Will the IRS Waive an FBAR Penalty?
FBAR Penalties Waived IRS Letter 3800: The IRS is like one of your teachers in high school. And like high school, the IRS has its own permanent record in which the Internal Revenue Service tracks your misdeeds. When it comes to the FBAR penalties, the IRS will sometimes forgive your misdeeds — and issue you a stern warning instead of all the horrible penalties it could if it wants to. The Letter is a 3800 Warning Letter ‘in lieu of penalty.’ In recent years, the IRS has directed its focus to foreign accounts compliance and unreported foreign income. And, while enforcement of FBAR penalties are on the rise, the IRS can still issue the FBAR Penalty Waiver Letter 3800 in lieu of penalty.
FBAR Letter 3800 Penalty Warning
An FBAR Letter 3800 is issued when the IRS has determined that you are out of compliance in reporting your foreign accounts, but the IRS will take mercy on you, and not issue penalties against you; rather, the IRS issues a “Warning Letter in Lieu of Penalties (aka FBAR Letter 3800).
In order to obtain an FBAR Letter 3800 (warning letter in lieu of penalty) it is important that the taxpayer’s attorney submit a convincing statement to the IRS — that your failure to comply was non-willful.
What is Non-Willful?
There is no bright-line test to determine willfulness.
It is a ‘Totality of the Circumstances‘ test based on whether or not your specific facts and circumstances reflect that you knew, or should have known that you were required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose.
Generally, if a person was unaware that there was a foreign account/foreign income/foreign asset reporting requirement, the client begins in the “non-willful” category, but more analysis is needed.
How to Analyze Willful vs. Non-Willful
What is your U.S. status?
How long have you been in the United States for?
How many years have you filed U.S. tax returns?
What types of investments do you have overseas?
Do you utilize a financial planner?
Do you have a CPA or EA?
Is your CPA or EA experienced in international tax?
Did your CPA or EA send you questions in writing asking about Foreign Accounts or Income?
Did you respond truthful to the CPA or EA?
Did you complete a schedule B?
Are you tax compliant in the country in which the accounts are maintained?
Did you have unreported income as well?
When is an FBAR Letter 3800 Issued?
When the 3800 letters issued, it is not because the IRS determined there were no violations (sorry for the double negative). Rather, it is because even though the IRS determined there were violations, they decided to take mercy on you and waive the penalties.
As provided by the Internal Revenue Service:
“The examiner may, after discussion with the group manager, issue an FBAR Warning letter, Letter 3800, if there is a violation of the FBAR requirements but no penalty is being asserted.
– The examiner may determine that there was a violation but that penalties are not warranted in view of the facts and circumstances of the case.
– A Letter 3800 is also issued when there is evidence of a negligent violation by an individual (not a business) prior to October 23, 2004.
– Letter 3800 is not used in Last Chance Compliance Initiative (LCCI) cases for the years when the FBAR penalties are forgiven as a part of the LCCI agreement.”
If Letter 3800 is issued, the closing procedures are:
“- The examiner will issue Letter 3800 and a copy to the person apparently in violation of the FBAR requirements and retain a copy in the file.
– This person will return any delinquent or corrected FBAR(s) and a copy of the warning letter to the examiner.
– Delinquent forms will be processed in accordance with instructions in this chapter. See IRM 18.104.22.168.8.
– The examiner will also complete a summary memorandum and FBAR Monitoring Document (FMD) and close the FBAR case file to the group manager.”
The group manager will:
“- Review the FBAR case file for both technical and procedural issues and note this on the activity record.
– Indicate on the FMD the date closed from the group.
– Forward on a 3210 the FBAR file to Internal Revenue Service, P.O. Box 33113, Detroit, MI 48232-0113.
Detroit Computing Center (DCC) will:
– Enter the information from the FMD into the FBAR database.
– Note on the FBAR database when a follow-up FBAR examination is needed.
– Remove the original FBARs for entry on CBRS and retention in the Federal Records System.
– Place the case file in the FBAR historic files.”
Additional Offshore Violation Penalties
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
Penalties 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 failure to file each one of these information returns or for filing an incomplete return, is a penalty 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 starts at $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 926
An unfiled form may lead to a penalty that 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.
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