Tuesday, May 24, 2016

Assessment and Collections of FBAR Penalties | Bethesda Tax Lawyer

The IRS continues to zealously pursue the collection of foreign assets and accounts, so taxpayers need to understand how the Report of Foreign Bank and Financial Accounts (FBAR) and FBAR penalties work.  The enforcement of the FBAR is derived from the Bank Secrecy Act, which was passed by Congress in 1970 to combat money laundering and tax evasion.  This is important because it means the Internal Revenue Service cannot use the traditional tax collection measures contained in the Internet Revenue Code to collect the penalty.  Instead, they must refer the matter first to the Bureau of Fiscal Services, the primary accounting division of the US government, and then to the Department of Justice, which will sue to collect the money (a judgment in their favor makes the government a “super creditor” with broad power to recover the debt).  There is a six-year statute of limitations governing these violations, which will begin to run regardless of whether a report was filed (i.e., 6 years from the due date of the FBAR to assess penalties).

FBAR penalties are proposed and determined by the examining Revenue Agent (the IRS), and the penalty assessment can be contested in IRS Appeals. If appeals are unsuccessful, the US Tax Court does not have jurisdiction to hear FBAR cases. The only option to judicially contest the fines is through the federal courts -- this is done in either the US Court of Federal Claims or Federal District Court. The US Government has two years from the date penalties were assessed, or the person was convicted of an FBAR penalty, to sue for collection of the debt. If a judgment is not obtained, the Government has an unlimited statute of limitations for offsetting payments (i.e., the IRS can keep your social security payments and any future tax refunds until the full payment of the liability).

The penalty structure is determined by the type of violation.  Statutory penalties for FBAR violations are $10,000 per account per year for non-willful violations or the greater of 50% of the highest annual account value, or $100,000, per account per year for willful violations. Persons who have acted badly or willfully--as described in previous blogs--can utilize the Offshore Voluntary Disclosure Program, which offers an offshore penalty of 27.5% in lieu of other possible penalties.  Streamlined filing compliance procedures can be used by people living outside the US who were unaware of their US tax obligations, who face no penalties, or for people living in the US who acted non-willfully, who are liable for a penalty of 5% in lieu of other applicable penalties.

There is something of a slight legal gray area regarding the nature of civil fines related to these matters.  In 1998, in US v. Bajakajin, the Supreme Court held that the forfeiture of $350,000 as a penalty for attempting to leave the US with $350,000 in currency--without reporting any of it, as is required for all movements of international currency in excess of $10,000--violated the Eighth Amendment’s prohibition on the imposition of “excessive fines.”   However, in the 2015 case US v. Moore, a district court in Washington held that a $40,000 penalty in an FBAR case did not constitute an “excessive fine” under the Eighth Amendment (the taxpayer had been assessed four years of maximum nonwillful penalties).  Although US v. Moore has not reached the Supreme Court and perhaps never will, it appears that the current penalty structure for FBAR violations will withstand Eighth Amendment scrutiny--although defendants will surely make this argument among others when contesting their penalties in court.

For a free phone consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Tuesday, May 10, 2016

FBAR Penalties for Failure to Maintain Foreign Account Records | Bethesda Tax Lawyer

One of the most common FBAR problems arise from a failure to keep required records.  The reporting requirements are not onerous, but taxpayers who are managing multiple accounts or making complicated business transactions can sometimes end up running afoul of the FBAR’s reporting requirements.  Anyone who has a financial interest in a foreign bank account must keep records that contain information regarding the name under the account is maintained, the number that designates the account, the name and address of the foreign financial institution where the account is maintained, the type  of account, and the value of the account.  Federal law requires that these records be kept for five years from the June 30 due date for filing the FBAR for that calendar year and be kept available for inspection as provided by law.  

Obviously, accidents can happen.  Employees entrusted with filing the FBAR report may mishandle it, individuals with dozens of international bank accounts might lose track of their money, and life circumstances (health problems, relationship troubles, etc.) could make it difficult to manage a large and diffuse financial portfolio. The Internal Revenue Manual gives the example of a taxpayer who has failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts.  In this instance, the underlying facts and circumstances would determine whether the examiner imposes civil FBAR penalties or merely sends the FBAR warning letter (“Letter 3800, Warning Letter Respecting Foreign Bank and Financial Accounts Report Apparent Violations”).

In most of these situations, a non-willful penalty amount up to $10,000 is the likely remedy, with mitigation factors applied to the penalty, such as reasonable cause for the violation or proper reporting of the account balance.  In more extreme cases, such as when a taxpayer goes out of his or her way to remain completely ignorant of the extent of his financial holdings or deliberately conceals them, the burden falls on the IRS to demonstrate willfulness of the violations, which could trigger a $100,000 penalty or 50% of the balance in the account at the time of the violation.  

