The IRS recently released an update to the section of its Internal Revenue Manual on appeals and penalties for taxpayers who have allegedly failed to file Reports of Foreign Bank and Financial Accounts, or FBARs. Most of the update comprises clarifications on how FBAR penalties will be reviewed administratively by the IRS Office of Appeals. The precision of these updates, however, suggests a new clarity and focus at the agency. To put it plainly, the IRS may be done messing around when it comes to FBAR compliance.
U.S. taxpayers who have any financial interest in one or more offshore bank accounts with an aggregate balance of $10,000 at any point in a year are required to e-file FBARs. Failure to do so can trigger substantial civil penalties -- especially if the IRS determines the failure was willful -- even criminal charges. The FBAR requirement is in addition to Form 8938 required by the Foreign Account Tax Compliance Act.
You should also know the IRS is actively pressuring foreign banks to report U.S. taxpayers' accounts. If you want to participate in the Offshore Voluntary Disclosure Program (OVDP), you must act before the IRS is notified of your account. If the IRS finds out about an offshore account before you report it, you will face higher civil penalties and potential criminal prosecution.
One significant change to the FBAR penalty procedure is that a memo by the IRS Counsel determining willfulness will now be included in the taxpayer's file before the IRS Appeals Office conference. Therefore, that memo can be obtained through a Freedom of Information Act request.
Other changes emphasize that a far broader array of options are available to resolve FBAR civil penalties before they are officially assessed than after. For example, alternative dispute resolution, including the Fast Track Settlement process, is only available pre-assessment.
Department of Justice approval is required before the IRS can settle post-assessment FBAR penalties in excess of $100,000. Also, if the taxpayer and the IRS cannot come to a resolution, no further action is required before the IRS can begin expedited collections.
If you haven't filed a FBAR on an offshore bank account, your best option is to consult with a lawyer before the IRS learns of your offshore account. Once it does, as these changes emphasize, act immediately before it officially assesses the penalty. After that, your options are sharply limited. The best cause of action to reduce civil penalties and avoid criminal prosecution is to enter the OVDP. We have represented many people in entering the OVDP and every one has successfully avoided criminal prosecution and paid significantly less in civil fines.
Source: Forbes' IRS Watch blog, "FBAR: Revised IRS Penalty Appeals Procedures," Charles Rettig, Nov. 25, 2013