- 1 FBAR Reporting
- 2 What is a FBAR?
- 3 IRS FBAR Penalties
- 4 FBAR Penalties
- 5 Lien
- 6 Levy
- 7 Seizure
- 8 Passport Revocation
- 9 U.S. vs. Foreign Property
- 10 Avoid FBAR Penalties with Offshore Voluntary Disclosure
- 11 When Do I Need to Use Voluntary Disclosure?
Filing a FBAR is no fun. If you happen to have foreign accounts, and due primarily to the enforcement of FATCA Reporting, the IRS has begun increasing enforcement of FBAR filing, FATCA reporting, and all the penalties associated with the failure to file these forms.
What is a FBAR?
A FBAR is a Report of Foreign Bank and Financial Account Form. (FinCEN 114). And, chances are in the past few years you may have learned about the dreaded acronym FBAR (Report of Foreign Bank & Financial Accounts) for one of many reasons. The main ways individuals learn about FBAR Filing is usually:
The form is dreaded for many different reasons. Most notably, and beyond the fact that you have to disclose significant personal information (electronically) to the US government regarding your foreign accounts, are the penalties you can suffer for failing to properly report.
The penalties are ridiculous; they range from an IRS 3800 letter, which is a warning letter in lieu of penalty – all the way up to a 100% fine for failing to properly report your accounts. While it would appear on first glance that the maximum penalty is $100,000 or 50% value, whichever is higher — that is only one year’s penalty.
The IRS has up to six years to penalize you if you have more than $5000 of unreported income. Moreover, if the IRS can prove the elements to Offshore Fraud or Offshore Tax Evasion, the IRS can audit you indefinitely (read: forever penalties).
IRS FBAR Penalties
IRS FBAR Penalties are burdensome, unfair and oftentimes far exceed the actual violation (Read: who really cares if Michelle forgot to report her foreign accounts and interest income earned in Portugal?)
We have written numerous articles on issues involving FBAR Penalties. It is not because we derive any enjoyment for writing these types of articles, but rather because our entire law practice is focused exclusively on IRS Offshore Voluntary Disclosure Programs.
For a large portion of our clients, the majority of the disclosure will include the filing of a late FBAR Penalty. We are not going to rehash our prior articles, but have provided links to those other articles so that you can access them if you wish to learn more about the penalty aspect of not properly filing an FBAR.
The focus of this article is on recovery of those penalties by the IRS to established debt recovery means.
A Lien is a brutal tactic by the IRS. Once the IRS meets the required elements to show:
- You owe a tax debt
- That the tax debt has not been paid, and t
- That you have been put on notice it’s still not paid the debt, the IRS can place a Lien on your property.
Here’s an example: David has unreported foreign accounts in Hong Kong. David receives a penalty letter showing that he owes $60,000 in penalties to the IRS for not filing the FBAR. During the time that David is figuring out his options to fight the penalty, David does not respond to the IRS.
Rather, David believes that the matter would simply go away if he just buries his head in the sand (read: it won’t). After a certain amount of time is past, David all but forgets about the penalties because he believes the IRS is no longer after him (read: they are).
About a year goes by and David decides he is going to sell his house. He’s decided to move back to Hong Kong now that his daughter has graduated from college and will be attending graduate school in Asia.
When David goes to sell his home, David’s real estate agent explains to David that there is a lien on the home, and therefore he most likely cannot sell the home until that lien is taken care of — not because it is not “sellable,” but because in all reality nobody wants to purchase a home that has the taint of an IRS lien attached to it.
Result: not only does David have to pay back the debt amount in order to release the lien, but David will also have to pay the interest that has accrued as well as possibly any additional fees incurred by the IRS and having to handle the removal of the lien.
When the IRS wants to use a heavy hand, they will oftentimes issue a levy. A levy is usually worse than a lien in situations in which you have high dollar amounts in your bank account or need immediate access to that cash.
Example: Michelle was penalized $150,000 for failing to report FBARs. Michelle’s initial penalty was significantly higher, but she was able to get that penalty reduced. Michelle’s attorney explains to her that she should pay the debt as soon as she can because the IRS may issue a Levy.
Michelle goes on with her life, busy with her medical practice and all but forgets about the debt amount. About a year later, Michelle is getting ready to purchase a new rental property but needs to withdraw about $400,000 of money from her savings account as a down payment.
When Michelle goes to access the money, she learns that she is locked out of her account. The reason why is because Michelle received a Notice of Levy and Intent to Levy on prior occasions, but did not open those notices from the IRS. Rather, she mistakenly believed if enough time passed she would be able to aggressively negotiate a one time payment to reduce the penalty amount.
Since Michelle is a highly compensated earner who runs her own practice and nets close to $500,000 annually, the IRS knows she has assets, income, and investments – and therefore would have no motivation to settle with Michelle on pennies on the dollar as she heard about in a radio commercial on the way home from work.
Getting a levy released after it is been issued is very time intensive and costly for your attorney’s fees bill. Moreover, during the time the account is locked, Michelle cannot access any of that money, at all, until the IRS takes out the portion that it wants in order to satisfy the debt (although usually the full amount of the money is on lock)
There’s an argument to be made that the IRS can only lock-up the account to the amount that Michelle earns, but in all reality your bank will lock the account until the IRS has taken the money and received it from your account.
A seizure is a much more intense collection method that is typically reserved for individuals the IRS believes are going to try to flee. With a seizure, the IRS essentially swoops in and seizes your property without prior notice. The purpose is to ensure that you do not have the opportunity to make a clean getaway and leave the United States or otherwise hide the money before the IRS can get to it.
Unless the facts of your case show that the IRS has specific facts that would indicate you’re going to hightail it out of the United States or move your assets, investments, or income stream to a hidden location – the seizure is not as common of her recovery method as is a lien or levy.
The IRS has the right to revoke your passport or deny your application for a passport if you have more than $50,000 in tax debt. With FBAR penalties it is not that far-fetched to believe if you got hit with FBAR Penalties for one or multiple accounts, including interest and other penalties that you may be hit with (8938, 5471, 8865, 8621) that you may owe more than $50,000 to the IRS.
U.S. vs. Foreign Property
The IRS is entered into tax treaties with more than 75 countries (income and estate tax treaties), intergovernmental agreements (IGAs) with over 100 different countries, and have received confirmation that more than 300,000 foreign financial institutions will be reporting US account holders under FATCA.
As a result, the IRS has the ways and means to collect against you for money, accounts or property located in either the United States or abroad. Therefore, just because your money is abroad does not mean the IRS cannot reach it.
Avoid FBAR Penalties with Offshore Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary 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.
We Can Help.
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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