FBAR 2019 Update: FinCen Form 114, Deadlines, Extension ...media.straffordpub.com/products/fbar-2019-update...Aug 06, 2019 · FBAR 2019 Update: FinCen Form 114, Deadlines, Extension,

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FBAR 2019 Update: FinCen Form 114, Deadlines, Extension,

Penalty Resolution and Waiver Provisions

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August 6, 2019

FBAR 2019 Update: FinCen Form 114, Deadlines, Extension, Penalty Resolution and Waiver Provisions

Dennis N. Brager, Esq., Certified Tax Specialist

Brager Tax Law Group

[email protected]

Igor S. Drabkin, Principal

Holtz Slavett & Drabkin

[email protected]

Fran Obeid, Principal

MFO LAW

[email protected]

Notice

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The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

FBAR 2019 Update: FinCen Form 114, Deadlines, Extension, Penalty Resolution and

Waiver ProvisionsWho Must File, What must be reported, Willful vs. Nonwillful

Failures

Fran ObeidMFO Law, P.C.

260 Madison Ave, 17th FloorNew York, NY 10016

T: [email protected]

*The information contained in this powerpoint is general in nature and based on authorities that are subject to change. It is not intended to be, andshould not be construed as legal or tax advice. Readers should consult a tax professional of their own choosing to discuss how these matters may relate to

their particular circumstances.

August 6, 2019A Strafford Webinar


What triggers FBAR filing requirements?

• 31 USC § 5314 requires each U.S. person having a financial interest in or signature or other authority over, a bank, securities or other financial account in a foreign country to report such relationship each year if the aggregate value of the accounts exceeds $10,000 at anytime during the calendar year. See also 31 CFR § 1010.350.

• U.S. person: a citizen of the United States; a resident alien; and an entity, including but not limited to: a corporation, partnership, trust, or limited liability company created, organized or formed under the laws of the U.S.

• Reportable accounts: banking accounts: savings deposit, demand deposit, checking or any account maintained with a person engaged in banking business.

• Securities accounts: an account with a person engaged in the business of buying, selling, holding or trading stock or other securities.

• Other financial account: an account with a person that is in the business of accepting deposits as a financial agency; an account that is an insurance or annuity policy with cash value; an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.

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FBAR Form 114 Legal Requirements Cont.• Financial Interest: A financial interest in a foreign account is defined as a

financial interest in each bank, securities or other financial account in a foreign country which the U.S. person is the owner, has legal title whether maintained for his/her benefit or the benefit of others.

• A U.S. person has a financial interest where the owner of record or title holder is a person acting as an agent, nominee, attorney or in some other capacity on behalf of the U.S. person.

• A corporation in which the U.S. person owns directly or indirectly more than 50% of the voting power or the total value of the shares; a partnership in which the U.S. person owns directly or indirectly more than 50% or any other entity in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of the equity interest or assets, or interest in profits.

• A trust, if the U.S. person is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes.

• A trust in which the U.S. person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of current income.

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FBAR Legal Requirements Cont.• Signature or other authority: Authority of an individual (alone or in

conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.

• Exceptions: officer or employee of (i) a bank examined by various U.S. government agencies; (ii) class of equity securities listed on a national security exchange; (iii) an entity that has a class of equity securities registered under section 12(g) of the Securities Exchange Act.

• Participants and beneficiaries of certain retirement plans under sections 401(a); 403(a); 403(b); 408 or 408A are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.

• A beneficiary of certain trusts are not required to report the trust’s foreign financial accounts if the trust, trustee of the trust or agent is a U.S. person that files a report disclosing the trust foreign financial accounts.

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Form 114 Deadlines and Filing Procedures• FBAR information is filed electronically on Form 114 with FinCEN.

The preparer holds in his or her files Form 114a, signed by the U.S. person, authorizing the electronic filing of Form 114.

• The FBAR is an annual form that must be filed on or before April 15 of the year following the calendar year to be reported. “The FBAR filing deadline will follow the Federal income tax due date guidance, which notes that when the Federal income tax due date falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday.” BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts FinCEN Form 114.

• Automatic extension to October 15 each year.

• Filer must maintain records used to prepare and file their FBAR reports.

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FBAR Practice Tips • BSA Electronic Filing Requirements for Report of Foreign Bank

and Financial Accounts FinCEN Form 114: Contains line by line instructions.

• FBAR Hotline: 1-866-270-0733 (toll free in U.S.); or 313-234-6146 (for callers outside the U.S. not toll free)

• It’s a family affair: A child is responsible for filing his/her own FBAR Report. If a child cannot file it, the child’s parent or guardian must file it for the child. If the child cannot sign his/her FBAR a parent or guardian must sign and in item 45 Filer Title enter, “Parent/Guardian filing for child.”

