Recently, 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. In this blog I will discuss some things that you need to keep in mind when negotiating FBAR penalties with the IRS.
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 loose when dealing with FBAR penalties.
2. 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.
3. 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”.
4. 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, you should hire 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.
5. The Offshore Voluntary Disclosure Initiative (OVDI) route.
When compared to past Voluntary Disclosure Programs used by people to avoid criminal charges, the OVDI amnesty program is intended to save people with undisclosed foreign accounts from the threat of huge or disastrous FBAR penalties. So to minimize your FBAR penalty, we recommend using the OVDI program as a starting point.
When you make use of OVDI, there is more chance of getting favorable review during the discussion of your potential claim of “reasonable cause”. But outside OVDI, the IRS does not treat people as favorably as those who make themselves visible under the OVDI. It does not matter whether you made an innocent mistake or made an unadvised “quiet” or “soft” disclosure, the ground for your case will be much less sturdy when it is outside OVDI.
The IRS audit division has a way of reaching into the every corner of a taxpayer’s life. By not facing the Federal District Court, you may avoid the prison time but losing your entire wealth through these audits can be nearly as devastating as sitting in a prison. Some people will look at the OVDI route and feel that its terms are unfair and thus not bother entering into the program. What they fail to realize is that the consequences when they get caught are a lot worse in that outside of OVDI the minimum penalty is 50% of your highest balance and the IRS can pursue criminal charges. They also do not realize that the OVDI route is not necessarily set in stone but can serve as a springboard for something better than the maximum penalty of 27.5% of your highest balance. OVDI also provides the benefit that you avoid criminal prosecution.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). 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. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Description: 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 Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.