The Foreign Bank Account Reports (FBARS), FINCEN Form 114, (this form was previously designated as TDF 90-22.1), has again been roundly criticized by the tax litigation attorneys have known for years: that the OVDP is unfair in both design and application.
In lieu of the OVDP, the Taxpayer Advocate has recommended a disclosure system which divides FBAR non-filers into three categories.
Category 1. Full relief from FBAR and information reporting penalties.
This would be available to those who underreported income by a de minimis amount, defined at least as high as the IRC Section 6662(d) threshold which is the greater of $5,000 in tax or 10% of the tax required to be shown.
Category 2. Taxpayers who have reasonable cause or who acted non-willfully.
Taxpayers who underreported more than the de minimus amount, but who believe they have reasonable cause or who acted non-willfully would be required to file delinquent returns, pay any applicable tax, interest and penalties under Title 26 (unless asserting reasonable cause). Depending on the circumstances and the taxpayer’s explanation, these taxpayers should be required to pay either the non-willful FBAR penalty or no penalty under the reasonable cause exception. The IRS would audit some, but not all of these submissions.
Category 3. Taxpayers not included in Category 1 or 2. Taxpayers who do not fall into categories one or two would be penalized under the current OVDP structure which generally provides for a 27.5 percent penalty.
In the opinion of our tax lawyers, while the recommendation is a vast improvement over the current OVDP, it is still problematic. The biggest advance is the addition of Category 1 for taxpayers who only have minimal tax amounts due. Our tax attorneys have met with many taxpayers since 2009 who were not good candidates for the existing OVDP, because after the application of foreign tax credits or expenses from the rental of real estate, the tax due was a few hundred dollars or even a few thousand dollars. Yet, these taxpayers are exposed to penalties ranging from $100,000 to several million dollars if they were to enter the OVDP and not opt-out.
The problem with Category 2 is that it provides for tax audits of some percentage that elect this category. What will happen to those who file under Category 2, but are determined by the IRS to have acted willfully? Will they be able to fall back into Category 3 or will they be subjected to possible multiple 50 percent willfulness penalties? Also for those taxpayers who are non-willful, but who have made many accounts, will they be subjected to a $10,000 non-willful penalty for each year and each account? That is the IRS’ current position for OVDP opt-outs.
There is no indication that the IRS is ready to adopt the Taxpayer Advocate’s recommendation, so in the meantime, if you have an unreported foreign bank account, contact the tax controversy attorneys at Brager Tax Law Group, A P.C. for a confidential consultation about all of your options.