• Certain accounts jointly owned by spouses: The spouse of an individual who files an FBAR is not required to file a separate FBAR if the following conditions are met (1) all financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the “filers” have completed and signed Form 114a, record of authorization to file FBARs.

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FBAR and Form 8938 Penalties• FBAR Penalties: Nonwillful: $10,000 per violation (per account); willful:

the greater of $100,000 or 50% of the balance in the account at the time of the violation. See 31 USC § 5321 (a)(5). Mitigation guidelines were established by the IRS on May 12, 2015 and are applied to FBAR penalties mainly after that date. The failure to file an FBAR may subject a U.S. person to a prison term of up to 10 years and a criminal penalty of up to $500,000. See 31 USC § 5322.

• Form 8938 Penalties: Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure to file within 90 days after IRS notification- $10,000 penalty every 30 days). See 26 USC § 6038D(d)(2). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. See 26 USC § 6662(j). If filer proves reasonable cause and absence of willful neglect, penalty will not apply. See 26 USC § 6038D(g).

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Civil vs. Criminal Sanctions

• Is the FBAR penalty capped at $100,000? Probably not; although the regulations cap the penalty at $100,000, the statute does not.

• U.S. v. Schoenfeld, 16-cv-1248 (M.D. Fla. June 25, 2019), “the statute is self-executing and the new penalty ceilings apply.” (FBAR penalty survives taxpayer’s death); see also U.S. v. Garrity, 2019 WL 1004584 (D. Conn. 2019) and U.S. Horowitz, 2019 WL 265107 (D. Md. 2019). But see U.S. v. Colliot, 2018 WL 227131 (W.D. Tex. 2018) and U.S. v. Wahdan, 325 F. Supp. 1136 (D. Colo. 2018) limiting FBAR penalties to $100,000 as per the regulations.

• Criminal Sanctions: U.S. v. Mani (C.D.Ca. Sept. 17, 2018): Plastic surgeon sentenced to one year and one day for not filing an FBAR for the 2013 tax year and failing to report $1.28 million in foreign income earned in Dubai. His accountant had advised to file an FBAR.

• Civil Sanctions: U.S. v. Flume, 16-cv-00073 (S.D. Tx. June 11, 2019): taxpayer liable for willful FBAR penalty. Recklessness establishes liability for the penalty of $456,509.

• U.S. v. Norman, 15-872T (Fed. Cl. July 31, 2018): taxpayer willfully violated 31 U.S.C. Section 5314 since “she acted to conceal her income and financial information, and also that she either recklessly or consciously avoided learning of her reporting requirements.” Held that when she signed her tax return, she was put on notice. $800,000 FBAR penalty assessed.

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FBAR Penalty Mitigation• A nonwillful FBAR penalty may be abated if the taxpayer demonstrates

reasonable cause and the delinquent FBARs are filed. Reasonable cause is not available for willful FBAR violations. See 31 USC § 5321(a)(5).

• The IRS has established mitigation guidelines in imposing the FBAR penalty as well as mitigation threshold conditions (IRM 4.26.16.6.6.1 (11-06-2015)):

• Mitigation Threshold Conditions:

1) The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.

2) No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.

3) The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).

4) IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.

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FBAR Penalty Mitigation Guidelines – Per Person Per Year- IRM Exhibit 4.26.16-2Non-Willful (NW) Penalties

To Qualify for Level I-NW – Determine Aggregate Balance

If the maximum aggregate balance for all accounts to which the violations relate did not exceed $50,000 at any time during the calendar year, Level I- NW applies to all violations. See IRM 4.26.16.3.6, Aggregate Value Over $10,000, above for instruction on determining the maximum aggregate balance.

The Level I-NW Penalty is $500 per violation, not to exceed a total of $5,000 per year.

To Qualify for Level II-NW – Determine Aggregate Balance

If the maximum aggregate balance of all accounts to which the violations relate exceeds $50,000, but does not exceed $250,000, Level II-NW applies to all violations.

The Level II-NW Penalty is $5,000 per violation

To Qualify for Level III-NW – Determine Aggregate Balance

If the maximum aggregate balance of all accounts to which the violations apply exceeds $250,000, Level III-NW applies to all violations.

The Level III-NW Penalty is $10,000 per violation, the statutory maximum penalty for nonwillful violations. 14

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Penalty Mitigation for Willful FBAR Violations-IRM Exhibit 4.26.16-2

To Qualify for Level I-Willful – Determine Aggregate Balance

If the maximum aggregate balance for all accounts to which the violations relate did not exceed $50,000 during the calendar year, Level I-Willful mitigation applies to all violations. See IRM 4.26.16.3.6, Aggregate Value Over $10,000, above for instruction on determining the maximum aggregate balance.

The Level I Willful Penalty is

The greater of $1,000 per year or 5% of the maximum aggregate balance of the accounts during the year to which the violations relate.

