Articles Posted in FBAR Violations

Nobody wants to file and pay taxes. However, the only thing worse than filing and paying taxes each year may be making a filing mistake that opens one up to an IRS tax audit or a criminal tax prosecution. Many times taxpayers may realize that they made an error on their initial filing. However what the individual does next could determine the consequences he or she may face. If, in a panic, the taxpayer attempts to conceal the error, she may have very well compounded her liability and make the possibility of facing severe tax consequences more likely. However, if the taxpayer discloses the error and corrects it she may be required to pay a relatively small penalty, but that could be the extent of the consequences.

Such was not the case for 46-year-old e-commerce entrepreneur, Gregg Kaminsky, who failed to pay taxes on money held in an undisclosed Swiss account and on income earned from the virtual world known as Second Life.

“I’m not a greedy criminal who set out to break the law”

In the past, having an interest in or signature authority over a foreign financial account did not attract the level of attention and scrutiny that it does today. This is because in the past foreign banking secrecy laws prevented even the disclosure of the identity of the account holder or holders and their links to the United States. Today, this no longer holds true. The IRS and the US government have expended significant resources in promoting and creating international regulatory and reporting regimes. FATCA provides a basis for the mandatory disclosure of certain asset types. Report of Foreign Bank Accounts (FBAR) through the Banking Secrecy Act (BSA) creates a disclosure obligation when the aggregate balance of a foreign financial account or accounts exceed $10,000.

What are the Penalties for Failure to comply with FBAR reporting requirements?

The penalties for failing to comply with FBAR requirements can be particularly harsh regardless of whether the violation is willful or non-willful. If your failure to comply with FBAR is considered non-willful, meaning that it did not involve an intentional or voluntary disregard of a known legal duty, you could face the potential penalty of $10,000 per an undisclosed account for every tax year where the account went unreported. If the violation involves a willful act, including willful blindness, then because there is a six year statute of limitations the penalty can rapidly eclipse the account balance. The penalty for a willful failure to comply with FBAR can result in the penalty of the greater of $100,000 or 50% of the account balance. Consider that if the original account balance was $200,000 a 50% penalty each year over the course of six years would result in the imposition of a penalty of $600,000 – triple the original balance.

At one point, banking secrecy laws in traditional tax havens were considered to provide ample protections in concealing the identity of the account holder. Wealthy individuals, companies, partnerships and a variety of other entities utilized these secrecy laws to open accounts where millions of dollars of otherwise taxable income could be surreptitiously funneled away to a foreign jurisdiction. For decades, this was considered business as usual by some individuals and the continued viability of these tax evasion strategies was not seriously questioned.

That has changed. The law today is clear: US taxpayers must disclose foreign assets of certain types and exceeding certain values or face penalties under FATCA. Furthermore, the failure to disclose certain foreign accounts in a Foreign Bank Account Report (FBAR) can result in additional penalties. The IRS and the US government have expended significant resources in eroding the protections provided by foreign banking secrecy laws. The risks of detection and civil or criminal prosecution has never been greater. In short, aside from being in clear violation of the US Tax Code, the benefits of secret foreign accounts no longer outweigh the risks of detection.

What is FATCA?

FBAR compliance mistakes and failures can be incredibly easy to make, but noncompliance carries harsh and significant financial penalties. In some instances where there is the appearance of fraud or willfulness, your tax matter may be referred to the IRS Criminal Investigation division (CI). Once your matter has been referred to CI, you should seek an experienced tax professional because criminal tax charges are likely to follow.

However, if you take deliberate, well-considered and strategic action before being audited or coming under investigation, you may be able to resolve you past FBAR problems. While there will almost certainly be some penalty associated with disclosing past non-compliance, these penalties are relatively mild in comparison to those that can be levied if civil or criminal tax charges are filed. The Brager Tax Law Group is dedicated to helping hard-working taxpayers resolve their FBAR problems and achieve compliance with the US tax system. The remainder of this post will analyze how FBAR failures can occur and potential solutions.

You did not understand when an FBAR filing is mandatory

FBAR reporting obligations require a US taxpayer holding $10,000 or more in a foreign financial account, at any moment in time during the tax year, to file a Report of Foreign Bank and Financial Accounts (FBAR). Once this obligation is known, at least in some contexts, the FBAR reporting requirement seems fairly obvious. Funds held in a foreign bank or securities that exceed $10,000 would rather clearly trigger an FBAR filing requirement. However, services provided over the Internet and hybrid services that can be used for multiple purposes can sometimes obscure these distinctions.

Such was the case in United States v. Hom, where online poker accounts and an online payment service triggered an FBAR obligation. This matter – which was pursued without a tax lawyer on a pro se basis – further emphasizes the value of representation by an experienced tax lawyer for FBAR and other international tax issues.

What were the facts in Hom?

Since January of 2014, those holding accounts in foreign banks throughout the world have received Foreign Account Tax Compliance Act (FATCA) letters from their financial institutions. These letters are sent to account holders whom the institution believes have a link to the United States that would give rise to tax reporting and payment obligations. These letters will request that the recipient provide information regarding their disclosures, if any, to the Internal Revenue Service (IRS). These disclosures typically include whether certain documents have been filed, including a Report of Foreign Bank and Financial Accounts (FBAR) and a 1040 personal return, and whether the individual has availed himself or herself of the Offshore Voluntary Disclosure Program (OVDP) administered by the IRS to resolve tax compliance problems.

