If you cannot come to an agreement to resolve your FBAR issue during the IRS examination stage, you may have a few options. The options available to you will depend on where you are in the penalty process, whether you were found to be in willful violation, and your history of compliance.
We will begin this article first with a discussion of FBAR penalty appeals. You have a right to take your case to Appeals. It may currently be in your best interest to work with the IRS agent and not depend on the case to go your way in Appeals. We recommend discussing this option with a tax attorney.
The restructuring of IRS Appeals paired with budget cuts have undercut the traditional functionality of the Appeals Division. Additionally, IRS agents have a surprising amount of discretion in this area; discretion that the Appeals Division has been reluctant to wield.
If you want to challenge the IRS decision in your FBAR case, then I advise you to contact me. This is a situation where you need the advice of an experienced tax attorney to look out for your best interests.
There are two ways for a case to go forward from the examination stage to appeals — pre-assessment or post-assessment. There is no interest that accrues on the FBAR penalty until the penalty is assessed. This means you are incentivized to work closely with the agent assigned your case in the examination stage to ensure that if your case does need to continue on to appeals, it gets there pre-assessed. It is better for the case to go forward in pre-assessment. However if it does go forward to post-penalty assessment, there is an additional requirement that the Department of Justice must approve any settlement agreement that may be reached.
This Department of Justice approval is not required at the examination stage, which provides another reason to try and work to resolve the issue with the IRS agent.
If Appeals does not resolve the dispute, you still have the option to pursue litigation. There is currently much litigation for ongoing FBAR cases. Depending on how these cases turn out, you may or may not need to pursue the litigation option.
You have options available to help you resolve your tax and foreign account reporting obligations if you voluntarily come into compliance before the IRS is aware. Once a civil investigation is started, it may be too late to get a favorable deal and avoid heavy penalties.
To allow taxpayers with international tax issues to get back in compliance, the IRS has a number of programs and options available. There are two types of programs, Offshore Voluntary Disclosure Program (OVDP) which is for willful violations. For non-willful violations, there are the Streamlined Foreign Offshore Procedures (SFOP) for non-resident taxpayers and the Streamlined Domestic Offshore Procedures (SDOP) for resident taxpayers.
These Streamlined Filing Compliance Procedures were designed to provide options to help both U.S. taxpayers residing overseas AND in the U.S., comply with their U.S. tax obligations.
Taxpayers who failed to disclose foreign dealings, either knowingly or unintentionally, now have the opportunity to “face the music” and possibly avoid criminal prosecution. Compared to the Former 2012 Streamlined Program, the SDOP and the SFOP include a broader section of non compliant, but non willful, U.S. taxpayers.
For the first time, U.S. resident taxpayers who are out of compliance with reporting their foreign source income or, who have failed to file international information returns such as the FBAR, could now participate. This article will first begin with a discussion of the revised Offshore Voluntary Disclosure Program.
Previously, the IRS had two programs, Offshore Voluntary Disclosure Program (2009) and Offshore Voluntary Disclosure Initiative (2011), which have been discontinued. In their place, the IRS has implemented a new program “affectionately” known as “Son of OVDP”, but is still often called OVDP. The main difference to the new OVDP is that there is no deadline. The stipulation is that the IRS demands full cooperation, because if you get caught concealing foreign assets while you are in the program, all bets are off. Also, you need to act quickly, as the IRS has the option to end or adjust OVDP at its discretion, which could mean a change in guidelines or an increase in penalties.
There are three steps to OVDP:
Step 1: The taxpayer must submit a pre-clearance request to Criminal Investigations on Form 14457. The latest version of the form was released in March 2019.
Step 2: After pre-clearance, the taxpayer is subject to a six-year voluntary disclosure program.
Step 3: Penalty framework. The taxpayer will pay a 75% fraud penalty for the highest tax deficiency
That is the low-down for taxpayers who were in willful violation of FBAR. Now, let us take a look at the programs for non-willful violations.