The Qualify for Level II-Willful – Determine Aggregate Balance

If the maximum aggregate balance for all accounts to which the violations relate exceeds $50,000 but does not exceed $250,000, Level II-Willful mitigation applies to all violations. Level II-Willful penalties are computed on a per account basis.

The Level II-Willful Penalty is

For each account for which there was a violation, the greater of $5,000 or 10% of the maximum account balance during the calendar year at issue.

To Qualify for Level III-Willful – Determine Aggregate Balance

If the maximum aggregate balance for all accounts to which the violations relate exceeds $250,000 but does not exceed $1,000,000, Level III-Willful mitigation applies to all violations. Level III-Willful penalties are computed on a per account basis.

The Level III-Willful Penalty is

For each account for which there was a violation, the greater of 10% of the maximum account balance during the calendar year at issue or 50% of the account balance on the day of the violation.

To Qualify for Level IV-Willful – Determine Aggregate Balance

If the maximum aggregate balance for all accounts to which the violations relate exceeds $1,000,000, Level IV-Willful mitigation applies to all violations. Level IV-Willful penalties are computed on a per account basis.

The Level IV-Willful Penalty is

For each account for which there was a violation, the greater of 50% of the balance in the account at the time of the violation or $100,000 (i.e., the statutory maximum penalty).

FBAR FILING REQUIREMENTS

Igor S. Drabkin

Holtz, Slavett & Drabkin, A.P.L.C.

Former IRS Attorneys

315 S. Beverly Drive, Suite 515

Beverly Hills, CA 90212

310-550-6200

[email protected]

www.hsdtaxlaw.com


http://www.hsdtaxlaw.com/

Part I

Type of Filer (Individual, Partnership, Corporation, Consolidated, Fiduciary)

U.S. Taxpayer Identification Number (SSN or EIN)

Foreign Identification, if necessary (Passport or Foreign TIN)

Date of Birth for Individuals

Name or Organization Name

Address

Whether the filer has a financial interest or signature authority in 25 or more accounts (if Yes, then Parts II, III or IV are not necessary).

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Part II – Financial Accounts Owner Separately

Maximum Account Value (check the box, if unknown)

Type of Account (Bank, Securities, Other)

Financial Institution Name and Address

Account Number or Other Designation

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Part III – Financial Accounts Owner Jointly

Same bank and account information as required in Part II, plus

Information about Principal Joint Owner◦ Name or Organization Name

◦ Taxpayer ID and Type

◦ Address of Principal Joint Owner

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Part IV – Financial Accounts Where Filer Has Signature Authority but No Financial Interest◦ Account Information (value, type of account,

account number, bank name and address)

◦ Owner Information (name, address, Tax ID)

◦ Filer’s Title with the Owner of Account

Part V – Accounts Where Filing Consolidated Report◦ Account Information (value, type of account,

account number, bank name and address)

◦ Owner Information (name, address, Tax ID)

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For tax years beginning after March 18, 2010 (i.e. 2011), certain individuals must file Form 8938, Statement of Specified Foreign Financial Assets

Form 8938 Must be Filed by Specified Individuals: • A U.S. citizen; • A Resident Alien;• A Nonresident Alien Who Makes Election to Be Treated as Resident Alien;• A Resident of Certain U.S. Possessions;

Specified Foreign Financial Assets• Financial Accounts (any depository or custodial account maintained by a foreign financial institution);• Assets Held for Investment (stock by foreign corporation; interest in foreign partnership; debt issue by a foreign person; interest in foreign trust or estate; options; swaps)

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Filing ThresholdsForm 8938 is required if the total value of the SFAs for the tax year is:

Unmarried Taxpayer Living in the U.S.: more than $50,000 on the last day of the tax year or more than $75,000 any time during the tax year;

Married Taxpayers Filing Joint Return and Living in the U.S.: more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year;

Married Taxpayers Filing Separate Return and Living in the U.S.: more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year;

Taxpayers Living Abroad and Not Filing Joint Returns: more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year;

Married Taxpayers Filing Joint Return and Living Abroad: more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year;

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Form 8938 consists of four parts: Part I is for financial accounts, such as a deposit or

custodial account with a financial institution. Part II is for other types of financial assets, such as stocks,

bonds and other financial instruments. Form 8938 has room for just one asset in Part I and Part II.

Taxpayers may use as many Forms 8938 as needed to report their foreign financial assets.

Part III is a summary showing where income from the foreign financial assets is reported elsewhere on the tax return.

Part IV is a summary for certain types of financial assets excepted from reporting on Form 8938 because that information is reported elsewhere on the tax return.

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Name or Names on Return

SSN or Tax Identification Number

Tax Year

Type of Taxpayer◦ Specified Individual (Married Filing Jointly or Other)

◦ Specified Domestic Entity

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Type of Account: Deposit or Custodial

Account Number

Check the box if the account was opened or closed during the tax year

Check the box if account is owned jointly with spouse

Check the box if no tax item reported in Part III of Form 8938 with respect to this account

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Maximum Value of the Account During Tax Year (in $ U.S.)

