FBAR Willful Penalties Issue if You Leave Voluntary Disclosure

FBAR Willful Penalties Issue if You Leave Voluntary Disclosure

FBAR Willful Penalties Issue if You Leave Voluntary Disclosure

At Golding & Golding, our international tax law specialist team has represented thousands of taxpayers in offshore disclosure matters. It is very common for taxpayers to get nervous or even cold feet at around the time of submission. But, when a person submits to the IRS voluntary disclosure program and then prematurely exits the program and/or opt-out of the penalty, they risk becoming subject to excessive fines and penalties. That is because under the IRS voluntary disclosure program procedures – – as opposed to other non-willful alternative procedures such as the streamlined procedures – the taxpayer acknowledges that they are willful. As a result, they become subject to willfulness penalties, and these types of FBAR penalties can be significant. Look at the recent case of US v Leeds.

Taxpayer Misrepresented Foreign Accounts to his Accountant

      • The aggregate balance of Account One exceeded $10,000 for 2006-2009, and the  aggregate balance of Account Two exceeded $10,000 for 2006-2012. Accordingly, Mr. Leeds was required to file FBARs for these accounts for these years.

      • Mr. Leeds failed to file any FBARs for the 2006-2012 years.

      • Accounts One and Two also generated interest, qualified dividends, and capital gains and other income during the 2006-2012 years, but Mr. Leeds also failed to report all of this income on his federal income tax returns for these years.

      • Mr. Leeds’ 2006-2012 federal income tax returns were prepared by CPA Joan Leanos.

      • Ms. Leanos provided her clients, including Mr. Leeds, with tax organizers, which contained questions about foreign accounts.

      • Mr. Leeds answered “No” to the questions in these organizers about whether he had any foreign accounts.

      • Mr. Leeds admitted to Ms. Leanos that he had a foreign source of income, and asked Ms. Leanos whether money in a foreign account was taxable. Ms. Leanos specifically advised him to see a tax attorney, but he did not follow her advice.

      • Mr. Leeds’ federal income tax returns for 2006-2012 reported on Schedule B that

      • Mr. Leeds did not have any interest in any foreign bank accounts.

Taxpayer Miscalculated the Risk of Opting Out of OVDP

      • In December of 2014 Mr. Leeds applied to participate in the IRS’s Offshore Voluntary Disclosure Program and was initially accepted.

      • In March of 2015 Mr. Leeds filed delinquent FBARs for 2006-2012 as part of the OVDP requirements. These FBARs used account values determined at year’s end.

      • In October of 2016 Mr. Leeds filed a second set of FBARs for 2006-2012, to correct the account values. The account values used for this set of FBARs reported maximum account values.

      • In April 2018 Mr. Leeds opted out of the OVDP and an IRS examination commenced.

      • In October 2019 the IRS issued Letter 3709 to Mr. Leeds informing him of proposed willful FBAR penalty assessments. Mr. Leeds protested the proposed assessments and requested consideration by the IRS Independent Office of Appeals, which upheld the assessments.

      • On September 4, 2020 the willful FBAR penalties were assessed in the total amount of $1,518,883 for years 2006-2012.

      • The total willful FBAR penalties were calculated to be 50% of the highest aggregate balance of Accounts One and Two, which was $3,037,768 in 2011.

Timely IRS Enforcement Action

      • The statute of limitations for the assessment of an FBAR penalty is six years from the date of the violation. 31 U.S.C. §5321(b)(1). The violation dates relevant to this action are June 30 of the year following the calendar year for which a report needed to be made. 31 C.F.R. §1010.306(c).

      • Mr. Leeds, however, consented to extend the statute of limitations for assessing the FBAR penalties at issue multiple times. The latest consent was on October 18, 2019, and it extended the time to assess the FBAR penalties to June 30, 2021. The assessment of the penalties on September 4, 2020 was therefore timely.

      • A suit to reduce to judgment FBAR penalties must be brought within two years from the date of assessment (in this case, September 4, 2020) to be timely. 31 U.S.C. § 5321(b)(2). This suit is therefore timely.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

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