November 14, 2014

Ohio Society of CPAs Columbus Accounting Show

November 14, 2014 — Vince Nardone, managing member of Nardone Law Group, LLC, spoke at the Columbus Accounting Show held by the Ohio Society of CPAs. Vince addressed the attendees regarding the representation of financially distressed businesses and individuals in front of the Internal Revenue Service, a topic that heavily impacts our clients. Thank you to the OSCPA for extending this opportunity!

November 13, 2014

Updated 'Streamlined Domestic Offshore Procedures' Target U.S. Residents with Undisclosed Offshore Accounts, Assets

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the latest developments in the Internal Revenue Service’s efforts to encourage taxpayers to disclose foreign accounts, assets, or entities. The recently expanded Streamlined Filing Compliance Procedures are available to a wider population of U.S. taxpayers living outside the country (via the ‘Streamlined Foreign Offshore Procedures’) and to certain U.S. taxpayers residing in the United States (via the ‘Streamlined Domestic Offshore Procedures’).

Our previous article, on the Streamlined Foreign Offshore Procedures, laid out the criteria and benefits of that program, as it relates to non-U.S. residents. This article provides a brief overview of the important requirements and effects of the Streamlined Domestic Offshore Procedures. Since the program’s expansion to U.S. residents is a fairly recent development, taxpayers may have questions about whether the Streamlined Domestic Offshore Procedures apply to them and, if so, what benefits the procedures provide. To answer these questions, we will start by reviewing the applicable criteria.

‘Streamlined Domestic Offshore Procedures’ Criteria

In addition to the general streamlined filing requirements, the Streamlined Domestic Offshore Procedures have specific criteria for U.S. residents. Taxpayers seeking to utilize the Streamlined Domestic Offshore Procedures must:

1. Fail to meet the applicable non-residency requirement (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement);

2. Have previously filed a U.S. tax return (if required) for each of the most recent three years for which the U.S. tax return due date has passed;

3. Have failed to report gross income from a foreign financial asset and pay tax as required by U.S. Law, and may have failed to file an FBAR and/or international information returns with respect to the foreign financial asset; and

4. Show that such failures resulted from non-willful conduct.

NLG Comment: For a review of the “applicable non-residency requirements,” as well as the “non-willful conduct” requirement, please see our previous article regarding ‘Streamlined Foreign Offshore Procedures.’

Compliance with the Streamlined Domestic Offshore Procedures

Once a taxpayer qualifies for participation under the Streamlined Domestic Offshore Procedures criteria, there are several important instructions the taxpayer must follow. Eligible taxpayers, seeking to utilize the streamlined domestic procedures, must:

1. Submit a complete and accurate amended tax return for the period(s) in question, together with any required information returns (Delinquent income tax returns may not be filed using these procedures);

2. Write “Streamlined Domestic Offshore” in red, at the top of the first page of each amended tax return, to indicate that the returns are being submitted under these procedures;

3. Complete and sign a statement of Certification by U.S. Person Residing in the U.S.;

4. Submit payment of all tax due, as reflected on the tax returns, and all applicable interest with respect to each of the late payment amounts;

5. Submit payment of the five percent miscellaneous offshore penalty, discussed below; and

6. File delinquent FBARs, and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Effect of Streamlined Foreign Offshore Procedures

At this point, you may be wondering, “Why would I want to use these procedures? What is the benefit?” Eligible taxpayers who utilize the Streamlined Domestic Offshore Procedures and comply with all of the applicable instructions will be subject only to a five percent miscellaneous offshore penalty. The five percent miscellaneous offshore penalty is based on the highest aggregate balance of the taxpayer’s foreign financial assets causing the tax compliance issue over the relevant period. All other penalties associated with the non-U.S. source income will be waived. The streamlined procedures do not, however, limit the civil penalties otherwise associated with the reporting of U.S. source income and do not provide protection from a possible criminal prosecution referral from the IRS.

Therefore, the Streamlined Foreign Offshore Procedures can be a very helpful tool for certain taxpayers seeking to become compliant with U.S. tax reporting and payment obligations related to their foreign accounts, assets, or entities.

Contact Nardone Law Group

This article is intended to highlight some important points of the Streamlined Domestic Offshore Procedures. If you have an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorneys today. Nardone Law Group routinely represents individuals and businesses in federal and state tax issues, including the Streamlined Domestic Offshore Procedures. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

November 11, 2014

'Streamlined Foreign Offshore Procedures' Allow U.S. Taxpayers Residing Outside the U.S. to Disclose Offshore Accounts, Assets

Nardone Law Group’s experienced tax attorneys, located in Columbus, Ohio, routinely advise taxpayers about their U.S. tax reporting obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. In our previous article, we provided an overview of the IRS’ Streamlined Filing Compliance Procedures. In 2014, the IRS expanded the streamlined procedures, making them available to a wider population of U.S. taxpayers living outside the United States (via the ‘Streamlined Foreign Offshore Procedures’) and, for the first time, to certain U.S. taxpayers residing in the United States (via the ‘Streamlined Domestic Offshore Procedures’).