Answer if you used a foreign currency exchange rate to provide the maximum value

If “Yes”, then identify the foreign currency in which account is maintained, identify the foreign exchange rate, and identify the source for the exchange rate if it is not from US Treasury Financial Management Service

Name and mailing address of financial institution

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Description of Asset; ID or Other Designation; If asset is acquired during the tax year, then list the

date; If asset is disposed of during the tax year, state the

date; Check the box if asset is jointly owned with spouse; Check the box if no tax item is reported for this asset; Check the value range. If more than $200K, provide

specific value Answer if you used a foreign currency exchange rate, if

“Yes”, then identify the foreign currency in which account is maintained, identify the foreign exchange rate, and identify the source for the exchange rate if it is not from US Treasury Financial Management Service.

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If the asset reported on line 1 of part II is stock of a foreign entity or an interest in a foreign entity, report:◦ Name of the entity;◦ Type of the entity (corporation; partnership; trust estate)◦ Check if it is a Passive Foreign Investment Company (PFIC);◦ Mailing address of the entity;

If the asset reported on line of Part II is not stock or an interest in a foreign entity, report:◦ Name of issuer or counterparty (if more than one issuer or

counterparty, attach additional pages for each one);◦ Type of issuer or counterparty (individual; partnership;

corporation; trust; estate);◦ Identify issuer or counterparty as a U.S. or Foreign Person;◦ Mailing address of issuer or counterparty;

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Part III of Form 8938 required taxpayers to enter the total income, gain or loss, deductions, ore credits for specified foreign financial assets, and the schedule, form, or return on which the item is reported.

Tax Items attributable to Foreign Assets reported in Part I and Part II of the form should be reported separately.

Information for the following items must be reported separately:◦ Interest;◦ Dividends;◦ Royalties;◦ Gains of losses;◦ Deductions;◦ Credits.

Note: if no tax item is reported with respect to a specified asset, box in line 3d should be checked in Part I or Part II of the Form.

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If certain assets were reported on other tax forms for the same tax year, they may be excepted from reporting on Form8938. Exception applies to assets reported on:◦ Form 3520 (Return to Report Transactions with Foreign Trusts and

Receipts of Foreign Gifts)◦ Form 3520-A (Annual Information Return of Foreign Trust with

U.S. Owner)◦ Form 5471 (Information Return with Respect to CFC)◦ Form 8621 (Information Return of a PFIC or QEF Shareholder)◦ Form 8865 (Return with Respect to Foreign Partnerships)◦ Form 8891 (Information Return for Beneficiaries of Canadian

Registered Retirement Plans)

If a foreign asset was disclosed in one of these forms, identify this form in Part IV and provide the number of forms filed.

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Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations (IRC §6038).

Form 5472 - Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business - (IRC §§6038A and 6038C)

Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation - (IRC §6038B)

Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships - (IRC §§6038, 6038B, and 6046A

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Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (IRC 6048(a)).

◦ Requirements apply to U.S. Person who:

Creates or transfers money or property to a foreign trust

Receives (directly or indirectly) any distributions from a foreign trust

Receives certain gifts or bequests from foreign entities

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http://www.irs.gov/instructions/i3520a/ch01.html#d0e127

http://www.irs.gov/instructions/i3520a/ch01.html#d0e127

Form 3520-A – Annual Information Return of Foreign Trust With a U.S. Owner (IRC 6048(b)).◦ This form provides information about the foreign

trust, its U.S. beneficiaries and any U.S. person who is treated as an owner of any portion of the foreign trust.

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Offshore Voluntary Disclosure Program (2014 OVDP) closed on September 28, 2018

◦ Provided for 27.5% penalty applied to the highest balance of the account and payment of taxes, plus 20% penalty, for up to 8 past years.

Post-9/28/2018 Voluntary Disclosure Practice (IRM 9.5.11.9)

◦ Voluntary Disclosure is still available.

◦ Legal source income only.

◦ Pre-Clearance Letter must be submitted to IRS-CI to determine eligibility.

◦ Note eligible if:

IRS initiated civil audit or criminal investigation of taxpayer;

IRS received information from third party (e.g. informant, other government agency, media) alerting IRS to taxpayer’s noncompliance.

◦ Main benefit: no guaranteed immunity, but IRS will NOT make a referral to DOJ for criminal prosecution.

35

Six Year Disclosure Period. Taxpayers must submit all required returns and reports for the disclosure period.

Examiners will determine applicable taxes, interest and penalties.

Civil fraud penalty under IRC 6663 or 6651(f) will apply to ONE tax year with the highest tax liability (75% of tax due).

Willful FBAR penalty will be asserted in accordance with existing IRS penalty guidelines (up to 50% of account value).

