FBAR Investigation (2019) – IRS Penalties & Offshore Account Amnesty: An Investigation of FBAR matters is something U.S. Taxpayers have to take seriously. The number of IRS investigations for Violations of FBAR (Foreign Bank Account Reporting) is on the rise. In addition, the number of people get issues FBAR Penalties also continues to rise, — and the penalties can be downright staggering. For some people, it may mean a 100% penalty in a multi-year audit examination.
Here are the basics:
An FBAR Violation occurs when an individual, trust, or entity fails to properly file an annual FBAR (Foreign Bank Account Reporting Form, aka Report of Foreign Bank and Financial Account Form) aka (FinCEN 114).
Violations range from a civil penalty warning letter in lieu of penalty, all the way to criminal penalties.
FBAR Investigation Example (Case Study)
Michael is originally from India. He has numerous accounts in India and was aware of the fact that he was supposed to file the necessary forms. He first came to the United States in 2008 on an H-1B visa.
In early 2009, he was at a dinner party with friends from India, and learned that U.S. individuals (even those on still on Visa and who meet the Substantial Presence Test) are required to file taxes just as any US person would.
Thus, if Michael had any foreign accounts (which he did) he was required to report the information on an annual FBAR, as well as report the income.
Myth 1: Offshore Reporting is A New Phenomenon
While FATCA may not have come into existence until 2010, with enforcement in 2014, there have been laws on the books requiring the disclosure of foreign accounts for many years. In fact, FBAR reporting dates back to the 1970s.
Therefore, just because your CPA or Accountant may have just learned about FATCA, you still had a reporting requirement under many other different US laws. In other words, just because FATCA is new, does not make offshore reporting new as well.
Michael’s Tax Professional Knows Less Than Michael
When Michael went to see his tax preparer for the first time, the taxpayer was relatively new. When the tax preparer asked Michael about his income, he never made any reference to foreign accounts, and Michael never volunteered the information to him.
Myth 2 – Your CPA is in IRS Trouble, Not You
In this particular situation, Michael was aware that he had a reporting requirement. The mere fact that his tax preparer did not ask him about foreign accounts does not absolve Michael from liability. In fact, it makes it worse because it clearly shows that Michael was willful, and knowingly did not disclose his foreign accounts or report the income.
Michael’s CPA Learns About Foreign Account Reporting
By 2017 and with the new forms required under FATCA, it would be nearly impossible for tax preparers to not have some knowledge (or at least be aware) of foreign account reporting. In fact, the IRS has made offshore enforcement a key priority, and the exceedingly high penalties are reflective of the IRS’ goal of catching and penalizing individuals.
When it’s time for next year’s tax returns, Michael’s CPA sends Michael a questionnaire asking him to complete all necessary portions. In addition, it asks Michael he had any foreign accounts. Michael does not complete the questionnaire, although he did confirm to the CPA that he received it.
Since Michael did not return the questionnaire (which is not uncommon for clients in general), the CPA presumed that nothing had changed, and continued reporting Michael’s US income based on the information Michael provided to him.
Myth 3 – Michael did not Actually “Lie” to the CPA
This is not true. Aside from making intentional misrepresentations to a tax professional there is the inverse, which is knowingly omitting key information from a tax professional. In other words, because Michael was aware that he had foreign accounts that he should have been reporting, but he never reported them – he is knowingly making an intentional misrepresentation to the tax preparer by proactively omitting the information (aka Willful Omission)
As such, the tax preparer is under false pretenses that Michael does not have any foreign accounts or foreign income, which is why he did not report it on the return.
Michael is Audited/Under IRS Examination
Michael returns home from a long day only to find a certified letter from the IRS. He opens it to learn that the Internal Revenue Service wants to Audit him.
As of now, the Audit has nothing to do with foreign accounts. Rather, Michael (who is a software engineer) also started a side consulting business, and tried to claim some unreimbursed expenses from his W-2 job through his consulting business. This is a typical red flag, and something the IRS frowns upon.
By embellishing his expenses, Michael was hoping to take more deductions through his consulting business than would not otherwise be available as a W-2 employee, which has the net effect of reducing his tax liability.