For a free phone consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation. 

Sunday, April 24, 2016

Willfulness and FBAR Penalties -- Non-willful Actions and Reasonable Cause | Bethesda Tax Lawyer

In this blog, I’d like to examine the differences between non-willful conduct which can trigger an IRS penalty, and non-willful conduct for which reasonable cause can be given, which offers grounds for why penalties should not be assessed.  An understanding of these differences can be critical to avoiding FBAR penalties or at least serve to make the taxpayer aware of circumstances under they might be imposed.  

Non-willful conduct is defined by the IRS a “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”  It carries with it lighter penalties than willful behavior and can help taxpayers demonstrate eligibility for streamlined domestic offshore procedures but, absent a showing of reasonable cause, cannot entirely obviate these penalties.  

In the recent decision Moore v. US, a US district court examined a taxpayer’s failure to file his FBARs and offered some clarification regarding what constitutes reasonable cause in a situation where the taxpayer’s failure to comply was non-willful in nature.  In that case, James Moore maintained high-balance overseas bank accounts in the Bahamas and Switzerland for many years but filed no Report of Foreign Bank and Financial Accounts until 2009.  


Moore tried to remedy this in 2009 after having learned of the OVDP program (which I have blogged about, here) amending several years of tax returns and filing FBARs to accompany them.  After several years of negotiation with the IRS, Moore opted out of OVDP and was assessed a fine.  Following some back-and-forth negotiation, the IRS imposed a $10,000 penalty, and Moore’s attorney offered arguments for why Moore had reasonable cause to believe he was not violating the law.  


The court’s decision, in which Moore was held to have committed non-willful violations for which the IRS penalty was appropriate, offered some clarification regarding what constituted reasonable cause under these circumstances.  By examining what constituted reasonable cause in other aspects of IRS tax procedure, the court concluded that “reasonable cause” existed when a violation of the FBAR occurred despite the exercise of ordinary business care and prudence.


Moore, however, had offered no objective evidence indicating he had exercised this standard.  Rather, on previous occasions, he had indicated to tax preparers that he had no interest in foreign accounts.  The court also determined that he knew of the Foreign Accounts and Trusts requirement, as he had occasionally followed it in past years.  Based on this standard, the sort of evidence needed to trigger a finding of “reasonable cause” is unlikely to be something that most taxpayers facing FBAR penalties possess.  For example, evidence of a conversation between the tax preparer and the taxpayer in which the taxpayer clearly and unequivocally states that he has foreign accounts and trusts, but the tax preparer tells him not to worry about it, would meet this standard.  This sort of strong objective evidence can demonstrate “reasonable cause,” but in its absence, the chief issue facing the taxpayer may likely be a determination of whether his noncompliant conduct was willful or non-willful, which I have discussed in previous blogs. 

The IRS offers a reduced penalty (5%) for taxpayers (through the Streamlined Program) if they can show that their actions related to the non-disclosure of their foreign accounts were not willful. This means that a person entering the Streamlined programs does not have to show reasonable cause and only has to show that his actions were not a result of willful actions nor willful blindness.

For a free phone consultation regarding the FBAR, OVDP, or other tax matters, please contact The Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.






Saturday, April 16, 2016

The Panama Papers | Bethesda Tax Lawyer

This week, I’d like to begin examining the Panama Papers, a leaked set of over 11 million confidential documents that describe the activities of 210,000 corporate entities overseen by the Panamanian law firm Mossack Fonseca.  Although only a handful of US citizens were named in the papers, this case offers an opportunity to evaluate a truly impressive example of outright tax fraud and willfully noncompliant behavior.

Internal Revenue Manual 4.26.16.6.5.1 states that the test for willfulness is “whether there was a voluntary, intentional violation of a known legal duty, which is demonstrated “by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.”  Examples of willful behavior include filing an FBAR but omitting one of several foreign bank accounts, filing the FBAR in earlier years but failing to file the FBAR in subsequent years when required to do so, and failing to file the FBAR after being sent a warning letter explaining the FBAR filing requirement.  Evidence of a willful violation is rarely direct, because willfulness is a state of mind, but is instead established by drawing reasonable inferences from available facts.  

However, in the Panama Papers case, Mossack Fonseca engaged in extremely willful tax evasion, constructing some of the elaborate shell companies yet discovered.  These companies, which boasted intricate, multi-level, and multi-national corporate structures, enabled clients to “operate behind an often impenetrable wall of secrecy.” To best accomplish this, Mossack Fonseca would move from jurisdiction to jurisdiction when incorporating its shell companies, abandoning those jurisdictions that had taken steps to become more compliant with international standards regarding these entities.  They preferred to incorporate in jurisdictions with minimal to nonexistent rules regarding disclosure, and they tried to perform as little due diligence in these jurisdictions as possible.  

