By: Howard Epstein
While FBAR reporting requirements have been in place since 1970, the significant revisions to the form (in 2008) and associated penalties for non-compliance are what have garnered the attention of many taxpayers and practitioners over the last few years. The IRS has taken steps to allow individuals who have not filed timely in the past to come forward- the Offshore Voluntary Disclosure Program (OVDP), and the Streamlined Program.
Negotiating FBAR Penalties
Those who decide to voluntarily step forward need to keep a few things in mind in negotiating penalties. Here are some essentials you should be discussing with your CPA as you negotiate FBAR penalties.
· Penalties can be astounding – While FBAR penalties can be unjust, remember that the IRS bases penalties on the account size. When dealing with FBAR penalties, there is tremendous risk and you must take this seriously. These penalties are unlike many other IRS penalties out there.
· There is no “good” penalty- The “get off lightly” FBAR penalty is $10,000 per foreign account. The penalty is assessed if the IRS feels you did “not willfully” fail to file your FBAR and you made an “innocent mistake”. For example, if you have six foreign accounts that you don’t report on your FBAR, the IRS can penalize you $60,000 per year! The “disastrous penalty” is 50% of the account value and can be assessed if the IRS feels you intentionally or “willfully” avoided filing your FBARs. Similarly, the “disastrous” FBAR penalty can also be assessed multiple times meaning the IRS can assess FBAR penalties that can potentially wipe out your entire net worth! One important point is that there are certain penalty mitigation provisions that the IRS can apply based on the facts and circumstances of your case. But you should also be mindful to the fact that a “willful” violation can result in jail time! These matters should not be taken lightly.
· “Burden of proof”- It is up to the taxpayer to prove non-willfulness or reasonable cause. Once you are in the program you are obligated to pay the penalty the IRS deems necessary. There may be certain strategies that can be employed such as entering a OVDP or Streamline program and then “opting-out”. These are options that should be weighed heavily and discussed thoroughly with a CPA.
· You can appeal to a higher authority- Yes, you can “claim” you day in court, but you should exhaust all administrative remedies first. Or you can attempt to pay all assessments, and then file a suit for refund in US District Court. Again this option should be thoroughly discussed with a CPA. Exhausting administrative remedies within the IRS appeals process is usually the best option. Our experience shows that clients don’t have to pay FBAR penalties until the end, and can be successful with alternative administrative remedies, making tax court unnecessary.
· The OVDP Route- Unlike past Voluntary Disclosure Programs, the main purpose of the FBAR OVDP is to create a consistent and standardized format for dealing with the potentially ugly or disastrous FBAR penalties. This is why it is important to use the OVDP as a starting point to minimize your FBAR penalty exposure. By initially going through the OVDP, you will get a much more favorable review when discussing your potential “FBAR reasonable cause” position. Outside the OVDP, the ground is much less sturdy and you will find the IRS does not treat people who they catch (whether innocently or those who made an ill-advised “soft” or “quiet” disclosure) as favorably as those who have come forward under the OVDP. The main advantage of the OVDP is that it can serve as a springboard to limit the potentially staggering penalties to 27.5% of your highest balance and then provides you a mechanism to “opt-out” of the OVDP and work with a revenue agent to apply the various Penalty Mitigation provisions discussed above.
At Freed Maxick, we try to gain an understanding of the issues you face. We have considerable experience in helping taxpayers that have not been historically compliant, to navigate the IRS guidelines and minimize their potential penalties through the various Voluntary Disclosure Programs that are available. We work with individuals and businesses in the U.S. and throughout the world, on addressing all of their International tax issues. For a confidential discussion of your FBAR situation, call us at 716.847.2651 (or toll free at 800.777.4885), or complete and submit the online form for more information.
If you’re not familiar with the term FBAR by now, then you are among the few that are able to resist blogs, media, television and newspapers. FBAR’s have been all over the news, as the IRS has a new focus on FBAR penalty enforcement. W hen determining if you should file the FBAR, all foreign (non-US) financial accounts must be aggregated using their highest value during the calendar year. A common misconception is that if a single account is under $10,000, no filing is required and this may not necessarily be the case. Additionally, filings are required even if the foreign account does not produce income.