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Texas Sized FBAR Penalty & Importance of Experienced FBAR Counsel

Texas Sized FBAR Penalty & Importance of Experienced FBAR Counsel (Board Certified Specialist in Tax)

Texas Sized FBAR Penalty & Importance of Experienced FBAR Counsel (Board Certified Specialist in Tax)

Texas Sized FBAR Penalty & Importance of Experienced FBAR Counsel

They say everything is bigger in Texas — and now you can add FBAR Penalties to the list.

When it comes to the IRS and FBAR cases, the IRS means serious business.

In the past few years, the IRS has significantly increased enforcement of FBAR penalties, and the trend continues.

Texas FBAR Willfulness Violation (2019)

While in years past, the IRS may have let the enforcement of FBAR penalties expire when the taxpayer didn’t “pay up,” the Internal Revenue Service has now taken to enforcement of FBAR cases with increased vigor — including seeking formalized judgments when necessary.

Some of these judgments can reach into the multi-million of dollars (even for non-willful FBAR penalties)

That is why it is crucial that you if you find yourself in an IRS bind involving FBAR Penalties (Foreign Bank and Financial Account form aka FinCEN 114), you retain an experienced Offshore Disclosure Specialist Tax Law team to assist you.

What Happened in the Bach Case?

In a recent Texas FBAR case, the IRS took the Taxpayer task, and sought to reduce the penalty to judgment. The penalties are creeping towards $1,000,000.

Background

The facts of this case are a bit different than some of the other cases. In this case, Taxpayer was married, and:

  • Taxpayer had foreign accounts
  • Taxpayer knew about the FBAR
  • Taxpayer had a tax preparer
  • Taxpayer seemingly did not divulge all account information to the tax preparer
  • Taxpayer only reported one account (he had multiple accounts)
  • Taxpayer entered into OVDI (Offshore Voluntary Disclosure Initiative)
  • Taxpayer dropped out of OVDI before signing the closing letter, but did not “Opt-Out”

These facts will typically lead a client into becoming willful, noting that Taxpayer submitted to OVDI before the Streamlined Procedures were available.

As provided by the IRS’ 

Howard Bach is a United States citizen who resides in Laredo, Texas.


Bach has at least three foreign financial accounts, which at one time were jointly owned with his late wife, Carol Bach.


For the years 2003 – 2010, Bach disclosed his interest in the ZKB account, timely filed FBARs for the ZKB account, and interest income therefrom was reported on the Bachs’ U.S. income tax returns.


Accordingly, the penalty assessments described below do not include amounts from this account.


Bach did not, however, disclose his interest in the BNP Paribas Account or the securities retirement account at Lienhardt & Partner on an FBAR, or his U.S. income tax returns.


What is OVDI?

Before there was OVDP, there was OVDI — which was essentially the same as OVDP, but preceded the introduction of OVDP

As provided by the IRS’:


Bach entered into the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”) program on August 11, 2011. Bach was accepted into the OVDI program on October 24, 2011.


Taxpayer Left the IRS Hanging…

The IRS does not like to be left hanging. And, when it came time to sign the closing letter, and submit payment — Taxpayer was nowhere to be found.

As provided by the IRS’:


Pursuant to Bach’s involvement in the 2011 OVDI program, he was issued a Closing Agreement (Form 906). However, Bach did not sign the Closing Agreement. 


Bach was removed from the OVDI program on November 20, 2014.


Bach was notified of his removal from the program on Letters sent on May 6, 2015, and July 21, 2015, but he did not respond to these letters.

Increased Penalties for Alleged Willfulness

In this case, the IRS has significant facts in its favor to show Taxpayer may have been willful:

As provided by the IRS’ 

For the years 2003 through 2010, Bach filed a Schedule B with his original federal income (Form 1040) tax return, and checked “Yes” in regards to having a financial interest in or signature authority over a financial account located in a foreign country.


As such, Bach had knowledge the requirement to disclose foreign bank accounts.


However, Bach only reported amounts for his ZKB account, and only listed Switzerland as the foreign country where the financial account was located.


Bach omitted both the BNP Paribas account, and the Lienhardt & Partner account on this Schedule B. Bach further omitted that he had an account in France. Bach did not file an FBAR for the BNP Paribas account or the Lienhardt & Partner account.


On information and belief, Bach only provided information regarding the ZKB account to his tax return preparer, and did not provide information on the BNP Paribas account, or the Lienhardt & Partner account


Heightened Penalties for FBAR Willful Violations

The IRS seeks nearly $1M in penalties.

As provided by the IRS’ 


31 U.S.C. § 5321(a)(5) provides for the imposition of civil penalties for a willful failure to comply with the reporting requirements of Section 5314 – i.e. when the person(s) maintaining a foreign account fails to timely file an FBAR reporting that account despite having an obligation to do so. For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed is 50% of the balance of the account at the time of the violation or $100,000, whichever is greater. 31 U.S.C. § 5321(a)(5)(C)(i). 26.


The IRS may also abate part of the FBAR penalty, such that the penalty imposed may be less that the 50% account-balance maximum.


On June 20, 2016, due to Bach’s willful failure to timely file FBARs reporting his financial interest in the BNP Paribas and Linehard & Partner accounts, a delegate of the Secretary of the Treasury assessed penalties against him pursuant to 31 U.S.C. § 5321(a)(5).


As of May 26, 2017, the total outstanding balance consisting of the FBAR penalties, penalties for late payment under 31 U.S.C. § 3717(e)(2) and interest, is $853,119.20.


We Specialize Exclusively in IRS Offshore Disclosure 

Had Mr. Bach retained a specialist, he may have been able to reduce his penalty in OVDI by way of opt-out.