Half of Mossack Fonseca’s shell companies were incorporated in the British Virgin Islands, a jurisdiction noted for its particularly lax tax regime.  Setting up companies in this and other loosely-regulated locales is a simple process, requiring the payment of a fee and the description of the purpose of the company (usually “investment” and “wealth management” are specified).  Estimates place the amount of wealth “offshored” in this manner at between $21 and $32 trillion dollars, with tax havens like the BVI accounting for a staggering 50 percent of all world trade.

Some have attributed the lack of US citizens among Mossack Fonseca clients to be the result of the effectiveness of the Foreign Account Tax Compliance Act (FATCA), FBAR, and other stiffened offshore reporting requirements.  That said, jurisdictions such as Panama and the BVI may always remain havens for willful non-compliance with reporting regulations, and may have to be dealt with more harshly, such as via sanctions,  to further discourage this behavior.  

For a free consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Saturday, April 2, 2016

Willfulness and FBAR Penalties -- Civil Fraud | Bethesda Tax Lawyer

In today’s blog post, I want to examine the indicators of fraud (sometimes called “badges of fraud,” though the terms are interchangeable) that can potentially trigger a criminal referral.  These indicators/badges of fraud are extremely important, among other places, during FBAR investigations.  I have written about the FBAR at length in previous posts--you can read these posts here and here --and the presence of fraud in an FBAR investigation can alter the dynamic considerably.  When a finding of fraud is made, IRS criminal investigations may become involved; civil penalties increase to 75% of the additional tax due and there is an unlimited statute of limitations to audit a return.

The IRS fraud handbook offers a comprehensive if hardly exhaustive list of these indicators/badges, and taxpayers with an inadequate or confused understanding of their financial situation--usually sole proprietors or small businesses with a small chain of command--often run afoul of them either through an attempt to inflate expenses and understate income or simply through sheer recklessness.  Offenses are sometimes tied to Chapter 9 of Title 18 of the U.S. Code, as consumers in bankruptcy proceedings may trigger fraud investigations because they are transferring assets for no consideration, leading an extravagant lifestyle, and failing to file the required income tax returns.  

Although there are many potential indicators/badges of fraud, a handful of them are particularly common and will attract the attention of IRS examiners.  Shell companies that hire employees and lease them back to the parent corporation, companies that withhold taxes from employees but fail to pay them to the government, the payment of cash wages, excise tax fraud, and the use of fictitious subcontractors as a way of paying employees off the books are all extremely common indicators of fraudulent activity.  Revenue agents and revenue examiners are familiar with such behaviors and can very quickly assess and stereotype organizations that are engaging in them.  

Once these fraud indicators/badges are discovered, IRS revenue agents will consult with their group manager and a Fraud Technical Advisor (FTA) to determine if a Fraud Development Recommendation should be filed.  From there, agents will request returns--excepting, of course, those returns that have not been filed that have raised the suspicion of fraud.  The IRS strives to avoid the perception that it is using a civil examination process to develop a criminal case against the taxpayer.  That said, once the appropriate referral paperwork is complete, the revenue agent will forward the case to the FTA, who will recommend a criminal investigation, if necessary.  At this point, evidence gathered in the case, including tax returns and a consideration of the taxpayer’s demographic profile, will determine what further subsequent steps are taken, such as additional investigation and prosecution.  

The best way to avoid this situation is to keep detailed business records and avoid the business practices listed here or outlined in the IRS fraud handbook.  However, once an IRS investigation begins, taxpayers wishing to avoid or reduce civil and criminal penalties are advised to consult with an experienced tax attorney to explore the options available to them.


For a free phone consultation regarding this subject or other tax matters, please contact The Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Wednesday, March 16, 2016

Willfulness and FBAR Penalties -- Willful Blindness | Bethesda Tax Lawyer

In my previous blog on FBAR penalties, I discussed willful behavior.  This week, I will be examining what constitutes willful blindness, an important sub-category of willful behavior, followed in a week by an analysis of non-willful actions.  Understanding the distinction between these two categories--willful blindness and non-willful actions--is critical because only non-willful actions would enable you to enter a streamlined program and avail yourself of reduced penalties.

If taxpayers could protect themselves from FBAR penalties through deliberate ignorance of filing requirements, many would undoubtedly do so.  However, the leading cases on this subject demonstrate that ignorance of these complicated tax laws is no excuse.  Taxpayers sophisticated enough to maintain offshore accounts and engage in other complicated transactions are assumed to be reasonably educated and thus aware of the basic rules governing these matters.  To make an analogy to the sporting world, former University of North Carolina men’s football coach Butch Davis, who had remained deliberately ignorant of all recruiting and academic matters in order to protect himself and his team from possible NCAA violations, was fired by his employer for exhibiting the athletic equivalent of willful blindness.

