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.

Tuesday, February 16, 2016

Maryland Comptroller Updates its List of Banned Tax Preparers | Bethesda Tax Lawyer

The Comptroller of Maryland has published a list of twenty-seven tax preparers from which it will not process returns because of suspected fraudulent income tax returns.  If used any of the listed preparers, you should have your income tax return reviewed immediately for compliance with state and federal laws.  The lists can be on the Comptroller of Maryland website here, and here.

For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.


Friday, February 12, 2016

When the Taxman Cometh, Don't Write a Check to Cash | Bethesda Tax Lawyer

I occasionally come across interesting or humorous tax articles and like to pass them along. Today, I found a story that was too good to pass up and provides a good piece of advice -- if an IRS agent ever asks you to pay him directly, call your lawyer. The USA Today article is worth reading for the entertainment value as it is not very often that you hear about Federal employees soliciting bribes. Aditionally, if an IRS agent ever asks for payment, never pay in cash and the check should always be written out to "US Treasury" with your EIN or social security number on the memo line. 

Dealing with the IRS is a complicated matter, and not selecting the correct strategy to handle an audit could have significant long-term repercussions on taxes owed and penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Friday, February 5, 2016

Disclosing Foreign Accounts -- Delinquent International Information Return Submission Procedures | Bethesda Tax Lawyer


As I discussed in my previous post, if you have a foreign account and have reported the income and paid taxes on it, but you have not filed FBARs, you can file the late forms without fear of late filing penalties. Unfortunately, the IRS is not as generous if you have reported the income from foreign entities (i.e. foreign partnerships, corporations, or trusts), but not filed the required information returns. The service does offer the Delinquent Information Return Submission Procedures for filing the missing documents, with a major drawback being that it requires a reasonable cause statement.  


The requirements, per the IRS's web page, to enter the procedures are that a taxpayer: 
  • "has not filed one or more required international information returns,
  • has reasonable cause for not timely filing the information returns,
  • is not under a civil examination or a criminal investigation by the IRS, and
  • has not already been contacted by the IRS about the delinquent information returns."

The major drawback to this program is that most people will not qualify because they have not properly reported all income because the reporting requirements for a foreign business are very complex. For example, if you (a US citizen or tax resident) and a friend rent property in a foreign country and formed a foreign LLC equivalent, you have just formed a foreign corporation. Your new business means that you now have to file IRS Form 1120-F, possibly, Form 5471 and Form 926, among others.  To further complicate the situation, did you know that foreign property is subject to different depreciation rules, or that there are rules about which exchange rate you use when converting foreign currency? 

Another problem with the procedures is that reasonable cause is not an easy standard to satisfy. The situations which the IRS provided standards of reasonable cause are:

  • Written advice from the IRS; 
  • Reliance on advice from your tax preparer; and
  • death, disability, sickness, natural disaster, etc.
As you can see, the IRS does limit what it will accept as an explanation for filing these forms late. While these examples are limited, the IRS might allow the excuse of I did not know about these requirements if you entered this program. However, this analysis would be a very fact based argument and is beyond the scope of this brief blog post. If you meet the above requirements including a reasonable explanation, the IRS will not assess penalties for the late filing of the information returns. 

Dealing with offshore accounts is a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.