If you cannot come to an agreement in resolving the issue in the IRS examination stage, you still have a right to take your case to Appeals. As mentioned above however, 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.
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.
Pre-assessment vs. Post-assessment
There are two ways for a case to go forward from the examination stage to appeals — pre-assessment or post-assessment. As mentioned previously, 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 examinations 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.
Resolution Programs Available
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.