Tax Problem Attorney Blog

What is Reasonable Cause for Failure to File an FBAR?

May 19, 2017 | by Dennis N. Brager

The IRS has the authority to impose civil and criminal penalties for the failure to file Foreign Bank Account Reports (FBARs), but it is has the authority to impose lesser penalties, or none at all, in certain cases. If there is a reasonable cause for your FBAR violations, and your conduct was non-willful, you may not have to pay any penalties at all.

Internal Revenue Manual (IRM) 4.26.16.6 states that when an FBAR violation is found, the IRS examiner must either issue a Letter 3800 or issue a penalty. The Letter 3800 is warning letter notifying you of your apparent FBAR violations. Some taxpayers may get lucky and receive a warning without any FBAR penalties.

The civil penalties for non-willful FBAR violations are up to $10,000 per account per year, for up to six years. However, these are the maximum penalties allowable. The IRS has the discretion to reduce or eliminate the penalties in some cases.

IRS “Substance Over Form” Argument Fails

May 17, 2017 | by Dennis N. Brager

The Sixth Circuit reversed a Tax Court decision and denied the IRS’s “substance over form” argument by allowing a clever tax reduction technique that was legal under the letter of the law. In Summa Holdings v. Commissioner, the court rejected the IRS’s position and declined to let Congress off the hook for allowing a loophole that was used by the taxpayer to avoid the contribution limits on Roth IRAs.

The Beneson family used a domestic international sales corporation” (DISC) to transfer money from their family-owned company to their sons’ Roth IRAs. DISC dividends are subject to a tax on unrelated business taxable income, but once the DISC dividends go into a Roth IRA, the earnings would grow tax-free, and the distributions would also not be subject to tax.

In other words, the Benesons avoided the Roth IRA contribution limits (currently $5,500 per account annually) using this strategy. Between 2002 and 2008, the Benesons transferred over $5 million into two Roth IRA accounts.

Is My FBAR Non-Compliance Considered Non-Willful?

May 15, 2017 | by Dennis N. Brager

The failure to file Foreign Bank Account Reports (FBARs) can result in large penalties, but there are two separate penalties structures for willful and non-willful conduct. If your conduct is determined to be willful, you could have to pay $100,000 or 50 percent of the balance of the offshore account. For non-willful violations, the penalty is $10,000 per account per year.

Another situation where you must determine whether your conduct is willful is when attempting to disclose your unreported offshore bank accounts. You have different options depending on whether or not your failure to report these amounts was willful or not. Non-willful FBAR violations may be eligible for the streamlined filing compliance procedures, while willful FBAR violations are not.

Options for Disclosing Unreported Foreign Income

Considerations When Submitting Delinquent International Information Returns

May 12, 2017 | by Dennis N. Brager

The IRS procedure for submitting delinquent international information returns such as Forms 3520, 3520A, Form 5471, or Form 8938, along with a reasonable cause statement is one of four options the IRS allows for taxpayers wish to come into compliance with their offshore filing requirements. This procedure has some benefits over the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Procedures, but it also has its drawbacks.

The main benefit is that if the IRS accepts your reasonable cause statement and submission of delinquent international information returns, you will have all penalties waived. Both the OVDP and the Streamlined Procedures (at least for domestic taxpayers) involve paying penalties, with the OVDP requiring much higher penalties and eight years of tax returns.

The drawback is that if your reasonable cause statement is rejected, you may be responsible for the full amount of the international reporting forms penalties.

Man Pleads Guilty After Hiding Swiss Bank Accounts

May 10, 2017 | by Dennis N. Brager

A case from a few years ago involving undisclosed Swiss bank accounts demonstrates the pitfalls of failing to disclose foreign financial accounts, as well as what happens when you lie to IRS special agents.

A New York resident pleaded guilty to corruptly endeavoring to obstruct and impede an investigation by the Internal Revenue Service after repeatedly lying about his assets in Swiss bank accounts. Not only did the taxpayer fail to report his foreign financial assets, but he also told several IRS agents that he had no foreign financial assets.

