The Internal Revenue Service (IRS) has a longstanding interest in the pursuit and prosecution of those who commit tax fraud through offshore tax dodges. The National Taxpayer Advocate recently reviewed how the IRS and the courts consider penalties for failure to file appropriate Foreign Bank and Financial Account Reports (FBARs).
Since 1970, FBAR filings have been required of U.S. persons who have offshore financial interests or foreign bank accounts that meet a threshold for reporting to the IRS. Initially, few investors understood the Bank Secrecy Act and its attending FBAR requirement. Today, the IRS assumes those who have offshore holdings are legally sophisticated and able to understand their own regulatory reporting requirements.
Yet—it is not always the case that a taxpayer with foreign holdings understands the requirement—or the penalties involved in failing to file an FBAR. The specifics about who does—and who does not—need to file an FBAR can get detailed. Basically, a U.S. person with authority, ownership, or an interest in a financial account outside of the U.S., and whose holdings exceeded $10,000 at any time of the year, is required to file an FBAR.
A review from the National Taxpayer Advocate (NTA) discusses the reporting requirement as well as the potential for the IRS to step over its boundaries in assessing penalties to those who do not file a required FBAR. The distinction made by the NTA is drawn between taxpayers who are willfully abusing the system and evading taxes, and those who have unwittingly, and unwillingly, made a mistake.
In a recent case considered by the U.S. Supreme Court (SCOTUS), the IRS pursued penalties against a taxpayer, Alexandru Bittner, who had not known about the FBAR reporting requirement until he returned to the U.S. from Romania. At that time, Mr. Bittner filed five FBAR reports for 2007 through 2011. Overall, Mr. Bittner had 272 different accounts which he reported on in different years. While the IRS did not claim that Mr. Bittner’s belated accounting for his foreign accounts was willful—the IRS still sought to attach a $10,000 penalty to each account—not to each of the five reports. By doing so, the IRS expected a $2.72 million payday. Instead, SCOTUS decided the penalty could be assessed per report—not per account.
In this case, the IRS sought full penalties, as defined by the IRS, to punish Mr. Bittner, who all agreed did not willfully avoid his duty to report. SCOTUS held differently and pushed back against the IRS. If you find yourself assessed with penalties and interest with which you disagree, speak with a tax attorney experienced with tax litigation and the IRS.
Contact us when you are challenged by an IRS audit or FBAR investigation
The tax group at Robert J. Fedor, Esq., LLC helps you respond strategically to questions about taxes and failure to file returns or regulatory reports. We serve local and international clients from offices in Chicago and Cleveland. Call 800-579-0997 or reach out to us today.