Tax Law Center Blog

Following the IRS’ successful 2009 and 2011 offshore voluntary compliance initiatives, tax professionals should expect an increase in IRS examination activity of taxpayers who did not enter into these compliance initiatives. Approximately 30,000 taxpayers entered into the initiatives. There are hundreds of thousands that the IRS suspects are not in compliance.

The IRS has a fertile source of leads to taxpayers who are not in compliance—from the offshore voluntary compliance submissions submitted (which often leads to other taxpayers and advisors thereto) and from banks such as UBS and HSBC who have turned over the identifying information regarding thousands of taxpayers pursuant to the “John Doe” summons. Our recent informal discussions with IRS and Department of Justice officials indicate that several other pending summonses.  Some other helpful leads include criminal enforcement initiatives by the Department of Justice (which result in foreign banks being required to turn over information on U.S. taxpayers pursuant to Deferred Prosecution Agreements) and using recent FATCA legislation, which starting this year will force many foreign banks to disclose their U.S. account holders or be subject to a potentially punitive withholding tax regime.

As a result, information is rapidly flowing to the IRS and tax professionals should be prepared for numerous IRS audits. Most of the audits will be income tax return audits seeking the unreported foreign income. These audits will likely identify the non-filing of Report of Foreign Bank and Financial Accounts, TD F 90.22-1 (FBAR) forms.

The failure to file the FBAR forms could result in significant consequences. If it is determined that if a taxpayer has an unreported foreign bank account, there can be a number of many different consequences—depending on whether the IRS determines there was a violation, a violation which should not be penalized, a violation subject to a penalty or a violation which warrants a referral to the IRS Criminal Investigation Division.

Critical to any FBAR examination are issues surrounding willfulness, which directly impacts the imposition of penalties.  To establish a willful violation for purposes of the civil FBAR penalty under 31 USC §5321 or to sustain the heavy burden of proof to obtain a criminal conviction under 31 USC §5322, the government must establish “a voluntary intentional violation of a known legal duty.” The government must prove that the taxpayer was aware of the requirement to fi le the FBAR and intentionally failed to do so (or fi led a false FBAR).  Unless there is a confession, the government will rely on circumstantial evidence and infer willfulness based on a course of conduct.  Willfulness is difficult to prove and our law firm has aggressively defended numerous FBAR cases resulting in a non-willfulness finding.

A skilled tax attorney should carefully monitor an FBAR case and be proactively engaged if the IRS examiner is considering asserting penalties.  Our firm aggressively defends taxpayers, including making appropriate legal submissions on whether there was a violation and, if so, whether there was reasonable cause for the violation.  Our submissions aim to convince the IRS examiner (and the IRS examiner’s supervisors) for the imposition of low or no penalties.

Meetings with the examiner and the IRS examiner’s supervisor may be helpful in appropriate circumstances to further advocate the taxpayer’s legal position.

Since the penalty for willful failures carries a high burden of proof which the government must meet to sustain the penalty and the amount of the penalty may depend on the taxpayer’s degree of culpability under the IRS’s penalty mitigation guidelines, there is significant opportunity at the IRS examination stage for a skilled tax attorney to influence a more favorable outcome of the examination in favor of the taxpayer.

Patel Law Offices has consulted with hundreds of clients regarding their FBAR compliance issues. 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.