TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Foreign bank account report filings with the U.S. government surpassed the 1 million mark during 2015, according to a recent IRS announcement. In 2015, Treasury Department’s Financial Crimes Enforcement Network (FinCen) received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. Incredibly, FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data.

“Taxpayers here and abroad need to take their offshore tax and filing obligations seriously,” said IRS Commissioner John Koskinen.” Improving offshore compliance has been a top priority of the IRS for several years, and we are seeing very positive results.” U.S. taxpayers with foreign accounts exceeding certain thresholds must electronically file Form 114, Report of Foreign Bank and Financial Accounts (commonly referred to as the “FBAR,” previously Form TD F 90-22.1) with FinCen.

Filings of IRS Form 8938, Statement of Specified Foreign Financial Assets, have generally remained consistent in recent years, hovering around 300,000 filings for 2014 and 2013 (it is filed with the taxpayers income tax return), and up from about 200,000 for tax year 2011, the first year Form 8938 was required to be filed.

OVERVIEW OF FBAR FILING REQUIREMENTS. Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must file FBARs. A U.S. person may have a reporting obligation even though the foreign financial account does not generate any taxable income. Taxpayers also report their interest foreign financial accounts by (1) completing boxes 7a and 7b on Form 1040 Schedule B; box 3 on the Form 1041 “Other Information” section; box 10 on Form 1065 Schedule B; or boxes 6a and 6b on Form 1120 Schedule N.

The calendar year 2015 FBAR is due by June 30, 2016 and must be filed electronically through the FinCen BSA E-Filing System website. The calendar year 2016 FBAR is due by April 15, 2017 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5 (the reference to Treas. Reg. section 1.6081–5 allows for the coordination of the FBAR due date to the June 15 deadline (after automatic extension) for the coordinating income tax return).

SEPARATE REPORTING REQUIREMENTS BY U.S. TAXPAYERS HOLDING FOREIGN FINANCIAL ASSETS (FORM 8938). Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. The Form 8938 filing requirement does not replace or otherwise affect the requirement to file FBAR. A chart providing a comparison of Form 8938 and FBAR requirements, and other information to help taxpayers determine if they are required to file Form 8938, may be accessed from the IRS Foreign Account Tax Compliance Act Web page

Taxpayers living in the U.S. must report specified foreign financial assets on Form 8938 (filed with their income tax return) if the total value of those assets exceeds $50,000 at the end of the tax year or if the total value was more than $75,000 at any time during the tax year for taxpayers filing as single or married filing separately (or if the total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year for taxpayers filing as married filing jointly).

Generally, for those living outside the U.S. (for an uninterrupted period that includes an entire tax year or who are present in a foreign country or countries at least 330 full days during any consecutive 12 month period that ends in the tax year being reported), Form 8938 must be filed if the total value of such assets exceeds $200,000 at the end of the tax year or if the total value was more than $300,000 at any time during the tax year for taxpayers filing as single or married filing separately (or if the total value of specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year for taxpayers filing as married filing jointly).

FBAR PENALTIES. The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The statutory civil penalties might be $10,000 per year for a non-willful failure but a willful failure to file could, by statute, be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years. Non-willful penalties might be avoided if there is “reasonable cause” for the failure to timely file the FBAR.

Generally, the IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes have been timely paid on the U.S. tax return, and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

RECENT GUIDANCE LIMITING FBAR PENALTIES. The IRS recently issued interim guidance to implement procedures to improve the administration of the Service’s FBAR other than determinations arising from participation in the ongoing IRS Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. Penalties determined under the IRS OVDP or the Streamlined Procedures are referred to as a “miscellaneous penalty” (rather than an “FBAR penalty”) determined in lieu of all the problems a taxpayer is avoiding by coming into the OVDP or filing through the Streamlined Procedures.

The statutory FBAR penalty provisions only establish maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount below that threshold based on the facts and circumstances of each case. In this regard, IRS examiners are instructed to use their best judgment when proposing FBAR penalties, taking into account all the available facts and circumstances of a case.

(a). Willful FBAR Violations. For cases involving willful violations over multiple years, IRS examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation for each year.

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. The IRS guidance provides that in no event will the total willful penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

(b). Nonwillful Violations. For most cases involving multiple nonwillful violations, examiners are told to recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts. In those cases, the penalty for each year will be determined based on the aggregate balance of all unreported foreign financial accounts, and the penalty for each year will be limited to $10,000.

For some cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval, may assert a single penalty, not to exceed $10,000, for one year only.

For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval, may assert a separate penalty for each account and for each year.

The IRS guidance provides that in no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination. A nonwillful penalty will not be recommended if the examiner determines that the FBAR violations were due to reasonable cause and the person failing to timely file correct and complete FBARs later files correct and complete FBARs.