Instead, he is now subject to higher penalties than he would have had to pay if he completed the program, or successfully opted out.

Consider Offshore Disclosure with a Board Certified Tax Specialist Attorney

It is human nature to want to avoid making a proactive submission to a government agency such as the IRS before the IRS ever discovers the non-compliance. But, typically that is best path forward.

Moreover, if you realize you are out of compliance and begin researching online, you may begin to feel as though it is hopeless.  Some of these attorneys and CPAs make it appear that everyone with unreported assets or income is going to be severely penalized and shipped off to prison.

That is simply not the case.

You have options, and depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).

IRS Offshore Reporting & Tax Amnesty Programs

There are 5 main versions of the program. Here are the 5 Main Options:

(New) Updated Traditional IRS Voluntary Disclosure Program

When OVDP (Offshore Voluntary Disclosure Program) ended back in September 2018, the Internal Revenue Service was unclear as to whether a New “Offshore” Voluntary Disclosure Program would be introduced. Instead of a “new program,” the traditional voluntary disclosure program was expanded.

You can use the disclosure program to submit FBARs for your Foreign Bank Accounts, FATCA, PFIC, along with your Domestic Income

Resource: Summary of the Traditional IRS Voluntary Disclosure Program

Resource: Golding & Golding’s 8-Step Guide to See if you Qualify

SFCP – IRS Streamlined Filing Compliance Procedures

IRS Streamlined Filing Compliance Procedures are a stand-alone “streamlined” version of the traditional OVDP. The “stand-alone” streamlined filing procedures were created in 2014 by the Internal Revenue Service.

The purpose of the procedures are to assist taxpayers who were noncompliant with offshore reporting requirements – but were also non-willful.

If the Taxpayer can certify under penalty of perjury of being non-willful, the IRS reduces the penalty structure, and even waives the penalty for applicants who qualify as foreign residents.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Filing Compliance Procedures

SDOP – IRS Streamlined Domestic Offshore Procedures

SDOP is the Streamlined Domestic Offshore Procedures, and it is the program designed for for U.S. persons residing in the United States (or do not meet the technical “Foreign Resident Test”) 

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Domestic Offshore Procedures

SFOP – IRS Streamlined Foreign Offshore Procedures

SFOP is the Streamlined Foreign Offshore Procedures. These are the Procedures for U.S. persons residing outside the United States is referred to as the Streamlined Foreign Offshore Procedures.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Foreign Offshore Procedures

DIRP – Delinquency Procedures for Offshore & Foreign Accounts and Assets

If you do not have any unreported income resulting in having to amend your tax returns — and all you have is unreported foreign assets, accounts or investments with no unreported income, you may be in luck. In these instances, in which you do not otherwise need to file for traditional offshore disclosure or the Streamlined Filing Compliance Procedures — you may qualify for the Delinquency Procedures and avoid any penalties.

Resource: Golding & Golding’s IRS Summary of Delinquent International Informational Return Submission Procedures

RC – Reasonable Cause for Offshore & Foreign Accounts and Assets

Reasonable Cause may be an option for some taxpayers. Specifically, if you were completely non-willful in your failure to disclosure, and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd.

Resource: Golding & Golding’s Summary of IRS Reasonable Cause for Offshore & Foreign Accounts & Assets

Fixing Lesser Experienced Law Firm mistakes.

IRS Voluntary Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

We know, because those cases usually end up on our door-step. 

Resource: Examples of recent cases we had to takeover from less experienced Attorneys can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

IRS Offshore “Potential” Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

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

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

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

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

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

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.

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

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

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.

How to Find Experienced & Reputable Offshore Voluntary Disclosure Counsel

Nearly all the experienced Attorneys in this field will have 5 Main Attributes:

  • Board Certified Tax Law Specialist
  • Master’s of Tax Law (aka LL.M.)
  • Dually Licensed as an Enrolled Agent or CPA
  • Around 20-Years of Private Practice experience
  • Extensive Litigation, Trial and related high-stakes experience.

Why is This Important? Because People Can be Whomever They Want to be Online

And that is the problem.

In recent years, we have had many clients come to us after being horribly represented by inexperienced tax counsel. While we are sure it is a problem in many fields, it seems to run rampant in IRS offshore voluntary disclosure.

These Attorneys ‘manipulate’ their past legal experiences, such as working for the IRS —  to make themselves sound more experienced than they are. You later find that they never worked as an attorney for the IRS, or even in the offshore disclosure department.  

The IRS has nearly 100,000 employees, and just being one of them does not make an attorney qualified to be an effective and experienced offshore voluntary disclosure tax attorney specialist.

IRS Offshore Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

International Offshore Disclosure Lawyer Fees – How Much are They?

As in life, you get what you pay for.

To get the best representation possible, you need an experienced Board Certified Tax Law Specialist, with advanced degrees and advanced certifications.

If you want to hire a newer private-practice attorney that just opened shop a few years ago, hoping to save a little money on fees,  where they sold you on some “over-hyped” Kovel Letter – you’re putting yourself at risk.

Those cases usually end up on our doorstep down the line after the attorney made significant mistakes on the submission (sometimes costing the client significant amounts of time and fees that could have been avoided)

Golding & Golding – Board Certified in Tax Law

Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1000 streamlined and voluntary disclosure submissions.

Our Team Lead is a Board Certified Tax Law Specialist (Less than 1% of Attorneys nationwide) and Enrolled Agent, with a Master’s of Tax Law (LL.M.)

Mr. Golding leads his team in each and every case we accept for submission.

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

We Can Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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.)
International Tax Lawyers - Golding & Golding, A PLC