IRS May Use Federal Tax Return Information to Initiate FBAR Investigations — New Federal District Court Ruling

On September 30, 2013, the United States District Court for the Northern District of California dismissed a taxpayer’s claim against the federal government in Hom v. United States, 2013 WL 5442960 (N.D. Cal. Sept. 30, 2013). The decision can be found here: https://docs.justia.com/cases/federal/district-courts/california/candce/3:2013cv02243/266299/19/0.pdf?ts=1380653423

In Hom, the IRS used information from the taxpayer’s personal federal income tax return to launch an investigation into the foreign bank accounts of the taxpayer to determine if FBARs were properly filed. This decision is very favorable for the IRS and illustrates the IRS’s recent crackdown on undisclosed foreign accounts. The IRS is going to great lengths to ensure taxpayers are filling FBARs that report all foreign assets and foreign financial accounts.

Under federal law, federal tax returns and the information on those returns are usually confidential and protected from disclosure. However, if the official duties of the officers and employees of the Department of the Treasury require the disclosure or inspection of federal tax returns for tax administration purposes, there is a statutory exception that permits this. This exception is found in 26 U.S.C. 6103(h)(1). Tax administration purposes include collection, assessment, litigation, enforcement functions and any other execution and application of the internal revenue laws or associated statutes.

The court in Hom based their decision to dismiss the taxpayer’s claim against the government on this exception to the tax return nondisclosure and confidentiality provision. The court in Hom alluded that Congress believed improving compliance with reporting of foreign accounts by enforcing the FBAR filing requirement is vitally importation to sound tax administration. Thus, the court found the disclosures of tax return information were lawful under Section 6103(h)(1).

Hom v. United States clarifies that that IRS may track down and pursue taxpayers who fail to file FBARs, disclosing foreign financial accounts, by using personal tax returns or tax return information. Therefore,Hom is an important reminder that failing to comply with the requirement to file the FBAR disclosing foreign financial accounts can easily result in an IRS investigation, because there are now even more ways for the IRS to discover hidden offshore accounts. This makes it vital for any taxpayer with a foreign bank account, foreign assets or foreign income to have an experienced tax attorney on their side.

The Tax Law Offices of David W. Klasing can help get you back into compliance and avoid potential investigation by the IRS. It could be as simple as filing missing FBARs and requesting penalty abatement for reasonable cause. Or as involved as filing 8 years of amended returns to report the foreign income, 8 years of FBARs, and then guiding you through the process of the IRS’ Offshore Voluntary Disclosure Program.