Taxpayer can request imposition of accuracy-related penalty under IRC 6662 (20% of tax) instead of civil fraud penalty; and non-willful FBAR penalty instead of willful penalty.

◦ Taxpayer must present convincing evidence on why fraud and willful penalties do not apply.

Other penalties for failure to file information returns (e.g. Form 5471, Form 3520) will not be imposed.

Taxpayer retains administrative appeal rights.

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Introduced in July 2014; Still Available

Designed for Non-Willful US Taxpayers

Non-willfulness is defined as negligence, inadvertence, or good faith mistake of law.

Taxpayers must file amended income tax returns (taxpayers residing in US) or either amended or delinquent income tax returns (taxpayers residing abroad) for past 3 years; plus, file FBARs for past 6 years.

Must file Certification of Non-Willfulness.

Must pay tax for 3 past years;

In lieu of FBAR or other international reporting penalties, taxpayers residing in US must pay penalty of 5% of the highest account balance.

0% Penalty for taxpayers residing abroad.

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Designed for Taxpayers who reported all income and paid all tax on income tax returns but failed to file FBARs.

No penalty will be imposed for the failure to file delinquent FBARs.

Must be done before Taxpayer is contacted by IRS civil examination or criminal investigation.

File using e-filing under regular rules.

On the cover page of the electronic forms, select a reason for late filing.

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Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:◦ have not filed one or more required international information returns,

◦ have reasonable cause for not timely filing the information returns,

◦ are not under a civil examination or a criminal investigation by the IRS, and

◦ have not already been contacted by the IRS about the delinquent information returns

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.

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.

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Copyright © 2019, Brager Tax Law Group

FBAR 2019 UPDATE

Deadlines, Extensions, Penalty

Resolution and Waiver Provisions

Presented By:

Dennis N. Brager, Esq.

Brager Tax Law Group, A P. C.

11400 W. Olympic Blvd., Ste. 750

Los Angeles, CA 90064

Telephone No.: (310) 208-6200

Email: [email protected]

A Strafford Webinar

August 6, 2019

Copyright © 2019, Brager Tax Law Group42

About Dennis Brager

Former IRS Trial Attorney

California State Bar Certified Tax

Specialist

40+ Years of Tax Dispute Experience

with IRS, EDD, BOE, and FTB

Problems

Nationally Recognized Tax Litigation

Attorney


Willfulness

Willfulness is “a voluntary, intentional violation of a known

legal duty.” United States v. Sturman,951 F.2d 1466 (6th Cir.

1991), quoting Cheek v. United States, 111 S. Ct. 604, 610

(1991); IRM 4.26.16.6.5.1(1) (11-06-2015)

A finding of willfulness under the BSA must be supported by

evidence of willfulness. IRM 4.26.16.6.5.1(2) (11-06-2015)

The mere fact that a person checked the wrong box, or no

box, on a Schedule B is not sufficient, in itself, to establish

that the FBAR violation was attributable to willful blindness.

IRM 4.26.16.6.5.1(5) (11-06-2015)


Willfulness (Cont.)

Willfulness is shown by the person's knowledge of thereporting requirements and the person's conscious choicenot to comply with the requirements. In the FBAR situation,the only thing that a person need know is that she has areporting requirement. If a person has that knowledge, theonly intent needed to constitute a willful violation of therequirement is a conscious choice not to file the FBAR. IRM4.26.16.5.1 (11/6/2015)

Willfulness is shown by the person's knowledge of thereporting requirements and the person's conscious choicenot to comply with the requirements. In the FBAR situation,the only thing that a person need know is that she has areporting requirement. If a person has that knowledge, theonly intent needed to constitute a willful violation of therequirement is a conscious choice not to file the FBAR. IRM4.26.16.5.1 (11/6/2015)


What is Willful Blindness,

and Why Do You Care? Under the theory of “willful blindness,” willfulness may be attributed to a person who

has made a conscious effort to avoid learning about the FBAR reportingrequirements.

“Willful blindness” requires proof that:

a person subjectively believed that there was a high probability that a factexists and

he took deliberate actions to avoid learning of that fact. Global-TechAppliances v. SEB, SA, 131 S. Ct. 2060, 2070-71 (2011).

• “Willful blindness” is more than recklessness or negligence. A willfully blind person isone who takes deliberate actions to avoid confirming a high probability ofwrongdoing and who can almost be said to have actually known the critical facts.A defendant must subjectively believe that there is a high probability that a factexists and the defendant must take deliberate actions to avoid learning of thatfact." Global-Tech Appliances. Id at 2070.

Cf. United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012) (Willful blindnessfound based on the failure to review Schedule B of the tax return) but see, IRM4.26.16.6.5.1(5) (11-06-2015). ("The mere fact that a person checked the wrong box,or no box, on a Schedule B is not sufficient, by itself, to establish that the FBARviolation was attributable to willful blindness").


