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The central question on many US taxpayers’ mind recently is: “What is the likelihood that the IRS will assess massive FBAR penalties on US taxpayers with unreported or under-reported foreign accounts and assets?”
Although the IRS can sometimes come across as being the Big Bad Wolf of the tax world, they are actually pretty open about the way that they direct their agents to handle the tax affairs of Americans. At times, their transparency can allow taxpayers to breathe a sigh of relief, but it can also confirm the ability of IRS agents to impose huge penalties for certain tax offenses. In any event, the need to consult with an experienced tax attorney is often apparent when reading through the documentation that is supplied by the Department of the Treasury.
The Treasury recently released updated procedures (SBSE-04-0515-0025) on how the IRS and their agents should handle the determination of penalties when dealing with taxpayers that have been deemed to be in violation of the Foreign Bank Account Reporting laws. For those who are unfamiliar, the FBAR laws require taxpayers who have accounts in foreign banks with balances of $10,000 or more at any time of the year to report those accounts to the IRS.
These laws were put into place in order to help the United States collect taxes from its taxpayers on their worldwide income, a task that was once difficult because of a lack of communication between countries.
The updated procedures are help IRS agents assess penalties for two types of taxpayers: those who have willfully violated the FBAR laws and those who are in violation of the FBAR laws, but did not do so “willingly”. It is important to note that the term “willingly” has a definition that is uncertain and the IRS has intentionally kept it that way to allow for the greatest amount of leeway with regard to its application.
The biggest fear of any taxpayer with an undeclared foreign account should be the possibility of being deemed to have broken the FBAR laws willfully. The new updated procedures provide IRS agents with a step-by-step guide on how to assess a penalty for willful violators. First, the agent must gather all of the relevant documentation with regard to the investigation. After the determination has been made that the taxpayer acted willfully, the agent is tasked with assigned penalty percentage that is based on all of the facts and circumstances of the case. This means that the agent has almost complete discretion as to the amount of the penalty.
The penalty amount is determined by the agent deciding on a percentage. The percentage is then applied to the high-balance in the taxpayer’s account proportionally over the years at issue. Generally, the penalty percentage cannot exceed 50 percent, though that rule is not written in stone as the agent has the ability to recommend a penalty percentage that is less or greater than the 50 percent cap as long as it is approved and warranted by the facts and circumstances of the case. And again, a facts and circumstances analysis can sometimes produce unpredictable results.
For taxpayers that are deemed to have violated the FBAR law but did so without the willful level of intent, the revenue agent is directed to determine a penalty percentage that applied on a year-by-year basis. A major difference between willful and non-willful violators is that the agent generally cannot impose a penalty that exceeds $10,000 for any single tax year. Like the determination for willful violators, the penalty is based on a facts and circumstances analysis.
If there is any good news with regard to the updated procedures, the taxpayer technically can be spared a penalty for each tax year that their account went undeclared. If the revenue agent believes that the facts and circumstances do not warrant a penalty for multiple tax years, they can recommend that the taxpayer only be assessed a single fine based on one tax year that does not exceed $10,000.
The updated procedures set out several documentation procedures for the revenue agent handling any FBAR case that include the paperwork that must be included with a taxpayer’s case file. Furthermore, the update requires cooperation between the Criminal Investigation Division as well as FBAR managers and coordinators when dealing with certain penalty determinations. Finally, it is important to note that these updated procedures apply to all cases that were active on or after May 13th, 2015 and the updates do not apply to taxpayers that have already entered the Offshore Voluntary Disclosure Program (OVDP).
Americans with accounts overseas that have not yet been declared should take the updated procedures as a warning. The IRS has essentially announced that their agents have a practically unrestrained ability to penalize FBAR violators at a rate of their choosing, as long as the facts and circumstances can justify the outcome. Many of the variables that revenue agents will use to determine a penalty level are statements that are made during the examination or correspondence made by the taxpayer to the IRS. Trying to talk your way out of an audit or other investigation can lead to the IRS collecting statements that might not only increase an FBAR penalty but can also be incriminating. The Obama administration has made sure that the IRS and Department of Justice are prosecuting cases for FBAR violations at an unprecedented rate. An experienced tax attorney can help make sure that you aren’t one of the unlucky taxpayers that spends years in prison because of an undisclosed foreign bank account.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have years of experience in defending taxpayers accused of violating FBAR laws as well as helping them participate in the OVDP, a program that could allow a taxpayer avoid time in a federal prison in exchange for their cooperation with the IRS. Don’t fight the IRS alone. Let us be in your corner and zealously advocate for your physical and financial freedom. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation or call 800-681-1295.