FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS. Lance Wallach, expert witness.

You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be prosecuted. They are wrong.

To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003. How much money does the IRS say he hid? A whopping $90,000. That’s it.

But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.

“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.

The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%.

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Issues with Potential Criminal Charges: Voluntary Disclosure-FBAR-OVDI IRS Information

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1. Some of these taxpayers have recently become aware of their filing obligations and now seek to come into compliance with the law. The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure will go into effect on Sept. 1, 2012.

Description of proposed new procedure:

While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Unfiled Returns

The remedy is to get the returns filed

There are two advantages to filing as soon as possible:

Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

Taxpayers who haven’t filed returns always want to know what problems could result from failure to file returns. The following is from the IRS website:

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

FBAR-What are You Hiding

The collapse of Swiss bank secrecy, the IRS settlement with UBS, the criminal investigation of HSBC and the related IRS voluntary disclosure program all have put foreign bank accounts in the spotlight. Tens of thousands, if not hundreds of thousands, of U.S. taxpayers have foreign bank accounts. Some of those taxpayers opened their foreign bank account in order to hide money or the earnings in the account from the IRS.
However, the majority of taxpayers with foreign bank accounts never intended to hide their foreign accounts from the IRS. Some just inherited the foreign account from a relative who lived abroad at some point in their lives. Other taxpayers lived abroad themselves and opened a bank account in a foreign country as a matter of convenience or necessity. Still other U.S. taxpayers with foreign accounts never even lived in the United States but are U.S. citizens, and therefore are subject to U.S. reporting requirements, simply because one or both of their parents were U.S. citizens.

Regardless of why the foreign account was created or acquired, any U.S. person with an interest in, or signatory authority over, a foreign financial account must file a Report of Foreign Bank Accounts (FBAR) with the United States Treasury Department. The IRS recently has stepped up enforcement against taxpayers who fail to file FBARs. The basic penalty for a simple, non-willful failure to file a FBAR is $10,000 per year for 2005 and later years. (Prior to 2005, there was no penalty at all for non-willful violations.) However, if the IRS can prove that the taxpayer willfully failed to file a FBAR, or willfully filed a false FBAR, the penalties are much higher. The taxpayer can be subject to criminal prosecution and, for 2005 and later years, the IRS can impose crippling civil penalties of up to 50% of the highest balance in the foreign account for each year that the violation continues. (Prior to 2005, the penalty for a willful violation was capped at $100,000 per year.)

If the IRS catches a taxpayer who failed to file a FBAR, the IRS will either refer the case for prosecution or attempt to assert a penalty based on some percentage of the highest balance in the foreign account. In fact, even taxpayers who approach the IRS and voluntarily disclose the existence of their foreign account will be charged a penalty based on a percentage of the highest balance in the foreign account. Taxpayers who voluntarily disclosed their foreign account prior to October 15, 2009 are being charged a 20% penalty. Taxpayers who make a voluntary disclosure after October 15, 2009 are still being accepted into the voluntary disclosure program, but they will be charged a penalty of at least 20%, and probably more, of the highest balance in the foreign account.

Any penalty that is based on a percentage of the balance in the foreign account is premised on the idea that the FBAR violation was willful, and therefore, the IRS could take up to 50% of the balance in the account for each year of the violation. However, if the FBAR violation was not willful, then the penalty would be limited to $10,000 per year, and it would not be possible to charge a penalty based on a percentage of the balance in the account. Even taxpayers who have entered the voluntary disclosure program can opt out of the program and contest the willfulness penalty that is imposed as part of the program. Thus, when advising a client regarding his or her exposure to FBAR penalties, it is essential to determine whether the failure to file the FBAR was willful.

Willfulness is defined as "an intentional violation of a known legal duty." The government has the burden of proving willfulness. To prove willfulness, the government must establish that (1) the taxpayer was required to file a FBAR; (2) the taxpayer knew that he or she had to file a FBAR; and (3) the taxpayer intentionally failed to file, or falsely filed, the FBAR. It is very difficult for the government to prove that a taxpayer knew that he or she had to file a FBAR. This is particularly so, given the complete lack of FBAR enforcement over the past 30 years. Very few taxpayers and tax return preparers had ever heard of a FBAR until recently. Indeed, most IRS agents themselves were completely unaware of the FBAR filing requirements until a few years ago when FBARs began to receive more attention from the IRS.

So, how does the IRS go about proving that a taxpayer knew that he or she had to file a FBAR? The Internal Revenue Manual identifies several types of evidence that could support an inference that a taxpayer knew of the requirement to file a FBAR yet nevertheless failed to file it. Such evidence includes, but is not limited to, (1) failure to report income from the foreign bank account on the taxpayer's tax return; (2) failure to check the box on Schedule B asking whether the taxpayer has a foreign account, or falsely checking the box "No"; (3) discussions between the taxpayer and an accountant regarding the foreign bank account; and (4) false statements to an IRS agent who inquires about the existence of a foreign bank account.

Many IRS agents believe any taxpayer who failed to report income from a foreign account and failed to disclose the account in response to the question on Schedule B is a tax cheat and liar who must have known about the FBAR filing requirements yet intentionally failed to comply. Nothing could be further from the truth.

As described above, many taxpayers created or inherited a foreign account for completely legitimate, non-tax-related reasons and believed that income earned in a foreign country is not reportable in the United States until it's brought into the country. The tax code is so complicated and riddled with exceptions regarding the reporting of off-shore earnings that such a belief is very understandable. Further, Form 1040 is sufficiently complex that many taxpayers simply signed their tax returns without reviewing every line, including the line at the bottom of Schedule B asking whether the taxpayer had a foreign bank account. Most accountants never discussed this aspect of the return with their clients and simply checked the box "no," or left it blank, with no further inquiry.

Our ex IRS agent who was a manager in the international division of the IRS suggests you file and then opt out to reduce taxes.