FBAR Litigation – Tax Court, District Court, Court-of-Claims & Appeals
- 1 FBAR Litigation
- 2 U.S. Tax Court
- 3 District Court
- 4 Court of Claims
- 5 Avoid FBAR Penalties – IRS Offshore Disclosure
- 6 When Do I need IRS Offshore Disclosure?
- 7 Golding & Golding – Offshore Disclosure
- 8 The Devil is in the Details…
- 9 What if You Never Report the Money?
- 10 Getting into Compliance
- 11 5 IRS Methods for Offshore Compliance
- 12 1. OVDP
- 13 2. Streamlined Domestic Offshore Disclosure
- 14 3. Streamlined Foreign Offshore Disclosure
- 16 4. Reasonable Cause
FBAR Litigation – Tax Court, District Court, Court-of-Claims & Appeals
FBAR Litigation is on the rise. As the IRS issues increasingly high penalties against individuals (Usually penalties which far outweigh any “Crime,”) the number of people trying to fight these FBAR penalties in court will continue to rise.
There are various methods for fighting the FBAR penalties, once they have been “affirmed” by the IRS, and all administrative tactics have been exhausted. We will summarize the different options below:
U.S. Tax Court
Technically, Tax Court is not the proper forum for FBAR Penalties, since it is supposed to be limited to Federal Court or the Court of Claims…but many times even FBAR matters seem to have a way of appearing in Tax Court.
For most individuals, Tax Court would be the preferred forum to put on their gloves and go toe-to-toe with the IRS to try and fight FBAR Penalties (once all administrative remedies have been considered and/or exhausted), if it is an option. This is especially true when the FBAR overlaps other International Informational Return Penalties – and a finding of having acted with reasonable cause as to other informational returns may positively impact any enforcement of FBAR penalties.
There are some benefits to Tax Court:
No Pre-Payment of Penalties
First, a person does not need to pay the penalty before fighting the penalty. In other words, if the IRS agent says you owe$1 million in penalties, you get the chance to fight the penalties before having to fork over one penny. With that said, interest continues to accrue so some people may consider depositing some money to offset the interest.
Tax Court Judges Know Their Craft
The judges are very knowledgeable, and this is a pro or con – depending on how you look at it. The reality is, if you have a good legal tax position, then a judge is not going to necessarily disagree with you and side with the IRS just because it is “Tax Court.”
In other words, you should not be concerned about bias. These judges do nothing but tax; therefore, there’s a good chance that if you have a strong argument in your favor, the judge may be able to see in your favor.
Another benefit the Tax Court is that there are certain rules and procedures in place to resolve the matter before it reaches the trial stage. Sometimes, while one attorney or agent may have disregarded your position, a more senior Attorney or different Agent (if a small court case) may be more apt to agree with you. And, depending on whether you want to fight the entire penalty or consider negotiating, you may be in a better position than you were dealing with the agent during the audit examination (or prior CAP/CDP hearings)
There are also some negatives the Tax Court.
There is no jury, and no “common folk” to understand your plight, and sympathize with you as a jury of your peers may. Moreover, if you happen to get on the bad side or the wrong side of the judge, there is only one person making the decision, not a group of people.
In addition, if the judge disagrees with you, they typically will stand their ground and it will be very difficult to sway the judge it from the outset they believe that the penalties are justified.
Federal court is a bit different. Oftentimes, a person does not choose federal court, but it is chosen for them. In other words, they miss the 90 day window to file with US Tax Court, and have no alternative but to file in federal court.
The 90-day rule is exacting. In other words, if you miss the statute of limitations to file with Tax Court, then you have missed you opportunity for Tax Court.
The one biggest drawback about federal court is the fact that it is a claim for refund Stated another way, in order to sue the IRS in federal court you have to first pay the amount that is due and then sue for refund. This is very off-putting (understandably so) for many people, especially if they don’t have the money to sue the IRS or pay the penalty.
In addition, it is very difficult to represent yourself in federal court. While it is never recommended that you represent yourself in Tax Court — it is more forgiving and often times individuals will be unrepresented by themselves in Tax Court.
While the judges and opposing counsel may not want to deal with you, the procedures and policies in Tax Court for evidence and other related issues pale in comparison to the strictness of federal court. Moreover, the judges can be very tough – even on people representing themselves.
Now, a few positives:
A Jury of Your Peers
Since it’s a jury of your peers, it is nice to know that most peers would think you being penalized hundreds of thousands of dollars because you forgot to fill out an FBAR is absurd. Thus, there is a better chance that they may side with your position and disagree with the penalties issued.
IRS is not the “Preferred” Party
Second, even if the Jury has no idea what an FBAR is, you’ll be hard-pressed to find a cheerleading section for the IRS. Therefore, the mere fact that the IRS is coming after you for what seems like an unfair claim against you will benefit you. Also, the IRS Attorneys may not feel as comfortable or at-home as they otherwise would in Tax Court.
Additional Claims Against the IRS
Finally, there may be additional causes of action you can file in federal court that you’d be limited to filing in Tax Court. That is not to say you will have any other basis to file any other claim or ancillary claim against the IRS, but who knows – maybe you will.
Court of Claims
The Court of Claims is a federal court. It is a court that is reserved for claims made against the government.
Typically, the difference between whether you would want to go to Federal Court for the Court of Claims is a form of “forum shopping.” In other words, you have the right to choose either court.
Therefore, it may benefit you to conduct a little research and get a feel for what the decisions have been at the District Court level versus the Court of Claims on various issues — as well as reviewing what the holdings are for various Court of Appeals depending on what circuit you are in.
Specifically asked to the Court of Claims, as provided by their own website:
“Many cases before the court involve tax refund suits, an area in which the court exercises concurrent jurisdiction with the United States district courts. The cases generally involve complex factual and statutory construction issues in tax law.
Another aspect of the court’s jurisdiction involves government contracts. It was within the public contracts jurisdiction that the court was given new equitable authority in late 1996. In recent years, the court’s Fifth Amendment takings jurisdiction has included many cases raising environmental and natural resources issues. Another large category of cases involves civilian and military pay claims.
In addition, the court hears intellectual property, Indian tribe, and various statutory claims against the United States by individuals, domestic and foreign corporations, states and localities, Indian tribes and nations, and foreign nationals and governments. While many cases pending before the court involve claims potentially worth millions or even billions of dollars, the court also efficiently handles numerous smaller claims. Its expertise, in recent years, has been seen as its ability to efficiently handle large, complex, and often technical litigation.”
Avoid FBAR Penalties – IRS Offshore Disclosure
The best way to avoid, limit, or eliminate FBAR penalties is to be proactive. The U.S. Government has programs in place called IRS Offshore Voluntary Disclosure. These programs are designed to safely facilitate your compliance.
When Do I need IRS Offshore Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”
It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause
Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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