The IRS may send a warning letter in lieu of asserting penalties for failure to…
OVDI: Requesting issuance of a FBAR warning letter instead of penalties
In a Tax Notes Today report of statements made at the Eastern Pennsylvania Working Together Conference in Malvern, PA, Jason Kuratnick, IRS Associate Area Counsel (Philadelphia), Small Business / Self-Employed Division is reported to have said:
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 said May 17. See Matthew Dalton, IRS May Issue Warning Letters on FBARs Instead of Penalties, 2012 TNT 97-3 (5/18/12).
The statement is too vague make any conclusions and certainly is not a definitive statement of the IRS position. In terms of background, IRS agents should generally either issue the FBAR warning letter, Letter 3800, or determine a penalty. See IRM 4.26.17 for the Letter 3800 procedures. See below.
Depending on the circumstances, we sometimes recommend some taxpayers to opt out of the voluntary disclosure initiative and allow us to demonstrate the absence of willfulness and avoid the normal FBAR penalty regime. In doing so we have been advocating for the IRS Agent to issue the FBAR warning letter instead of penalties.
- The IRS has been delegated authority to assess FBAR civil penalties.
- There are civil penalties for negligence, pattern of negligence, non-willful, and willful violations.
- Whenever there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty. See IRM 4.26.17 for the Letter 3800procedures .
- 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.
- FBAR civil penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.
- Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are only intended as an aid for the examiner in determining an appropriate penalty amount. The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case. For example, if an individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts but the income from each account was properly reported and the taxpayer made no effort to conceal the existence of the account, it may be more appropriate to issue a warning letter rather than assert penalties under the mitigation guidelines.
- FBAR penalties are determined per account, not per unfiled FBAR, for each person required to file. Penalties apply for each year of each violation. As noted above, however, examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted.
- There may be multiple FBAR civil penalty assessments arising from one account. FBAR civil penalties can apply to each person with a financial interest in, or signature or other authority over, the foreign financial account. Thus there may be multiple penalty assessments if there is more than one account owner or if a person other than the account owner has signature or other authority over the foreign account. Each person can be liable for the full amount of the penalty.
In the meantime, 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. Taxpayers, who have not done so already, should explore the OVDP program to avoid criminal prosecutions and civil audit examinations.
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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