Articles Posted in Tax Litigation and Tax Controversy

FBAR compliance mistakes and failures can be incredibly easy to make, but noncompliance carries harsh and significant financial penalties. In some instances where there is the appearance of fraud or willfulness, your tax matter may be referred to the IRS Criminal Investigation division (CI). Once your matter has been referred to CI, you should seek an experienced tax professional because criminal tax charges are likely to follow.

However, if you take deliberate, well-considered and strategic action before being audited or coming under investigation, you may be able to resolve you past FBAR problems. While there will almost certainly be some penalty associated with disclosing past non-compliance, these penalties are relatively mild in comparison to those that can be levied if civil or criminal tax charges are filed. The Brager Tax Law Group is dedicated to helping hard-working taxpayers resolve their FBAR problems and achieve compliance with the US tax system. The remainder of this post will analyze how FBAR failures can occur and potential solutions.

You did not understand when an FBAR filing is mandatory

FBAR reporting obligations require a US taxpayer holding $10,000 or more in a foreign financial account, at any moment in time during the tax year, to file a Report of Foreign Bank and Financial Accounts (FBAR). Once this obligation is known, at least in some contexts, the FBAR reporting requirement seems fairly obvious. Funds held in a foreign bank or securities that exceed $10,000 would rather clearly trigger an FBAR filing requirement. However, services provided over the Internet and hybrid services that can be used for multiple purposes can sometimes obscure these distinctions.

Such was the case in United States v. Hom, where online poker accounts and an online payment service triggered an FBAR obligation. This matter – which was pursued without a tax lawyer on a pro se basis – further emphasizes the value of representation by an experienced tax lawyer for FBAR and other international tax issues.

What were the facts in Hom?

Since January of 2014, those holding accounts in foreign banks throughout the world have received Foreign Account Tax Compliance Act (FATCA) letters from their financial institutions. These letters are sent to account holders whom the institution believes have a link to the United States that would give rise to tax reporting and payment obligations. These letters will request that the recipient provide information regarding their disclosures, if any, to the Internal Revenue Service (IRS). These disclosures typically include whether certain documents have been filed, including a Report of Foreign Bank and Financial Accounts (FBAR) and a 1040 personal return, and whether the individual has availed himself or herself of the Offshore Voluntary Disclosure Program (OVDP) administered by the IRS to resolve tax compliance problems.

If you have received such a letter, it is often essential that you seek the advice of a tax professional. Failure to do so can result in significant civil penalties or a referral for criminal tax prosecution. The Brager Tax Law Group can explain your legal situation and present potential solutions.

Why did I receive a FATCA letter?

Hong Kong has been conspicuously absent from the list of early signatories of the Foreign Account Tax Compliance Act (FATCA). That ended last month with Hong Kong announcing its long-awaited entrance into a Model 2 IGA with the US government. Covered Hong Kong-based financial institutions must now enter into separate foreign financial agreements (FFAs) with the IRS. This new agreement could result in some painful lessons for US taxpayers who have failed to report or pay taxes on their international assets. The remainder of this post will analyze the IGA announced by US and Hong officials and some of the potential consequences of such an agreement.

What conditions does this IGA impose on Hong Kong Financial Institutions?

All foreign financial institutions falling under the purview of FATCA — including investment entities, banks, insurance companies and custodial institutions – are required to register with the IRS. Aside from registration with the US taxing authority, the foreign financial institutions must comply with the terms of the IGA. Failure to adhere to these terms can result in a 30% withholding tax being imposed on relevant payments that originated in the United States.

Many people assume that when the IRS discusses or references “willful” conduct, the agency is using the term “willful” in its ordinary sense. Unfortunately, while ignorance may be an excuse, those who fail to rely on the advice and guidance of an experienced tax professional, may find themselves embroiled in serious tax problems. While the IRS presents the Streamlined Offshore Voluntary Disclosure Program (OVDP) as a means to avoid civil prosecution and fines, failure to understand the program’s requirements caused by not consulting a tax lawyer can result in harsh civil consequences or even a referral for a criminal tax prosecution.

What does the IRS consider to be willful and non-willful conduct?

For purposes of the Streamlined OVDP, non-willful conduct is 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. While this standard may appear to a layperson to offer non-compliant taxpayers a quick and easy path out of tax compliance problems, the reality is that the standard is much more stringent.

Several months ago the Brager Tax Law Group requested IRS documents through a Freedom of Information Act (FOIA) request, which was filed on behalf of the TaxProblemAttorney Blog.com. The Brager Tax Law Group received a CD in response to this FOIA request. Out of the 7,092 responsive pages, the IRS sent over 6,500 pages and withheld the rest. This information was published on the Brager Tax Law Group website in November. The requested documents included material used in training IRS personnel in the Offshore Voluntary Disclosure Program (OVDP), determining Program penalties and instructing IRS employees on the Program. The purpose of the OVDP program is for individuals who have failed to file an FBAR (Foreign Bank and Financial Accounts Report) form with the IRS, or didn’t report income from offshore activities to disclose their errors and to avoid criminal tax prosecution. The OVDP’s current penalty is 27.5 percent, but there are other alternatives available to certain taxpayers which may provide additional relief.

The OVDP is a complex program with countless rules; at times these rules may be conflicting. What complicates these OVDP rules are the “technical advisors” who review decisions that are made by individual revenue agents. Instead of being approved by the courts, these decisions are approved by these unknown advisors. The IRS does not disclose the identities of these technical advisors, which then doesn’t allow tax attorneys and their clients to communicate with these advisors directly. This material may shed some light on how decisions are being made.

The Brager Tax Law Group submitted a FOIA request in April and received the files about six months later. These files were stored on a password protective CD. These thousands of pages can be found on the Brager website on the offshore bank account problems page.