(c). IRS Mitigation Guidelines. In determining the appropriate penalty, IRS examiners are to first determine whether the mitigation threshold conditions in Internal Revenue Manual are satisfied. If the mitigation threshold conditions are met, examiners are to make a preliminary penalty calculation based upon the mitigation guidelines in IRM, except that the penalty for each year will be limited to $10,000. Unless the facts and circumstances of a case warrant a different penalty amount, this is the penalty amount to be asserted.

If the IRM mitigation threshold conditions are not met, the mitigation guidelines do not apply and examiners are told to not make a preliminary penalty calculation based upon the guidelines. Examiners, with the group manager’s approval, are told to assert a separate penalty for each account and for each year. However, the IRS guidance provides that in no event will the total amount of the nonwillful penalties exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.

(d). Co-Owned Accounts. Where there are multiple owners of an unreported foreign financial account, the IRS guidance provides that examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. For each co-owner against whom a penalty is determined, the penalty will be based on the co-owner’s percentage ownership of the highest balance of the foreign financial account. If examiners are unable to determine a co-owner’s percentage ownership, the penalty will be based on the amount determined by dividing the highest account balance equally among the co-owners.

ELECTRONIC FBAR FILING REQUIRED. Generally, all FinCEN forms must be filed electronically. E-filers will receive an acknowledgement of each submission. The online FinCEN Form 114 allows the filer to enter the calendar year reported, including past years.

The FinCEN system also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program. For longer explanations, some practitioners provide an online statement indicating that a more in depth factual explanation is in the possession of the filers counsel and is available upon request.

VERIFICATION OF FBAR FILING. Ninety days after the date of filing, the filer can request verification that the FBAR was received. An FBAR filing verification request may be made by calling 866-270-0733 and selecting “option 1.” Up to five documents may be verified over the phone. There is no fee for this verification. Alternatively, an FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number and the filing period.

RECORD KEEPING REQUIREMENTS. Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period. The records must be retained for a period of 5 years from the required filing date and must be available for inspection as provided by law. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements.

DELINQUENT FIING OPTIONS. Taxpayers who have are not in compliance with their reporting and filing options regarding undeclared interests in foreign financial accounts and assets are faced with various options to come into compliance.

(a).       The OVDP. Taxpayers participating in the ongoing 2014 OVDP generally agree to file amended returns and file Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1), commonly referred to as the “FBAR,” for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years.

The OVDP is designed for taxpayers seeking certainty in the resolution of their previously undisclosed interest in a foreign financial account. For those who might be considered to have “willfully” failed to timely file an FBAR or similar, the OVDP avoids exposure to numerous additional penalties associated with the income tax returns and various required foreign information reports, a detailed examination, and limits the number of tax years at issue while also providing certainty with respect to the avoidance of a referral for criminal tax prosecution.

(b).       Streamlined Procedures for Non-Willful Violations. In addition to the OVDP, the IRS maintains other more streamlined procedures designed to encourage non-willful taxpayers to come into compliance. Taxpayers using either the Streamlined Foreign Offshore Procedures (for those who satisfy the applicable non-residency requirement)^[9] or the Streamlined Domestic Offshore Procedures^[10] are required to certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to “non-willful” conduct.

For these Streamlined Procedures, “non-willful conduct” has been specifically defined as “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.” For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the Streamlined Foreign Offshore Procedures. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue under the Streamlined Domestic Offshore Procedures.

Even if returns properly filed under the Streamlined Procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

( c).      Delinquent FBAR Submission Procedures. Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs, should file the delinquent FBARs according to the FBAR instructions. FBARs will not be automatically subject to audit but may be selected for audit through the existing IRS audit selection processes that are in place for any tax or information returns. 

            (d).      Delinquent International Information Return Submission Procedures. Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. Delinquent information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing IRS audit selection processes that are in place for any tax or information returns.

Those directly involved in creating and maintaining the foreign account and assets are the only ones capable of determining their potential non-willful status. If such status is not supported by sufficient objective facts, consider other methods of coming into compliance, including the OVDP

NEED FBAR FILING HELP? Assistance regarding the electronic filing of an FBAR is available at BSAEFilingHelp@fincen.gov or through the BSA E-Filing Help Desk at 866-346-9478. The E-Filing Help Desk is available Monday through Friday from 8 a.m. to 6 p.m (Eastern Time).

Help in completing an FBAR is available by telephone at 866-270-0733 (toll-free within the U.S.) or 313-234-6146 (from outside the U.S., not toll-free) from 8 a.m.—4:30 p.m. Eastern time, or by sending an e-mail to FBARquestions@irs.gov.

Additional information, including Frequently Asked Questions, is available.