Willful Blindness - Williams

United States v. Williams, 489 Fed. Appx. 655, 2012 U.S. App. LEX IS 15017(4111 Cir. July 20, 20 12)(unpublished), reversing 2010 U.S. Dist. LEX IS 90794,No. I :09-cv-437 (E. D. Va. Sept. I, 2010).

Non-precedential

Split panel

Criminal Conviction -- Mr. J. Bryan Williams pled guilty to a two-countsuperseding criminal information, charging him with conspiracy to defraudthe IRS, in violation of 18 U .S.C. § 3 71 , and criminal tax evasion, inviolation of 26 U.S.C. § 7201.

Unreported Income of $800,000 on $7,000,000 in deposits

Lied to the accountant on the organizer

Checked the “No” box

“I also knew that I had the obligation to report to the IRS and/or theDepartment of the Treasury the existence of the Swiss accounts, but for thecalendar year tax returns 1993 through 2000, I chose not to in order to assistin hiding my true income from the IRS and evade taxes thereon, until I filedmy 2001 tax return.”


“Unfortunate” aspects of Williams

Court focused on willful blindness despite ampleevidence of willfulness

The Court stated that the fact that Williams admittedhe never read, the FBAR form or line 7a of the taxreturn, and "never paid any attention to any of thewritten words on his federal tax return," constituted a"conscious effort to avoid learning about reportingrequirements."

The Court equated “reckless conduct” with willfulblindness– an approach rejected by the SupremeCourt.

Willful Blindness – Williams

(cont’d)


Willful Blindness-McBride

United States v. McBride, 2012 U.S. Dist. LEXIS 16 1206, Case No. 2:09-cv-378 ON (D.Utah Nov. 8, 2012)

Preponderance of Evidence standard

Adopted Williams willful blindness standard repeating the assertion thatrecklessness equates to willful blindness

McBride adopted the determination in Williams that Schedule B, line 7a's directionto "[s]ee instructions for exceptions and filing requirements for Form TDF 90-22. 1"placed the taxpayer "on inquiry notice of the FBAR requirement."

Evidence of willfulness should have been sufficient without relying on willful blindness

McBride lied about key details to the IRS during the course of an audit, withheldinformation, and made contradictory statements.

McBride read some of the marketing materials which informed him of the duty toreport foreign accounts.

McBride used nominee entities to move U.S. revenue offshore

His stated purpose of entering the financial plan was to make it appear that hedid not have a financial interest in foreign accounts that he had established bycreating nominee corporations to hold the accounts.

His initial reaction to the promoter when told about the details was “This is taxevasion.”

McBride’s partner’s accountant expressed concerns about the plan, but McBridedid not discuss the plan with his own accountant.


Recklessness =Willfulness

Recklessness is a lower standard than willful blindness.

Recklessness "is an objective standard that looks to whether conduct entails "an unjustifiably high risk of harm that is either known or so obvious that it should be known." Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68 (2007).

“Recklessness requires a known or obvious risk that was so great as to make it highly probable that harm would follow. ” [S]uch risk is substantially greater than that which is necessary to make his conduct negligent. Id at 52. Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52, 127 S. Ct. 2201, 2205 (2007)

Norman v. United States, 138 Fed. Cl. 189, 194-95 (2018 (“Although one of the few consistent pieces of Ms. Norman's testimony was that she did not read her tax return simply not reading the return does not shield Ms. Norman from the implications of its contents”).

Bedrosian v. United States, 912 F.3d 144, 153 (3rd Cir. 2018). (Willful intent includes recklessness. A person "recklessly" fails to comply with an IRS filing requirement when he or she "(1) clearly ought to have known that (2) there was a grave risk that [the filing requirement was not being met] and if (3) he [or she] was in a position to find out for certain very easily."

United States v. Bohanec, 263 F. Supp. 3d 881(C.D. Cal. 2016). Defendant reckless. (“Part III of Schedule B of Defendants' 1998 tax return put them on notice that they needed to file an FBAR.”)


Willfulness - Standard of Proof

The IRS must prove willfulness by a preponderance of the evidence); United States v.

Bohanec, 2016 U.S. Dist. LEXIS 170149, 118 A.F.T.R.2d (RIA) 6757 (C.D. Cal. Dec. 8, 2016);

United States v. Garrity, 304 F. Supp. 3d 267, 274 (D. Conn. 2018). But see IRS CCA

200603026, 2005 IRS CCA LEXIS 83 **5-7 (Sept. 1, 2005) (willfulness must be proven by "clear

and convincing" evidence, and the general presumption of correctness afforded to tax

assessments is inapplicable). Disregarded by the court in Bohanec, and Garrity.

In Carlson v. United States, 754 F.3d 1223 (11th Cir. 2014) the issue was the plaintiff's liability

for the civil " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701.”

The court held that the standard of proof is by “clear and convincing evidence.”

Query: Is this applicable to FBAR violations?

