How the Government Pursues Offshore Account Violations

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How the Government Pursues Offshore Account Violations (Golding & Golding, Board Certified Tax Specialist)

How the Government Pursues Offshore Account Violations (Golding & Golding, Board Certified Tax Specialist)

Learn How the IRS Pursues Offshore Account Violations

FBAR Penalty Assessment & Enforcement Process: In the past few years, the FBAR (and IRS FBAR Penalty regime) has taken center stage as a key offshore enforcement initiative for the IRS.  While the penalties for other reporting forms can be bad, they pale in comparison to the FBAR Penalty.

The IRS can issue an IRS FBAR Penalty, when the FBAR is not filed timely, or “unfiled.”  The IRS FBAR penalty can be broken down into various subcategories. In years past, the IRS did little to enforce FBAR filing and reporting. In fact, most practitioners did not even know the form existed, or if it was required to be filed.

How the Government Pursues Offshore Account Violations

In recent months, the IRS has prevailed in various FBAR cases.

We will summarize the FBAR penalty assessment and enforcement regime for you.

Civil Non-Willful Penalty (U.S.C. section 5321)

The most common type of FBAR Penalty is the non-willful FBAR Penalty.   

The IRS does not need to prove much of anything in order to execute this type of penalty.  Essentially, if the form was not filed properly for timely, the IRS has the right to issue a non-willful penalty (subject to the reasonable cause exception).

The non-willful FBAR penalty has a very broad spectrum.  The penalty can be broken down into four categories.

*The FBAR statutes utilize the $10,000 mark as the baseline panel. That amount has been increased to reflect adjustment for inflation (currently ~$12,900) but since nearly everywhere you read we’ll refer to the $10,000 non-willful FBAR penalty, we will use that as a baseline as well.

There are 4 levels of penalty:

  • Warning Letter in Lieu of Penalty
  • A single $10,000 penalty
  • $10,000 per year penalty *
  • $10,000 per account, per year penalty.

*Most common FBAR penalty issued.

IRM 4.26.16.6.4.1 (11-06-2015)

The general guidance is to issue a $10,000 per year.

As provided in the Internal Revenue Manual:

Penalty for Nonwillful Violations – Calculation

 

After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts.

 

The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.

 

Common Example of Non-Willful FBAR Non-Compliance

The baseline non-willful penalty for an FBAR is $10,000 (Adjusted for inflation to about $12,900.) If you take a step back and really think about that, it is mind-blowing.

Here is a common example:

Kevin is from India. He relocated to the U.S. on H-1B and was unaware of any reporting requirement. A few years later he learns of the requirement, and is already 4-years non-compliant. He has $1.4M in foreign accounts, PPF, LIC and foreign mutual funds.

If Kevin is audited and gets the wrong IRS agent on the wrong day, he could be hit with a per account, per occurrence FBAR penalty for up to six years.

Civil Willful Penalty (U.S.C. section 5321)

If the person is considered “willful,” the penalty can be much worse.

As provided by the code section U.S.C. section 5321:

Willful violations-

 

In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314— (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

 

(I)$100,000, or

 

(II)50 percent of the amount determined under subparagraph (D), and

 

How is Willfulness Defined?

There is no bright-line test for willfulness.

As provided in the Internal Revenue Manual:

 

The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.

 

A finding of willfulness under the BSA must be supported by evidence of willfulness.

 

The burden of establishing willfulness is on the Service.

 

Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.

 

In the FBAR situation, the person only need know that a reporting requirement exists.

 

If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.

 

In other words, the IRS has a very low burden and is required to show a whole lot of nothing in order to seek 50% maximum account balance penalties.

Reckless Disregard and Willful Blindness

The term, “willful” is misleading.

That is because the IRS does not need to show you acted with any “intent” to prove you were willful in a civil setting.

In a criminal proceeding, the term willful requires intent or knowledge.

With the FBAR willful penalty, it is enough to show that the filer or non-filer acted with Reckless Disregard or Willful Blindness.

Civil Burden of Proof for FBAR Penalty Infractions

For an FBAR penalty to issue, the IRS need only meet minimum burden of proof, aka “Preponderance of Evidence.”

Preponderance of the Evidence is the lowest standard of proof, and typically is considered just more than 50%.

This standard of proof is significantly less than the Clear and Convincing Evidence (~75%), which is required for civil tax fraud, or Beyond a Reasonable Doubt (~95%) standards, which is required for criminal cases.

Shouldn’t It At Least Be Clear and Convincing Evidence?

The Supreme Court noted in Huddleston that:

 

“[W]here Congress has not specified a standard of proof, the Court has applied the clear and convincing evidence standard in civil matters only “where particularly important individual interests or rights are at stake,” such as in cases involving termination of parental rights, involuntary commitment, and deportation. 459 U.S. at 389.

Former IRS Chief Counsel Believed it Should be Clear & Convincing

 

In the Chief Counsel Memorandum 200603026 (January 20, 2006), it provides the following guidance on the standard of proof applicable to the section 5321(a)(5) penalty for willful violations:

The burden of proof for criminal cases for establishing willfulness is to provide proof “beyond a reasonable doubt.” Although the same definition for willfulness applies [for civil cases] (“a voluntary intentional violation of a known legal duty”), the Service would have a lesser burden of proof to meet with respect to the civil FBAR penalty than the criminal penalty.

 

We expect that a court will find the burden in civil FBAR cases to be that of providing “clear and convincing evidence,” rather than merely a “preponderance of the evidence.”

So there you have it, even the IRS presumed FBAR penalties should be subject to preponderance of the evidence.

Criminal Violations & the Penalty for FBAR

Beyond civil penalties (money), the U.S. government may also pursue criminal penalties as well. These penalties may result in jail or imprisonment

Criminal State for Violation of FBAR 31 U.S.C. 5322

 

(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both. 

 

(b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.

 

(c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues.

 

(d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.

 

Recent Trend in Cases of Penalties for FBAR Violations

The recent trend in FBAR cases is for the IRS to assess penalties, and actively seek to reduce the penalties to judgment. Many courts have sided with the IRS, and agreed to issue willful penalties, either through trial or summary judgment.

Here are a list of recent cases, and a link to the Golding & Golding summary:

FBAR Disclosure Amnesty – Golding & Golding (Board-Certified)

We specialize exclusively in international tax, and specifically IRS offshore disclosure.

We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Streamlined Counsel?

How to Hire Experienced Streamlined Counsel?

How to Hire Experienced FBAR Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.