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Pressure Rises on Taxpayers to Report Foreign Assets as FBAR Deadline Nears

April 3, 2020

Increased Pressure on Taxpayers to Report Foreign Assets with Looming FBAR Deadline

Core Issue: Taxpayers were facing a fast approaching June 30, 2013 deadline to file the Report of Foreign Bank and Financial Accounts (FBAR) for the previous tax year.

Main Concern: Government was applying more pressure for taxpayers to declare their foreign assets.

Procedure Required: Form due to arrive at IRS by the due date, not to be mailed by the deadline.

The government was stepping up the pressure on taxpayers to reveal their offshore assets as a deadline to report foreign bank accounts drew closer, practitioners explained to BNA in a series of interviews.

Taxpayers needed to be acutely aware of their requirement to file the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) as the June 30 due date approached, they said.

“There are no extensions and no exceptions,” Jeffrey Neiman, a former federal prosecutor who had gone into private practice in Miami, explained to BNA on June 24 of that year. “The passing of the FBAR deadline will certainly create more headaches for taxpayers with undeclared foreign assets.”

A number of tax professionals interviewed by BNA impressed upon taxpayers their great need to be aware that the filing was expected to be received by the Internal Revenue Service by the deadline, not mailed by the deadline (as with other IRS returns). In light of the fact that June 30 fell on a Sunday that year, technically the form must have arrived by Friday, June 28.

Possibly Ruinous Penalties
Neiman said the FBAR was just one facet of the government’s continued pursuit of information on accounts and assets held in other countries. In this era of increased criminal enforcement, the bright spotlight on the FBAR, and the Foreign Account Tax Compliance Act, it was more important than ever for taxpayers to come into compliance, he said.

U.S. citizens living abroad, dual citizens, and those living in the United States all need to understand their responsibilities, he said. Scott Michel, a practitioner at Caplin & Drysdale in Washington, said that he believed the attention surrounding the FBAR has been a motivator for taxpayers to come into compliance, even though there was likely still more awareness internationally than there was in the United States.

“There are still a lot of people in the U.S. who have never heard of it,” he said on June 24, adding that the “potentially catastrophic penalties” for non-filing of the report landed on the radar of many more individuals and tax professionals in the weeks leading up to the approaching date.

Even More Aggressive
“In the past a lot of practitioners believed that these cases would resolve themselves with a one-year penalty,” he said, noting that “The government was now more aggressive. The government bears the burden of proving willfulness, but the burden might be lower than people think.”

Josh O. Ungerman, a partner with the Dallas firm Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP, said on June 24 that he believed there was now more heightened awareness of the FBAR requirement among return preparers, predicting that IRS would receive a big influx of these reports.

“I think the IRS was definitely flexing its muscles to send a message to professionals, tax advisers, and taxpayers.”

Ungerman said the government got the word out early in June when it sued a taxpayer in federal court for millions in penalties for failure to reveal the existence of a Swiss bank account on the FBAR (117 DTR K-3, 6/18/13).

In the lawsuit, the Department of Justice argued that Florida resident Carl R. Zwerner neglected to report the account in four consecutive years and was liable for penalties in each of those years totaling nearly $3.5 million. The government demonstrated that Zwerner’s failure to file was “willful,” and he refused to pay the penalties even thought they sent him multiple notices (United States v. Zwerner, S.D. Fla., No. 1:13-cv- 22082, complaint filed 6/11/13).

The Significance of the DOJ Lawsuit
Ungerman and other attorneys said the case demonstrated that the government was gearing up to apply pressure on taxpayers and was not shy about imposing multi-year penalties.

“I think the IRS was definitely flexing its muscles to send a message to professionals, tax advisers, and taxpayers that it has more tools at its disposal that it hasn’t yet begun to use to punish recalcitrant taxpayers with offshore holdings,” Ungerman told BNA.

He said the timing of the case appeared to coincide with the arrival of closing agreements in IRS’s offshore voluntary disclosure initiative (OVDI) at the doorsteps of many taxpayers. The program gives taxpayers an opportunity to reveal their foreign assets in exchange for a static penalty and the chance of being spared criminal prosecution.

