign country.” He listed Switzerland as the country. He also filed an FBAR for the first time in which he reported the existence of one of the two UBS accounts.

The IRS notified Mr. Bedrosian in April 2011 that it would be auditing his returns and he was cooperative and forthcoming in his dealings with the IRS. In the results of the audit, the IRS assessed a willful FBAR penalty for tax year 2007 of just under $1 million.

When the case was first heard by the Federal District Court, the only disputed issue was whether Mr. Bedrosian’s failure to disclose his $2 million UBS account was willful. In that case as reported in Bedrosian v. U.S., 2017 PTC 431 (E.D. Pa. 2017), the district court concluded that the IRS had failed to establish Mr. Bedrosian’s willfulness. The government appealed to the Third Circuit, arguing that the district court used an incorrect legal standard for willfulness, placed too much weight on Mr. Bedrosian’s subjective motivations, and erred in finding that Mr. Bedrosian did not know he owned a second foreign bank account.

Court’s Analysis

The Court Of Appeals stated that to prove a “willful” violation with respect to the filing of an FBAR, the IRS must satisfy the civil willfulness standard, which includes both knowing and reckless conduct.

In its analysis of “willfulness,” the court considered the taxpayers’ behaviors in U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), and U.S. v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012). The court noted that unlike those taxpayers, who continued to submit inaccurate FBARs even after being targets of government investigation, or who repeatedly lied and refused to produce requested documents, Mr. Bedrosian was cooperative with the IRS during the audit process.

Upon the IRS’ urging to consider “willfulness” outside of the FBAR context, the court also reviewed Greenberg vs. U.S., 46 F.3d 239 (3d Cir. 1994). There the court had considered whether a party had willfully failed to pay certain employer withholding taxes. It was determined that willfulness depended on the individual’s knowledge that his company had not paid the taxes at the time he paid company funds to the employees and other suppliers.

Although the court here agreed that Mr. Bedrosian should have been more careful about reviewing the 2007 FBAR and in being aware of the fact that he had not one but two accounts at UBS, the court determined that it was not apparent that he submitted it knowing that it omitted the second UBS account.

Significantly, the court summarized that the only evidence supporting a finding that Mr. Bedrosian’s violation was “willful” was: (1) the inaccurate form itself, lacking reference to the second account, (2) the fact that he may have learned of the second account’s existence at one of his meetings with a UBS representative, (3) his sophistication as a businessman, and (4) his accountant’s statement to him in the mid-1990s that he was breaking the law. The court concluded that “none of these indicate ‘conduct meant to conceal or mislead’ or a ‘conscious effort to avoid learning about reporting requirements,’ even if they may show negligence”.

Accordingly the Third Circuit then remanded the case for the district court affirming that Mr. Bedrosian did not act willfully in failing to disclose the second UBS account in his 2007 FBAR filing.

What Should You Do?

Taxpayers who have entered into the Streamlined Program whose case is weak on showing nonwilfullness have a huge risk of being picked by IRS and losing the favorable status offered by the Streamlined Procedures where the IRS feels that the non-willful standard is not met.  Such taxpayers will not then be able to enter into a voluntary disclosure program and can face the same battle as Mr. Bedrosian.  Likewise, anyone who has not come forward in voluntary disclosure and the issue of nonwilfullness is questionable would still have the opportunity to come forward under a voluntary disclosure program.  Keep in mind that any submission must be complete or else like Mr. Bedrosian, the IRS will reject the settlement and look to assess the full penalties provided by law. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.

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