Willfulness can rarely be proven by direct evidence, since it is a state of mind It is usually

established by drawing a reasonable inference from the available facts. The government

may base a determination of willfulness in the failure to file the FBAR on inferences from

conduct meant to conceal sources of income or other financial information. For FBAR

purposes, this could include concealing signature authority, interests in various transactions,

and interests in entities transferring cash to foreign banks. IRM 4.26.16.4.5.3(7).

The National Taxpayer Advocate has argued in favor of the clear and convincing

standard. National Taxpayer Advocate, Area of Focus #12, “The IRS’s Offshore Voluntary

Disclosure (OVD)-Related Programs Have Improved, But Problems Remain,” in Objectives

Report to Congress, Fiscal Year 2017 (June 2016). The NTA has also set forth other criticisms

of the FBAR penalty regime as interpreted by the IRS. Id.


Non-Willfulness: Will You

Know It When you See It?

Presumably non-willful means the absence of

willfulness, actual or constructive, but…

“Non-willful conduct” for the Streamlined

Procedure 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.”


Who Prepared the return?

Self

Tax Preparer

Did the tax preparer use an organizer?

Was it filled out, and sent back?

Were you asked about the existence of any offshore accounts or assets or about any foreign source income by the tax preparer?

If yes, what did you say?

Was the preparer informed about foreign assets/income?

Why not?

When did you first become aware of the foreign source income, foreign accounts or foreign assets?

Willfulness – Factors/Questions


Willfulness -

Factors/Questions (Cont.) Level and type of education?

Work experience?

Was the account opened with a U.S. passport? If not, why not?

What were/are the sources of the funds in the accounts?

Were the accounts held in an offshore structure?

What is the source of the funds?

Legal vs. illegal

Taxed vs. untaxed

How were funds withdrawn?

Were the funds moved from one offshore bank to another?

What did the client do when he was asked by a foreign bank to close his account?


Willfulness--What you hope not

to see.

“[s]he sent emails to her accountant, Peter Kent, that

display a consciousness of guilt, including references

to the IRS being "so far behind us with the UBS junk,

that they won't catch up with [her husband Burt] in his

lifetime and I'll be on my way to Tahiti.“ United States

v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017)


Examination procedures. IRM

4.26.17.1(3) (05-05-2008)

If the examiner notes that a Foreign Bank and

Financial Accounts Report TD-F 90-22.1 (FBAR)

apparently should have been filed during a tax,

Form 8300 or BSA examination, the examiner will

determine:

Whether the FBAR was required; and if so

Whether the FBAR was filed; and if so

Whether the records required by the FBAR instructions

and 31 C.F.R. 103.32 were retained.


FBAR Procedures Starting the

Case - Related Statute

Memorandum.

If the source of the FBAR information is a Title 26 examination, including a Form 8300 examination, the information acquired is return information protected by IRC Section 6103. The examiner must obtain a related statute determination, signed by a Territory Manager before using the return information in an FBAR case.

A related statute determination is a good faith determination with respect to the present case, that the apparent FBAR violation was in furtherance of an apparent Title 26 violation.

A related statute determination is necessary to allow the examiner to use the information obtained from a Title 26 examination in the FBAR examination.

Without a related statute determination, Title 26 information cannot be used in the Title 31 FBAR examination. Any such use could subject the persons making the disclosure to penalties for violating the disclosure provisions protecting Title 26 return information. IRM 4.26.17.2 (01-01-2007)


IRM4.26.17.2.1 (01-01-2007)

Obtaining Related Statute

Determination

The examiner will prepare the Foreign Bank and Financial Accounts

Report Related Statute Memorandum - Form 13535 (RSM).

The RSM should be completed in full after discussion with the group

manager.

Each year requires a separate RSM to facilitate tracking of the

statute of limitations.

A separate RSM is required for each person required to file an FBAR,

even if a joint tax return has been filed.

The territory manager must approve the RSM before the FBAR

examination can commence


The IRS Keeps an FBAR Case File

Distinct from the Title 26 Exam File.

IRM 4.26.17.3 (05-05-2008).

Agent Activity Record

Related Statute Determination if appropriate.

FBAR lead sheet and work papers.

A brief summary memorandum explaining the FBAR violation(s) if

any.

Copy of any delinquent FBAR(s) annotated in red on the top "

Secured by Examination" , if available.

FBAR Monitoring Document (FMD), providing closing information for

the FBAR database and

Closing documents as appropriate.

Letter 3800, Warning Letter for Apparent Foreign Bank and Financial

Accounts Report Violations (copy)


The IRS Keeps an FBAR Case File

Distinct from the Title 26 Exam File.

IRM 4.26.17.3 (05-05-2008)(cont).

