More IRS Resources May Be Dedicated to Catching FBAR Violators

It is no secret that the federal government has historically-high debt. With a budget deficit of over $192 billion, Congress has made enormous cuts to funding levels of several federal departments. The IRS has been one of the hardest hit governmental entities and its leadership has recognized that low staff levels, combined with under-utilized employees are allowing intricate tax crimes to be committed. But as identifying a problem is half of the battle, U.S. taxpayers should expect a change in the Service’s focus and should take proactive efforts to ensure that they are in compliance with U.S. tax laws.

The IRS Criminal Investigation Division (CID) was originally formed to battle complex tax crimes. Those agents who are placed into the CID typically have experience that allows them to sniff out and take down tax criminals who are engaged in intricate tax schemes. Many of those tax crimes are high value matters that involve corporate and offshore components. When a revenue agent who is conducting an audit determines that there is a possibility that criminal tax fraud is being committed, they refer the case to the CID. After an extensive investigation, the CID will hand the case over to the Department of Justice for prosecution, if the situation warrants criminal charges to be filed.

In the past decade, the use of stolen identities to secure fraudulent refunds has proliferated and local law enforcement agencies across the nation found themselves unable to keep up with the volume. As a response to requests from the states, the CID created a group that works directly with local police to help fight tax refund fraud. But creating new working groups while having critical funding reduced means that the ability of the CID to battle more complex tax crimes is also dramatically cut down.

Former IRS Deputy Commissioner Mark Matthews said in a statement to a Floridian newspaper that he believed that the CID staff’s shift from working primarily on complex tax crimes to working on tax refund fraud may be more harmful than it is helpful. Further, he suggested that the staff at the CID is too specialized to spend their time handling low-valued refund fraud cases. Although Matthews is no longer with the Service, his sentiments may be resonating with existing leadership.

If Congress allocated additional funding to the Service or if senior leadership decides to reallocate resources to fight higher-valued tax schemes, those who are willfully violating Foreign Bank Account Reporting (FBAR) laws may be the first to be targeted. The IRS and the DOJ have taken very large strides over the past five years to fight against the secreting maintenance of foreign bank accounts in foreign countries and the penalties the come with being found guilty of an FBAR violation are a welcomed source of revenue for the federal government.

Federal law requires that U.S. residents disclose the existence of signature authority or ownership interests in foreign bank accounts with a high-balance of $10,000 or more at any point during the year. Those who fail to live up to their reporting obligations face the possibility of jail time and penalties that have often been called “draconian”.

Although the CID and Department of Justice have been quiet on what constitutes the “willful failure” to comply with FBAR laws, they have stated that maintaining an account with a foreign bank that has been known to assist Americans with secret accounts is an indication of willfulness.

The Foreign Account Tax Compliance Act (FATCA) has also made it easier for the federal government to receive incriminating information about U.S. residents who have, or continue to, maintain a foreign bank account. The legislation imposes a 30% withholding on any foreign financial institution that does not provide information about U.S. customers. In addition to FATCA efforts, the State Department has negotiated various Intergovernmental Agreements (IGAs) with foreign nations that create a pipeline through which U.S. account-holder information may be transferred to the feds. It is now extremely clear that the U.S. government has or will soon have information that can be used to prosecute U.S. residents for FBAR violations.

Notwithstanding the above, there is a way that taxpayers may be able to avoid some of the negative repercussions of a FBAR investigation, trial, and conviction. The Offshore Voluntary Disclosure Program (OVDP) allows residents who have undeclared foreign accounts to come forward, disclose information about their account and financial matters, and pay a penalty in exchange for an agreement by the federal government to not prosecute the case in a criminal court. Although the program is a terrific way to escape a jail sentence, it won’t be around forever. In fact, IRS officials have made statements that insinuate that the OVDP may soon be coming to an end. Furthermore, residents applying for the OVDP may be denied if they are already being investigated or are under examination by the IRS for any purpose. In the end, the takeaway should be clear: If you have a foreign bank account that hasn’t yet been declared to the government, you should speak with an experienced tax attorney immediately.

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers who have undeclared foreign bank accounts. Our zealous tax advocates can analyze your particular situation and suggest an appropriate course of action that is the most beneficial to you. Waiting for the IRS and Department of Justice to discover your potentially illegal activity could lead to devastating penalties and a long sentence in a federal prison. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation. Also, be sure to check out our YouTube channel for helpful and informative tax law content.