Foreign Bank Account Reporting (FBAR) laws require U.S. residents to disclose the existence of bank, brokerage and various financial accounts at foreign financial institutions if the U.S. resident owns or has signature authority over the account and the cumulative offshore account balance reached $10,000 at any point during the reporting calendar year. The deadline for such reporting coincides with a taxpayers individual U.S. federal income tax return and can be extended by extending the personal tax return.
One of the most hotly debated questions with regard to enforcement of FBAR laws is the definition of “willful”. The distinction between the two can mean financial penalties that could ruin a taxpayer and even result in up to a decade-long stay in a federal prison.
A taxpayer that is required to disclose the existence of a foreign bank, brokerage or financial account but non-willfully fails to do so is subject to a $10,000 penalty per year the foreign bank account goes unreported (maximum of 6 years or $60,000). Although painful, many taxpayers can bounce back from a non-willful civil penalty. On the other hand, taxpayers who are found to have willfully failed to comply with FBAR laws are subject to a penalty that is the greater of $100,000 or 50% of the high-balance of the foreign bank account that was undisclosed during the six-year statute of limitations. For taxpayers with bank accounts with millions of dollars in them, the willful FBAR penalty can be like an atomic bomb, thrusting a taxpayer into financial turmoil. And as if the civil penalty for willfulness was not enough, the case may be referred to the Department of Justice for criminal prosecution. If convicted, a taxpayer who is found to have willfully violated FBAR laws could spend up to a decade in prison.
For several years, the IRS refused to set forth a concrete definition of willful. Instead, they simply began imposing harsh willful penalties on those who they thought willfully failed to comply with FBAR laws. Since then, federal courts around the country have been defining willful, one case at a time. By looking at a few of those cases, this is what practitioners currently know:
the inquiries about foreign bank accounts on Schedule B.
which satisfies the legal definition of willfulness.
that the taxpayer either had knowledge of the law and violated it or engaged in reckless
When a taxpayer receives notice that his or her tax return has been selected for examination, they will typically meet with an IRS agent to discuss the items that the IRS has flagged. In the case of potential FBAR violations, a taxpayer will still meet with an IRS field agent, but the examination is not necessarily focused on taxable income or other items typically scrutinized on a tax return, but instead on whether the taxpayer (1) was required to disclose a foreign bank account per the FBAR laws, and if so (2) was the taxpayer’s failure to do so willful or not.
Once the IRS field agent makes his or her determination, the taxpayer may utilize their right to an administrative appeal. Appeals at the IRS are conducted through a settlement conference with an IRS appeals officer. These IRS employees are tasked with offering ways for taxpayers to settle their dispute without going to trial. In some cases, the appeals officer will offer a reduced settlement based on the IRS’s “hazards of litigation”, a fancy way of identifying the chances that the IRS may lose at trial. If the IRS has a solid case against a client, there is a chance that the appeals officer may not offer a reduced settlement at all.
In the case of FBAR violations, recent case law has favored the IRS and their interpretation of the willfulness standard. Knowing that the IRS is in a favorable litigating position, the IRS appeals officer may be unwilling to offer a reasonable settlement because hazards of litigation are low. This evidences the need to avoid the initial classification of a willful FBAR violation at the very first meeting with the IRS field agent.
It goes without saying that consulting with an experienced tax attorney as soon as you receive notice that your FBAR compliance is being questioned is critical. A tax attorney that focuses on foreign bank account reporting compliance will help you put together the documentation needed to show the IRS field agent that even though you indeed were not in FBAR compliance, your omission was non-willful. Because the IRS field agents are likely less familiar with the intricacies of the case law surrounding the FBAR willfulness standard, your experienced FBAR attorney will also endeavor to persuade them, where possible, as to why your set of circumstances does not fall into the willfulness fact patterns affirmed by the courts.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers from all walks of life who are looking to come into compliance with FBAR laws or who are the subject of an FBAR-related examination or investigation. Our team of zealous advocates are ready to assist you develop an effective strategy aimed at preserving your physical and financial freedom. These include the new version of the offshore voluntary disclosure procedures (OVDP) where extensive badges of fraud are in your fact pattern, the expat and domestic streamlined offshore procedures where there are no badges of fraud and delinquent offshore reporting with penalty abatement if no offshore income was omitted. Do not let the threat of life-altering civil penalties or federal prison time keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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