Fighting the IRS After an FBAR or FATCA Audit – Know Your Options
Even after the IRS issues penalties for non-filed or incomplete FBAR (Report of Foreign Bank and Financial Account Form) aka FinCEN 114, or FATCA (Foreign Account Tax Compliance Act) Penalties, you have options.
You have the right to fight the penalties in Tax Court – without paying the penalty first. Alternatively you could pay the penalty first, and then sue the IRS in Federal Court or the Court of Claims.
How to Fight FBAR Penalties
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 (and 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 the 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.