Argue for No Penalty and a Warning Letter for FBAR Violations

The IRS may send a warning letter in lieu of asserting penalties for failure to file a Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” if it would be sufficient to bring the individual into compliance, an IRS official recently said.

Jason Kuratnick, IRS associate area counsel (Philadelphia), Small Business/Self-Employed Division, explained that the Office of Chief Counsel reviews every proposed FBAR penalty. “Our office is involved early” and is ensuring that adequate facts exist to support the proposed assessment, said Kuratnick. Once chief counsel approves an FBAR penalty, it stands behind it, he added. Kuratnick spoke on a panel at the IRS Eastern Pennsylvania Working Together Conference in Malvern, Pa.

The largest penalties apply to persons who willfully violate FBAR requirements and include up to 50 percent of the value of the account that is not reported. Kuratnick said that when applying the willfulness penalty, the IRS looks for circumstantial evidence that the taxpayer had knowledge of a filing obligation, such as a prior warning letter or penalties. If a person who conducts all his banking in the U.S. decides to open an account in a foreign country, the IRS will be interested in the reasons for opening the account. It will also consider whether the account is inherited and how the taxpayer treated other inherited accounts.

Under IRM 4.26.16.4  (FBAR Penalties) (07-01-2008) whenever there is an FBARviolation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future. Under IRM 4.26.16.4, examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted.

In some of our cases, the Taxpayer failed to timely file FBARs as a result of a misunderstanding of fact or law that is reasonable in light of Taxpayers’ advanced age, disability, and lack of knowledge, education and sophistication.  Through the OVDP, our client has also filed all delinquent FBARs. Therefore, in some cases, the issuance of FBAR warning letter 3800, rather than the assertion of a penalty, will achieve the IRS’ desired result of improving compliance in the future.

Our law firm expects unabated aggressive enforcement of the US tax laws, including increased criminal prosecutions and civil audit examinations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

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