“The fact that we would see this case now was likely by design and not coincidence,” Ungerman said.

Ungerman stressed that while taxpayers do indeed have the ability to “opt out” of the OVDI, they should weigh their options carefully before determining if that was the best way to go.

“Those taxpayers with less than stellar facts that are considering opting out must conduct a thorough evaluation of their circumstances,” Ungerman said. “They have to understand that the IRS can go back six years,” he told BNA.

Compliance Critical
Caplin’s Michel stated that taxpayers needed to be aware that the government was scrutinizing cases thoroughly, and there were no guarantees that a case would not be sent over to the Justice Department.

“Taxpayers should not take comfort that they will sort of skate through the review process,” he said. At the same time, Michel said, it was important to remember that “not everyone who has failed to file an FBAR was a criminal.”

For a long time, the form was an obscure filing, he said, adding that those living overseas may have been completely oblivious to it. The best advice for such people is to go ahead and file their FBARs. In addition, other options exist for coming into compliance, Michel told BNA.

The Caplin & Drysdale attorney said the obligation to make sure the form arrived at IRS by June 28, instead of requesting that it be postmarked by June 30, was “just silly.” He pointed out that although the IRS is receiving the form, that it was actually under the auspices of the Financial Crimes Enforcement Network (FinCEN). This detail confused many people.

“It looks like a tax form that was prepared by the IRS and it goes to an IRS service center,” Michel noted, saying it made more sense for it to be subject to the same deadline rule as IRS forms. That it was physically due on June 28 was “incomprehensible to me,” he said.

‘Blissfully Unaware’
Dennis Brager, a former IRS senior trial attorney, referred to the configuration of the deadline as “one more headache that you don’t need.”

As head of the Brager Tax Law Group in Los Angeles, he said he was consistently encountering people who had no clue about the FBAR and even taxpayers who were in fear of filing the report.

“There’s still a large number of people who are blissfully unaware,” he told BNA June 24. “The prevailing view was always, `I’m paying taxes where the account was located and therefore it’s not taxable here in the United States. What they’re doing was using a dangerous shortcut. It doesn’t change the fact that it needs to be reported here.”

On top of the numerous people who had no idea, Brager said, there was “a whole group of people who have become aware of the requirement and are paralyzed with fear that the IRS will come after them for back years. They’re plain scared and are continuing to let things lapse.”

He echoed that the Zwerner case was unique, because it asserted multiple FBAR penalties against a single taxpayer, but said at the time that it was too soon to draw conclusions about why the government decided to take that approach.

“At this point we don’t know any of the background. They could have considered criminal prosecution also,” Brager said. “Until we get some more details about who this fellow was and why they assessed multiple penalties, it’s tough to say.”

Confusion Continued
Kevin Packman, an attorney with Holland & Knight LLP in Miami, Florida observed that there was still much uncertainty about when an FBAR must be filed.

“Certain people still have confusion,” he said, noting that he had met certified public accountants who thought that domestic accounts held through foreign structures needed to be reported.

Touching on another issue in a June 24 interview, Packman said taxpayers and practitioners were continuing to grapple with the fact that they needed to file both the FBAR and, in some cases, Form 8938, Statement of Specified Foreign Financial Assets (103 DTR J-1, 5/30/12).

The two forms have some similarities but a lot of differences, Packman said. The FBAR was used by taxpayers to report their foreign bank accounts to the government. Form 8938 implements new tax code Section 6038D, which took effect under FATCA.

Form 8938 is for taxpayers to report a wide array of “specified foreign financial assets,” with notable differences from the FBAR. The two regimes come from different clusters of the law and have different goals, which Packman said remained difficult for some to understand.

IRS announced proposed rules on Section 6038D (REG-130302-10) in December 2011 (241 DTR GG-1, 12/15/11) and followed them with Notice 2013-10 which extended the deadline for certain reporting in January 2013 (16 DTR G-3, 1/24/13).

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