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.