Programs for Non-willful Violations: SFOP and SDOP
If you are found to have been non-willful, you may be eligible to enter one of the IRS’ streamlined procedures. The IRS has two main programs: 1) SFOP (Streamlined Foreign Offshore Procedures, for non-resident taxpayers who have filed delinquent or amended returns and 2) SDOP (Streamlined Domestic Offshore Procedures)- for resident taxpayers who have filed delinquent or amended returns. Additionally, the IRS has recently instituted a new program that provides relief for certain former U.S. citizens. This section will begin with a discussion of the SFOP and SDOP Programs.
To be eligible for the SFOP or SDOP program, the taxpayer must certify under penalties of perjury that their conduct for the failure to report all income, pay all tax and file all information returns, including FBARs, was due to non-willful conduct. However, these options are not without their downsides.
First off, these programs could close at any time. Secondly, by putting a taxpayer into a streamlined procedure and the IRS receives/discovers evidence of willfulness, fraud, or criminal conduct, it could result in the IRS opening up examination/investigation and FBAR penalties, civil fraud penalties, information return penalties, or referral to criminal investigation.
If the taxpayer gets audited, then all bets are off. To hopefully circumvent an audit, it is important that the taxpayer files a certification that discloses all the facts. It is important to get out in front of an audit but if there is any doubt in the mind of your client (or you) that they were acting willfully, then they should participate in the new disclosure program that replaced the old OVDP (Offshore Voluntary Disclosure Program).
The IRS is serious about FBAR compliance. The possibility of being penalized to this extent provides enough incentive to file an FBAR, even in cases where you are not entirely convinced that your circumstances require doing so. It is better to make the filing beforehand, and square away the rest later.
The benefit of these programs is that you can walk away with only paying a 5 percent penalty after making full disclosures. However, you should really approach this with caution because there are no guarantees and an audit may accompany to verify that the disclosures are full and complete.
The requirements for this program are:
The main differences between SFOP and SDOP is that in SDOP, the taxpayer qualifies as a resident taxpayer; in SFOP, you are classified as a non-resident U.S. taxpayer. Secondly, for SFOP, all penalties are waived.
The taxpayer only needs to file original or amended returns, pay taxes and interest due over a three-year period, and file delinquent or amended FBARs for the most recent six years.
For SDOP, the taxpayer must have filed original returns, amended returns and paid taxes and interest due over a three-year period and a five percent miscellaneous penalty on the highest account balances of the taxpayer’s offshore assets (using a six-year look back period and the year-end balances).
The first step that must be taken for both SFOP and SDOP is to file Forms 14654 (domestic) and 14653 (overseas). These are certification forms and are extremely complex. That is why we cannot stress strongly enough that you should have an expert in tax law help you complete this, and other resolution program forms. The following content must be included in these forms:
Forms needed: 14653 (certification form)
Additional Requirements: The taxpayer was outside of the U.S. for at least 330 full days for one of the streamline years. The IRS has defined “abode” to mean “one's home, habitation, residence, domicile, or place of dwelling” and not one’s principal place of business. See the IRS’ page on Foreign Earned Income Exclusion - Tax Home in Foreign Country.
Temporary presence of the taxpayer in the U.S, or the maintenance of a dwelling in the U.S., does not automatically make the U.S. the taxpayer’s “abode” (non-residency requirements). See 26 CFR § 1.911-2(b). Taxpayers who are green card holders or not U.S. citizens, meet the non-residency requirement if they did not meet the “substantial presence” test for any of the past three years for which the U.S. tax return date has passed.
In addition to completing and submitting the required forms and paying all taxes and penalties, the you must:
Once you have met the eligibility for SFOP, the process is as follows:
Forms needed: Form 14654 (certification form)
Additional Steps: You must file amended tax returns and file all required information returns (for example: 3520, 3520-A, 5471, 5472, 8938, 926, and 8621). You must also file any delinquent FBARs for any of the last six years missing a filing.
In addition to completing and submitting the required forms and paying all taxes and penalties, then you must:
Once you are have met the eligibility for SDOP, the process is as follows:
As we have mentioned, one major difference between SFOP and SDOP is that SDOP incurs a 5 percent miscellaneous penalty on the highest aggregate balance or value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered FBAR period. The following are assets that are included in the penalty assessment.
On September 6, 2019, the IRS announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come back into compliance with their U.S. tax and filing obligations and receive relief for back taxes. The taxpayer’s non-compliance actions must be deemed non-willful.