Michael Receives an IDR for ALL Income and Accounts
About a week prior to start of the examination, Michael’s CPA (who agree to represent him in the audit) receives an IDR – Information Document Request. The request is about five pages, and asks questions including (a now standard question) whether Michael has any foreign bank accounts or other foreign money or income that he did not report.
When Michael CPA goes to confirm with Michael, Michael relents and explains to his CPA that he does have foreign accounts and income. Michael’s CPA is understandably upset, and refuses to represent Michael at the audit. Moreover, now that the CPA will not represent Michael, Michael has to find new representation as well as worry about whether the IRS will ask Michael CPA about Michael’s file.
There is NO ATTORNEY-CLIENT PRIVILEGE with the CPA
We understand individuals make decisions about tax preparation/disclosure in-part based on the fees charged by the tax professional. And, the fees charged by a non-attorney are typically less expensive than an attorney. But that comes at a cost, and with a risk.
The risk being that the IRS has every right to ask the CPA for any documents or other information provided by Michael to the CPA, or by the CPA to Michael. This is a major catastrophe, because now the IRS will learn that the CPA sent Michael a questionnaire that specifically asked whether Michael had foreign accounts, and Michael received it, but did not complete it. This could lead to Michael being held to be willful
On the flip-side, the IRS agent will learn that Michael received this questionnaire but did not return it to the CPA and still signed the return.
Serious Penalties at Stake
The IRS can issue a slew of potential different penalties against Michael, including:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
We Specialize in FBAR Matters
We have successfully handled a diverse range of FBAR cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
What Type of Attorney Should I Hire?
IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.
You should hire a Tax Attorney who has the following credentials:
- ~20 Years of Private Practice experience representing his/her own clients
- Experienced in Criminal and Civil Tax Litigation
- Experienced representing clients in Eggshell and Reverse Eggshell Audits
- Advanced Tax Degree (LL.M.)
- EA (Enrolled Agent) or CPA (Certified Public Accountant)
- Preferably a Board Certified Tax Law Specialist
Here are some important credentials to consider when hiring an OVDP Attorney for your IRS Offshore Disclosure:
1. Board Certified Tax Law Specialist
Becoming a Board Certified Tax Specialist is a tough feat.
Becoming a California (Board Certified) Tax Specialist
The specialist exam for Tax specifically, is known for being extremely difficult.
There are more than 200,000 attorneys in California, and tens of thousands of them practice in some area of tax.
Whether they are full time tax attorneys or they practice tax law as part of a bigger practice such as estate planning, real estate, divorce, corporate and business law, or acting as outside counsel — tax law is everywhere.
Less Than 350 Board Certified Tax Law Specialists in California
In California alone, there are less than 400 Board-Certified Tax Specialists. Why? Because the test is brutal.
It covers many different areas of tax, oftentimes areas which are not even included in the practitioner’s daily area of practice. Tax Specialist Exam study materials are scarce at best, and basically the practitioner has to rely upon is his or her experience to complete the full day exam.
And, in order for a person to be Board Certified — the applicant must also meet rigorous ethical and experience requirements as well.
Less than 1% of Tax Attorneys Nationwide Are Certified Tax Law 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.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys.
2. Master’s in Tax Law (LL.M.)
A Master’s in Tax Law is the highest legal degree earned by practicing Attorneys. It is a Master’s degree in Tax Law, and requires 15-20, upper-level graduate tax classes.
3. Enrolled Agent (Highest IRS Credential)
Many people attempt the Enrolled Agent exam, only to fail. Instead of getting back on the horse and trying again-they give up.
This is unfortunate, because anyone who sits for the exam is obviously someone who takes tax representation very seriously.
As provided by the IRS:
An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee.
Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.
Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.
4. 20 Years of Legal Experience
Our Managing Partner, Sean M. Golding, JD, LLM, EA is a Board Certified Tax Law Specialist earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
Sean has served as a contributing author to the NOLO legal book series on issues involving U.S. and International IRS and State Tax matters for individuals and businesses.
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore & Voluntary Disclosure.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)