For the tax years 2001 through 2010, Georges Briguet, the owner of now defunct famed French restaurant Perigord, failed to report his foreign financial accounts on his tax return. He did not report the income from these accounts or pay taxes on this income. He had placed around 7 million Swiss Francs in a Swiss bank account in 1992.

How Much of My Wages Can the IRS Levy?

May 8, 2017 | by Dennis N. Brager

An IRS levy on your wages or other income is limited by a defined exemption amount. Your exemption will be determined based on the standard deduction, your filing status, and the number of exemptions you claim. All income that exceeds the exemption amount will be taken by the IRS.

Unlike bank account levies, wage levies are continuous. The IRS will continue to take many out of every paycheck you receive until your full delinquent tax balance is paid off.

A few examples can illustrate how much money you will actually receive while the IRS is levying your wages:

When to Use the IRS Voluntary Classification Settlement Program

May 4, 2017 | by Dennis N. Brager

The IRS Voluntary Classification Settlement Program (VCSP) allows taxpayers to reclassify their workers as employees for employment tax purposes and eliminate the risk of payroll tax problems caused by misclassification in previous tax years. In essence, the taxpayer agrees to classify its workers as employees going forward and pays a small portion of the employment tax liability that would have been owed for previous tax years if the workers were considered employees. In exchange, the IRS will not conduct a payroll tax audit based on worker classification for prior tax years.

The VCSP should not be confused with the Classification Settlement Program (CSP), which is available to taxpayers currently under an employment tax audit. The VCSP is not available to taxpayers who are currently under an employment tax audit.

Eligibility for the Voluntary Classification Settlement Program

Can the IRS Levy My Retirement Account?

May 2, 2017 | by Dennis N. Brager

The IRS can levy the funds in your retirement accounts, including 401(K) plans, IRAs, profit sharing plans, SEP-IRAs, and Keogh plans. Many taxpayers may be unaware that the IRS has this authority because retirement plans are often protected from creditors. However, the IRS has powers that exceed those of most creditors, including levying the funds in your retirement account.

The IRS uses a three part analysis before levying a retirement account. There is a bit more caution used by the IRS in these cases when compared to bank account or wage levies. These accounts provide for a taxpayer’s future welfare, and the IRS will only levy these funds if certain requirements are met.

IRS Procedures for Levying a Retirement Account

How to Get a State Tax Lien Removed

May 1, 2017 | by Dennis N. Brager

The California Franchise Tax Board (FTB) can issue a state tax lien on real or personal property to recover state tax debt. This lien protects their right to the balance owed. It also makes it difficult to sell your property or refinance your mortgage, and can damage your credit rating.

While a state tax lien does not involve seizure of your assets, it can still cause numerous financial difficulties. Getting a tax lien removed can be done in conjuncture with other tax relief strategies to eliminate your California income tax problems.

Reasons for Removal of State Tax Lien

The Difference Between Streamlined Filing and the Offshore Disclosure Program

April 27, 2017 | by Dennis N. Brager

The IRS streamlined filing compliance procedures and the Offshore Voluntary Disclosure Program (OVDP) are two different methods that can be used to resolve your offshore bank account problems. Taxpayers who have not filed a Report of Foreign Bank and Financial Accounts (FBAR) or reported their income from overseas financial accounts may be eligible to use one of the procedures to eliminate the risk of large criminal or civil penalties.

A non-willful failure to file an FBAR can result in penalties of $10,000 per violation, while willful violations can result in criminal penalties of up to $250,000 and five years in prison, plus civil penalties in excess of $100,000 per violation. Because of these onerous penalties, many taxpayers who have failed to file FBARs either intentionally or due to ignorance should consider “coming clean” using the OVDP or Streamlined Filing procedures.

While both programs can reduce or eliminate the risk of criminal prosecution, they do have important differences. Taxpayers can not participate in both programs, so consult your tax attorney to determine which one is the better choice for your situation.