- 1 Defending FBAR Penalties
- 2 5 Important FBAR Defense Considerations
- 3 Take Proactive Steps to Get Compliant
- 4 Did you Use an Experienced Tax Preparer?
- 5 Did You Prepare Your Taxes Yourself?
- 6 Bank Accounts or Other Accounts/Investments
- 7 IRS Agent Mitigation & Discretion
- 8 FBAR Penalties May be Mitigated or Avoided
- 9 Golding & Golding: About Our International Tax Law Firm
Defending FBAR Penalties
Defending FBAR Penalties: When it comes to the FBAR, oftentimes a taxpayer does not become aware of the reporting requirements until they are already out of IRS compliance. Sometimes, a taxpayer can sidestep the issuance of a penalty by making a proactive offshore disclosure submission through one of the FBAR amnesty programs. Other times, the taxpayer will be on the receiving-end of a notice or examination — and be forced to play defense as opposed to proactively making a representation through voluntary disclosure. Defending an FBAR case is much more complicated than it needs to be. This is because the FBAR is not technically a tax form, so it is not covered under article 26 of the U.S.C. — yet, because it is enforced by the IRS, the Internal Revenue Service automatically get the upper hand by disallowing you to use Tax Court to dispute the penalty.
5 Important FBAR Defense Considerations
Here are five potential defense strategies when you come up against an FBAR Penalty situation.
Take Proactive Steps to Get Compliant
Once a taxpayer is out of compliance for the non-reporting of foreign accounts, assets or investments, they have limited-time to get into FBAR compliance. The reason that their window of opportunity is limited is because until a taxpayer is under audit or examination, they (generally) qualify for one of the offshore voluntary disclosure programs — which is a safe and legal way to get into compliance. But when a Taxpayer receives an IRS audit or examination notice, they no longer qualify for voluntary disclosure — and instead must try to negotiate around the penalty during the audit or examination.
Did you Use an Experienced Tax Preparer?
When a taxpayer hires a professional to assist them with preparing their tax returns and informational returns, they may be able to rely on the fact that the professional did not ask all the right questions or set the taxpayer up for success fore reporting their foreign accounts. For example, if the Tax Preparer knew you had foreign accounts, but did not require you to disclose them — then that may work in your favor when it comes time to defend against an IRS penalty.
But, if the tax preparer was inexperienced in international reporting, it will be harder (but not impossible) to show reasonable cause sufficient for a penalty reduction or waiver.
Did You Prepare Your Taxes Yourself?
If you prepared your tax returns yourself, you may be put into a bit of a more complicated situation when it comes to defending against an FBAR penalty for non-reporting.
In an all-too-common situation, a taxpayer relies on TurboTax or Tax Act when preparing their tax return. These software programs do not ask very specific questions about foreign accounts — and do not even provide many of the necessary international reporting forms that many taxpayers require to report their foreign assets or gifts. Still, most software programs now do at least prompt the taxpayer to identify they have foreign accounts.
Depending on the level of misunderstanding or miscommunications between the Taxpayer and the software program may either help or hinder the Taxpayer’s ability to defend against an FBAR penalty.
Bank Accounts or Other Accounts/Investments
The type of unreported account is also important when it comes to the FBAR.
The acronym FBAR refers to Foreign Bank and Financial Account Reporting — but many taxpayers end their analysis with the bank account portion of the acronym. In another common all-too-familiar situation, a taxpayer may not have foreign bank accounts because they no longer reside overseas — but thay have six or seven figures in their foreign pension or stock account.
The fact that there are no bank accounts (or accounts with low dollar balances) may assist their defense.
For example, possibly the taxpayer only has a current account in a foreign country with under $10,000 in it — and was not aware that non-bank accounts were also required to be reported.
IRS Agent Mitigation & Discretion
The IRS Agents/Examiners do have discretion to reduce and mitigate penalties. In fact, when you read all about the terrible penalties that the IRS can issue regarding the FBAR — those are the maximum penalties. And, while oftentimes the IRS will issue the “maximums”when it comes to FBAR penalties — there is room for negotiation and mitigation. IRS agents have a significant amount of discretion to potentially reduce, minimize or eliminate FBAR penalties.
FBAR Penalties May be Mitigated or Avoided
In conclusion, it is true that in recent years the Internal Revenue Service has significantly increased the enforcement of offshore fines and penalties for unreported foreign accounts, assets and investments. But, while FBAR penalties are tough, taxpayers will generally have an opportunity to avoid or eliminate them.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure, with a focus on defending against FBAR Penalties.
Contact our firm today for assistance.