Letter 3709, FBAR 30 Day Letter (transmitting Agreement for Assessment and Collection, F-13449) (copy)

Form 13449, Agreement to Assessment and Collection of Penalties Under 31 U.S.C. Sections 5321(a)(5) and 5321(a)(6) (original)

Notice 1330, Information on Making FBAR Penalty Payment By Check (copy)

Power of Attorney document (original)

Form 13448, Penalty Assessments Certification Summary (Title 31 FBAR) (internal document)

Letter 3708, Notice and Demand for Payment of FBAR Penalty (copy)

Notice 1330, Information on Making FBAR Penalty Payment By Check (copy)


Closing the FBAR Case With Penalties.

IRM 4.26.17.4.3 (05-05-2008)

If the examiner, after discussion with the group manager, determines that it is appropriate to assert an FBAR penalty and that a referral to Criminal Investigation is not appropriate or has been declined, the examiner will assert penalties in accordance with the FBAR penalty guidelines. See IRM 4.26.16 for the FBAR penalty computation rules and penalty mitigation guidelines.

Once the penalties have been determined and just before the examiner is ready to issue Letter 3709, the FBAR 30 Day Letter, and Form 13449, FBAR Agreement to Assessment and Collection, the examiner will submit the FBAR case file to an SB/SE Counsel Area FBAR Coordinator.

Each of the eight SB/SE Division Counsel Areas has at least one Counsel FBAR Area Coordinator..

Review by Counsel is generally required except:

When the examiner has determined that there is no FBAR issue or in cases where the examiner has determined that the issuance of Letter 3800, the FBAR Warning Letter, is appropriate.


The Information Document

Request

See Sample of a typical IDR

Attempt to narrow the scope of the IDR by negotiation with the agent

Possession or control

Obtain copies of all requested documents from the taxpayer

Bate stamp all documents

Determine if any privileges apply to the documents including the 5th

Amendment

Beware the required records doctrine

Remember it’s a DOCUMENT request. The taxpayer can’t be required to

create a document that doesn’t exist

Keep a separate record of any documents furnished to the IRS


Taxpayer Defenses

Negate the existence of a violation. E.g.

Not a U.S. Person.

Account Balances not in excess of $10,000.

Not a foreign financial account.

Did not have a financial interest in the account or signature or other authority over the account.

Requisite mental intent didn’t exist.

Statute of limitations expired

Penalty calculated incorrectly

Taxpayer is entitled to the benefit of an IRS program or procedure.

E.g. Mitigation guidelines for small accounts. IRM 4.26.16.6.


Administrative FBAR Appeals

Appeals handles appeals both before and after assessment. IRM 8.11.6.2(17) (09-27-2018). Whether the penalty is pre- or post-assessed when it comes to Appeals, it is considered the same penalty and only one appeal is available. Id.

For pre-assessed FBAR cases, Appeals requires 365 days remaining on the assessment statute of limitations at the time the administrative file is received in Appeals. IRM 8.11.6.3(1) (09-27-2018)

Post-assessment FBAR cases in excess of $100,000 cannot be compromised by Appeals without approval from the Department of Justice. IRM 8.11.6.2(5) (09-27-18).

Pre-assessed FBAR penalties are eligible for Fast Track Settlement (FTS) only if the FBAR 30-Day Letter, Letter 3709, has not been issued to the taxpayer. IRM 8.11.6.2(6) (09-27-2018).

Rapid Appeals Process (RAP) is not available in any FBAR penalty case. IRM 8.11.6.2(8) (09-27-2018).

Post Appeals Mediation (PAM) is not available in any FBAR penalty case. IRM 8.11.6.2(9) (09-27-2018).


Best Practices for IRS FBAR

Examinations

Determine up front who should represent the client at the audit.

Enter into a Kovel arrangement with an experienced CPA or EA.

Consider advising your client to assert his 5th Amendment rights.

If not asserted at the first opportunity it will have been waived!

Understand the law, including recent case law and IRS guidelines, if any.

Make sure you carefully question your client about the facts.

Then do it again.

Advise clients of the potential criminal risks.

Each year of a multiple-year case must be addressed.

Prepare a spreadsheet of possible penalties under different alternatives.

Alert the client to worst case scenarios.


Best Practices for IRS FBAR

Examinations

Do not rely on the unverified facts set forth by your client.

Instead, review all back-up documentation including prior

tax returns, relevant bank statements, and emails.

Obtain copies of any organizer that your client filled out

and sent back to the tax preparer

Take into account unlimited SOL for most Foreign

Information Reporting Forms, and the penalties.

If your client states that he or she relied on a third party,

consider interviewing that person (usually the tax

preparer)

File a Freedom of Information Act (FOIA) request if an

appeal is necessary, or sometimes during an audit.


QUESTIONS?Telephone No.: (310) 208-6200

Email:

[email protected]

Documents

FBAR 2019 Update: FinCen Form 114, Deadlines, Extension ...media.straffordpub.com/products/fbar-2019-update...Aug 06, 2019 · FBAR 2019 Update: FinCen Form 114, Deadlines, Extension,