Eligible individuals must have:
A taxpayer meeting these requirements will not be “covered expatriates” under IRC 877A, and will not be liable for any unpaid taxes and penalties for these years or any previous years.
This relief is only available to individuals. Furthermore, taxpayers who previously filed Form 1040-NR (U.S. Nonresident Alien Income Tax Return) under the good faith belief that they were non-citizens/resident may still apply for this relief. Seeking this relief will not automatically subject the taxpayer to an IRS audit. Rather, documents filed under this program will be viewed under the same criteria applied to determine whether to audit any other tax return.
Determining whether you are a “covered expatriate” is important because taxpayers with that designation must pay an exit tax on their assets for the tax year in which they leave the country.
Expatriates who meet the following criteria will be deemed “covered expatriates”:
See IRC 877(a)(2) for more detail.
In order to receive this relief, qualified taxpayers must submit the following documentation to the IRS:
See Relief Procedure for Former Citizens, Relief Procedures FAQs, Q. 11 for more detail.
We always always stress the importance of good record keeping when it comes to any tax matter, and documenting relief procedures is no exception. Keep copies of everything. In particular, put together a file of evidence that will substantiate the value of your assets. This will help prove your net worth to the IRS.
If you are not in need of the Streamlined Procedures because you do not owe additional tax and you have reasonable cause for not filing an informational return, you may file the delinquent information returns along with an explanation of the facts that support your claim of having reasonable cause for failing to file on time. You must do this before a civil examination or criminal investigation has been opened.
There are some conditions that you must meet in order to file delinquent informational returns:
While filing delinquent will not automatically throw you into the audit category, it does not guarantee that you will not be audited in the future.
If you must file a delinquent form 3520 and 3520-A, you will file it according to the instructions on the form which can be found here. Make sure that you do not send the return to Utah; send it to the Austin, Texas address.
For all other delinquent information returns (e.g., 5471, 5472, 8938, 926, and 8621): attach the completed forms and reasonable cause supporting fact statement to an amended tax return and file according to the instructions for an amended return, which can be found here.
Taxpayers who do not need to use the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns could still have additional issues. If the taxpayer has
they should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file in a timely manner.
As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended U.S. tax return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
A reasonable cause statement may be attached to each delinquent information return filed for which reasonable cause is being requested. However, the IRS states that penalties still may be assessed without regard to the reasonable cause statement. Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for normal tax or information returns.
Similar to information return delinquent filings, you must include a statement that explains why you have reasonable cause and you must take action before being contacted by the IRS about the delinquent FBAR(s).
Keep in mind that any of these filings can be selected for audit, so be sure your reasonable cause has sufficient support and your disclosures are complete.
If you should find yourself in need of further assistance, please feel free to reach out and set up a consultation with our experienced Senior Counsel at Brotman Law.
For starters, a lack of funds is not reasonable cause for failure to file or pay taxes on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the reducing failure to pay penalty. The IRS will consider any reason which establishes that the taxpayer used all ordinary business care and prudence to meet filing obligation but was nevertheless unable to do so.
The IRS will consider the following circumstances as “reasonable”:
Some taxpayers may not need to use the Streamlined Filing Compliance Procedure options, but still may have a delinquent FBAR. FinCEN has established a procedure to address this problem.
The solution is available to those who:
Time is of the essence when dealing with a delinquent FBAR.
A taxpayer who has not already been contacted should immediately file the delinquent FBARs electronically according to the instructions on the FinCEN website.The filing must include a statement explaining why the FBARs were filed late. Legal counsel should be retained to assist in the preparation of this letter.
On the cover page of the electronic filing, you will be required to select from a list of options as to the reason for the late filing. If you are absolutely unable to file electronically, you should contact FinCEN’s Regulatory Hotline for guidance concerning alternatives.
Keep in mind FinCEN form 114 (the FBAR) is not an IRS filing.
The IRS will not impose a penalty for the failure to file the delinquent FBARs as long as you properly reported the income on your U.S. tax return and paid the tax on the income from the foreign financial account.
You will also be exempt from a failure to file penalty as long as you have not otherwise been contacted regarding an income tax examination or received a request for delinquent returns for the years in which the delinquent FBARs are submitted.