If you have received such a letter, it is often essential that you seek the advice of a tax professional. Failure to do so can result in significant civil penalties or a referral for criminal tax prosecution. The Brager Tax Law Group can explain your legal situation and present potential solutions.

Why did I receive a FATCA letter?

Hong Kong has been conspicuously absent from the list of early signatories of the Foreign Account Tax Compliance Act (FATCA). That ended last month with Hong Kong announcing its long-awaited entrance into a Model 2 IGA with the US government. Covered Hong Kong-based financial institutions must now enter into separate foreign financial agreements (FFAs) with the IRS. This new agreement could result in some painful lessons for US taxpayers who have failed to report or pay taxes on their international assets. The remainder of this post will analyze the IGA announced by US and Hong officials and some of the potential consequences of such an agreement.

What conditions does this IGA impose on Hong Kong Financial Institutions?

All foreign financial institutions falling under the purview of FATCA — including investment entities, banks, insurance companies and custodial institutions – are required to register with the IRS. Aside from registration with the US taxing authority, the foreign financial institutions must comply with the terms of the IGA. Failure to adhere to these terms can result in a 30% withholding tax being imposed on relevant payments that originated in the United States.

Many people assume that when the IRS discusses or references “willful” conduct, the agency is using the term “willful” in its ordinary sense. Unfortunately, while ignorance may be an excuse, those who fail to rely on the advice and guidance of an experienced tax professional, may find themselves embroiled in serious tax problems. While the IRS presents the Streamlined Offshore Voluntary Disclosure Program (OVDP) as a means to avoid civil prosecution and fines, failure to understand the program’s requirements caused by not consulting a tax lawyer can result in harsh civil consequences or even a referral for a criminal tax prosecution.

What does the IRS consider to be willful and non-willful conduct?

For purposes of the Streamlined OVDP, non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. While this standard may appear to a layperson to offer non-compliant taxpayers a quick and easy path out of tax compliance problems, the reality is that the standard is much more stringent.

Several months ago the Brager Tax Law Group requested IRS documents through a Freedom of Information Act (FOIA) request, which was filed on behalf of the TaxProblemAttorney Blog.com. The Brager Tax Law Group received a CD in response to this FOIA request. Out of the 7,092 responsive pages, the IRS sent over 6,500 pages and withheld the rest. This information was published on the Brager Tax Law Group website in November. The requested documents included material used in training IRS personnel in the Offshore Voluntary Disclosure Program (OVDP), determining Program penalties and instructing IRS employees on the Program. The purpose of the OVDP program is for individuals who have failed to file an FBAR (Foreign Bank and Financial Accounts Report) form with the IRS, or didn’t report income from offshore activities to disclose their errors and to avoid criminal tax prosecution. The OVDP’s current penalty is 27.5 percent, but there are other alternatives available to certain taxpayers which may provide additional relief.

The OVDP is a complex program with countless rules; at times these rules may be conflicting. What complicates these OVDP rules are the “technical advisors” who review decisions that are made by individual revenue agents. Instead of being approved by the courts, these decisions are approved by these unknown advisors. The IRS does not disclose the identities of these technical advisors, which then doesn’t allow tax attorneys and their clients to communicate with these advisors directly. This material may shed some light on how decisions are being made.

The Brager Tax Law Group submitted a FOIA request in April and received the files about six months later. These files were stored on a password protective CD. These thousands of pages can be found on the Brager website on the offshore bank account problems page.

Our tax lawyers have reviewed the IRS’ newly issued FAQs for its Delinquent International Information Return Submission Procedures, the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States (SDOP), and the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP). These programs are first cousins of the IRS’ Offshore Voluntary Disclosure Program (OVDP), but technically are not part of OVDP, and are options for individuals who have failed to report income from offshore bank accounts, and who may have failed to file a Foreign Bank Account Reports, FinCEN Form 114, formerly TDF 90-22.1 (FBAR) or other international information reporting returns.

Perhaps the most disturbing FAQ is the one issued for the Delinquent International Information Return Submission Procedures. The procedures replace former OVDP FAQ 18, and became effective July 1, 2014. Under old FAQ 18, if a taxpayer failed to file an information reporting form, but had reported all taxable income, and paid all the tax the IRS would not impose a penalty. Under the new Delinquent International Information Return Submission Procedures however, even if all income has been reported, and taxes paid, the taxpayer must submit a “reasonable cause statement” with each delinquent information return. Before the issuance of the new FAQ, many tax attorneys believed (hoped?) that if a taxpayer met the requirements of old FAQ 18 that no penalty will be imposed without regard to whether there was reasonable cause.

The FAQ makes clear that if the IRS does not accept the reasonable cause statement then penalties will be imposed. The FAQ states that the reasonable cause determination will be based upon longstanding authorities, and cites to Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3). The FAQ suggests that a statement of facts made under penalties of perjury should be included with the late filed returns.