In the 2012 case United States v. Williams, the 4th Circuit held that a taxpayer who signed his tax return was charged with constructive knowledge of its contents.  Williams, the taxpayer, had exhibited willful blindness by going to great lengths to avoid familiarizing himself with FBAR reporting requirements, never reading the forms he signed or the instructions related to those forms.  In the court’s opinion, Williams had made a conscious effort to conceal or mislead his sources of income and other financial information.  

James v. United States, a district court case arising out of Florida in 2012, offered an instance of a taxpayer who had understandably erred when failing to file Form 3520, which applies to foreign trusts and the receipt of certain foreign gifts.  The IRS had not issued regulations related to that form, and the court concluded that the taxpayer had made a good faith effort to comply with the existing law and could not be reasonably expected to know of this particular requirement.  In James, there was no evidence that the taxpayer had gone to the same lengths as the taxpayer in Williams; in fact, the available evidence examined by the court suggested that he had exercised the ordinary care and prudence expected of similarly situated individuals.

However, in United States v. McBride, the Utah District Court articulated a more exacting standard, reasoning that taxpayers had constructive knowledge of all instructions related to the tax forms that they sign:  “‘It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms,’ including the reference on Schedule B to the FBAR.”  McBride goes a step further than either of these cases, seemingly imposing a willful FBAR penalty on anyone who signs a federal tax return with a Schedule B attached and fails to file a required FBAR.  

Individuals who might find themselves in a position to incur FBAR penalties should avail themselves of an experienced tax practitioner’s assistance in filing their taxes.  The chief lesson from all of these cases is that taxpayers should try to stay reasonably informed of all reporting requirements, keep a detailed narrative of their transactions, and, should they face IRS action, seek the aid of a tax attorney as soon as possible.  

For a free phone consultation regarding this subject or other tax matters, please contact The Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Sunday, February 28, 2016

Willfulness and FBAR Penalties, was Your Non-Disclosure Entirely Innocent? | Bethesda Tax Lawyer


In my previous blogs about the OVDP, SDOP, and the SFOP, I explained how deciding which disclosure program to enter was dependent upon your exposure to willful FinCen Form 114 (FBAR) penalties.  If your actions did not rise to the level of willful behavior, then you should enter one of the streamlined programs.  However, the IRS has not provided a bright-line test for willfulness or non-willfulness.  Thus, to qualify for the Streamlined programs, you must show that your actions were not intentional nor were they due to an intentional disregard of the laws (willful blindness). I am dividing this discussion into three posts. This post will cover the topic of willful behavior, followed in a few weeks by blogs addressing willful blindness and non-willful actions.

IRS examiners will recommend steep penalties for each year in which the FBAR filing and recordkeeping violation was willful, so understanding this term is very important.  Internal Revenue Manual 4.26.16.6.5.1 states that the test for willfulness is “whether there was a voluntary, intentional violation of a known legal duty, which is demonstrated “by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.”  A “conscious choice not to file the FBAR” is sufficient to constitute a willful violation.  Examples of willful behavior include filing an FBAR but omitting one of several foreign bank accounts, filing the FBAR in earlier years but failing to file the FBAR in subsequent years when required to do so, and failing to file the FBAR after being sent a warning letter explaining the FBAR filing requirement.  Evidence of a willful violation is rarely direct, because willfulness is a state of mind, but is instead established by drawing reasonable inferences from available facts.  Various financial documents, such as statements from foreign bank accounts and prior FBAR warning letters, can indicate that a violation was willful.  The burden of proof for this determination is on the government (see Ratzlaf v. United States, 510 U.S. 135 (1994), holding that “the Government must prove that the defendant acted with knowledge that his conduct was unlawful”).  

Per the recent case of United States v. McBride (DC Utah 2012), a district court in Utah noted that the appropriate evidentiary standard for a determination of willfulness for the purposes of the FBAR was a “mere preponderance of the evidence” rather than the higher bar of “clear and convincing evidence,” reasoning that greater protection was unnecessary since no important individual rights or interests are present in FBAR cases, which “only involve money.”  The district court then noted that even individuals such as McBride, who may have believed they were legally justified in withholding FBAR reporting information, were nonetheless guilty of a violation if they failed to disclose required information.  This decision seems to indicate that willfulness penalties are a matter of strict liability:  the taxpayer is guilty of a violation for non-disclosure even if he believed he did not have to make the disclosure.  

Taxpayers facing willful FBAR violations should seek counsel at the earliest stage of an audit so that they can prepare narratives that indicate their violations were not the result of willful behavior.  Subsequent posts on this blog will address willful blindness and non-willful actions.  

For a free phone consultation regarding this subject or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.