The audit process with regard to FBARs is similar to the selection process in place for tax returns. The key to curing the delinquency is to get the FBAR filed before FinCEN or the IRS comes looking for it.
Where a taxpayer cannot establish reasonable cause for their failure to file and it is the first time they are being subject to the penalty in question, there is still the option of applying for penalty relief under the First Time Abatement (FTA) waiver. The FTA waiver is available for those who have filed a return or an extension for any returns due AND have paid or arranged to pay any taxes currently due. See IRS Part 20. Chapter 1. Section 1. 184.108.40.206
Consistent with the statute of limitations, the IRS will expect the taxpayer to be up to date, or on a path towards being up to date, on the past six years of returns.
The FTA may only be applied to the first instance in which the specific penalty in question is being imposed. However, because failure to pay penalties accrue until the taxpayer has remitted all of the proper tax amount (even after the first FTA relief is granted), the taxpayer may request the waiver a second time when the balance has been paid in its entirety.
When you owe taxes and do not believe you will be able to pay the liability off in time for the deadline, there are four potential routes that you can take in order to get yourself back into compliance:
Generally extensions on tax returns should be filed by April 15, the same deadline for regular returns. The extension will give you an extra six months, or until October 15, to submit your returns.
Even if an extension is granted, you are still required to pay your tax bill by the regular deadline.
Nonetheless, you may find that by the tax deadline, you have come short on paying the entire amount. If this happens, and you have paid over 90 percent of your total tax liability, you are in luck.
Taxpayers who received an extension on their taxes but have already paid 90 percent or more of their tax liability will only be responsible for interest charges on the outstanding amount and no penalties will be imposed.
If the filing deadline has already passed and you still owe taxes, then perhaps a payment plan will help alleviate the burden.
If you owe less than $10,000, have filed and paid all taxes for the past five years, did not enter into an installment plan for the past five tax years, agree to pay your current liability within three years and currently do not have the means to pay your liability, then you may qualify for a guaranteed installment agreement. (See Instructions for Form 9465, 1.) If you enroll in a guaranteed installment agreement, you will not have tax liens filed against you for your outstanding debt.
For those not qualifying for guaranteed installment plans, other options are the short and long-term payment plans. Along with the difference in the length of time you are given to pay your liability, the distinction between the short and long-term plans is the fees you will have to pay to sign up. See the IRS’ page Additional Information on Payment Plans.
For the short term plan, there are no fees to sign up and you may do so online (if you are an individual) or via phone, mail or in-person.
On the other hand, if you enroll in the long-term plan, you may pay as low as $31 to sign up online for payments via the IRS’ Direct Debit Installment Agreement (DDIA) or as high as $225 dollars for in-person, mail, or phone enrollments.
The fees vary based on the payment method that you elect and your method of enrollment. Refer to the IRS’ page for a description of the fee schemes for various payment and enrollment methods.
Once a taxpayer who filed a timely return has enrolled in an installment plan, their penalty percentage will be reduced to 0.25 percent. See the IRS’ page on Common Penalties for Individuals. Therefore, even if you believe you do not have sufficient funds to pay your tax liability at this moment, there is incentive to enroll in a payment plan both to get into compliance and to minimize the penalties.
In some cases, taxpayers may qualify for a partial payment installment agreement. These agreements put the taxpayer on an income-based monthly payment plan and is meant for individuals owing more than $10,000 who are not currently in bankruptcy proceedings, have filed all past returns, and who have limited or no assets. (See 5.14.2 Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED)).
If the IRS has found you in violation of FBAR laws, you may have some recourse through appeals or compliance programs. Both are preferable to criminal charges and excessive fines.
You could also look into setting up a payment plan if you are eligible.
As I have stated many times on my website and in my ebooks, the IRS is cracking down on international taxation because of taxpayer abuse of concealing assets overseas. Breaking one of these cases can yield huge payoffs for the IRS so they are not going to back off any time soon.
If you have received notice from the IRS or have had your case reviewed, you need professional guidance. I invite you to call me to discuss your situation and I can recommend your best option. In addition, we can develop a compliance plan to ensure that you will never be put in this difficult international taxation situation again.
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