There is an expectation by the Internal Revenue Service (IRS) that U.S. persons are aware that their income is taxed on a global basis—although the U.S. is one of very few countries that do so. Failure to file required reporting on assets outside of the U.S. can lead to a foreign information penalty—sometimes with no notice provided.
High-asset U.S. taxpayers and businesses with offshore tax and income interests elsewhere in the world have a duty to report those holdings and income. The admonition also applies to U.S. persons who receive money from abroad, or who live abroad and earn, spend, and save the entirety of their income in a foreign jurisdiction. High-income, moderate, and low-income taxpayers and businesses can fall into the pitfall of IRS foreign information penalties—even as they do their best to report.
What is the issue?
For several years, the Taxpayer Advocate Service (TAS) has advanced a legislative recommendation to address the definition of “willful” when considering assessment of penalties for foreign bank and financial accounts. Under the current process, let’s say a taxpayer becomes aware of the necessity to file a Report of Foreign Bank and Financial Accounts (FBAR). They duly prepare and file the report. When the report rolls through the IRS computer system, a late filing penalty is assessed at the outset—without the benefit of explanation by the taxpayer or review by the IRS.
It gets worse when the IRS, which can waive these penalties for reasonable cause, creates an onerous path for taxpayers to request removal of the fees. The taxpayer request may not be reviewed—or it may be reviewed much further down the line if the taxpayer continues to challenge the assessment, which most taxpayers do not.
While one of the overall mandates of the IRS is to encourage tax compliance—the current process around automatic assessment of fees upon taxpayers who are trying to remain compliant is troubling. TAS notes between 2018 and 2021, the abatement rate for these penalties was approximately 74 percent.
On this issue, a taxpayer recently won a case against the IRS after asserting the IRS did not have the authority to assess these penalties. The TAS agreed with this positive finding by the Tax Court.
But—the TAX recommendation for the IRS to modify the definition of “willful” regarding foreign information penalties remains a paper recommendation.
If you have foreign assets, offshore tax holdings, or interest in a foreign bank account you have not reported, speak with an experienced tax lawyer about reporting and regaining compliance.
A skilled legal team you can count on for experienced representation on compliance, alleged tax fraud, and tax litigation
Locally and abroad, our tax lawyers at Robert J. Fedor, Esq., LLC provide strategic guidance and representation with IRS audits, criminal tax investigations, and other tax issues. Call 440-250-9709 or contact us online today. We have offices in Chicago and Cleveland.