This article highlights some important information regarding the Streamlined Foreign Offshore Procedures, which offers non-U.S. residents the opportunity to report previously undisclosed foreign financial accounts, assets or entities. Our next article will discuss the Streamlined Domestic Offshore Procedures, which provides U.S. residents the same opportunity. There are important, and sometimes subtle, differences between the two procedures, and taxpayers might have some questions about which category they qualify for and what benefits are associated with those categories. We will try to answer some of those questions now, starting with “Who qualifies as a non-U.S. resident?”

Non-Residency Requirements

The first question that should arise is: how does the Internal Revenue Service define a non-resident? A common misconception is that one must permanently live outside of the United States to be a “non-resident.” But, U.S. Citizens or Lawful Permanent Residents (i.e., ‘Green Card Holders’) satisfy the “applicable non-residency requirement” if the individual did not have a U.S. abode and was physically outside of the United States for at least 330 full days, in one or more of the most recent three years for which the U.S. tax return due date has passed.

NLG Comment: It is important to note that neither temporary presence of the individual in the U.S. nor maintenance of a dwelling in the U.S. by an individual necessarily mean that the individual’s abode is in the U.S. For joint return filers, both spouses must meet the applicable non-residency requirement.

Individuals, who are not U.S. Citizens or Lawful Permanent Residents, however, may meet the applicable non-residency requirement if the individual fails to meet the ‘substantial presence test,’ in one or more of the last three years for which the U.S. tax return due date has passed. The ultimate determination as to whether one satisfies the non-residency requirement, requires a detailed review of the facts and circumstances of each particular taxpayer’s case. Once it has been determined that a taxpayer qualifies as a “non-resident,” the next step is to consider the additional criteria.

‘Streamlined Foreign Offshore Procedures’ Criteria

In addition to the general streamlined filing requirements, covered in our previous article, the Streamlined Foreign Offshore Procedures have specific criteria for non-U.S. residents. Taxpayers seeking to utilize the Streamlined Foreign Offshore Procedures must:

1. Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account; and

2. Show that such failures resulted from non-willful conduct (i.e., conduct that is due to negligence, inadvertence or mistake, or conduct that is the result of a good-faith misunderstanding of the requirements of the laws.

NLG Comment: The certification of “non-willful” conduct is an essential component for taxpayers to understand when deciding whether they qualify for the Streamlined Foreign Offshore Procedures. The taxpayer must certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. If the IRS determines that the taxpayer intentionally falsified the certification, the taxpayer may be subject to prosecution. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct, and therefore seek assurances that they will not be subject to substantial monetary penalties and/or criminal liability, should consider participating in the Offshore Voluntary Disclosure Program.

Effect of Streamlined Foreign Offshore Procedures

Once a taxpayer meets the applicable non-residency requirement and is eligible for the Streamlined Foreign Offshore Procedures, the taxpayer must file the delinquent or amended tax returns, along with any required information returns and any delinquent FBARs. The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

The major benefit of qualifying as a non-U.S. resident is that all penalties related to the disclosure will be waived. However, the streamlined procedures do not limit the civil penalties associated with the reporting of U.S. source income or provide protection from a possible criminal prosecution referral from the IRS. An experienced tax attorney can help taxpayers determine if they can take advantage of this program and the beneficial penalty waivers it provides. 

Contact Nardone Law Group

As this article illustrates, there are many factors for taxpayers to consider when determining what method of offshore account disclosure will produce the optimal results. It is important to have an experienced tax attorney evaluate your case to decide whether the Streamlined Foreign Offshore Procedures, the Offshore Voluntary Disclosure Program, or opting out and undergoing a regular civil examination is best for you. Nardone Law Group frequently represents individuals and businesses in federal and state tax issues, including the Streamlined Foreign Offshore Procedures. If you have an undisclosed foreign account, asset, or entity, contact an experienced Nardone Law Group tax attorney today. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case

November 06, 2014

Taxpayer's Criminal Conviction for Assisting in False Tax Return Filings Upheld by U.S. Court of Appeals

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated regarding the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. In our prior article on IRS Audits and Examinations, we discussed the IRS’ ability to conduct civil investigations of taxpayers’ federal income tax returns and to impose accuracy-related penalties, resulting from any deficiencies. It is important to know that the IRS also has the ability to conduct criminal investigations, which may result in fines, as well as sentences of incarceration. Taxpayers who commit tax crimes, such as filing false returns, making fraudulent claims, or assisting others in similar acts, can face severe punishments if convicted. A recent decision by the U.S. Court of Appeals highlighted the government’s authority to criminally punish fraudulent taxpayers.  

Tax Fraud Results in 97 Month Jail Sentence

In the case of United States v. Bell, the U.S. Court of Appeals for the Ninth Circuit affirmed the conviction of a taxpayer who made false, fictitious, and fraudulent claims to the U.S. Treasury, and assisted in the filing of false tax returns. The case concerned a tax scheme, involving false Form 1099-OIDs, in which a taxpayer would file the form, which falsely stated that an amount of income tax had been withheld. The taxpayer would then rely on that false withholding figure to submit a fraudulent refund claim.

Bell filed five false income tax returns using this scheme. In addition to these false submissions and fraudulent refund claims on his own returns, Bell also promoted the tax scheme to other people, including his son. From October 2008 to October 2009, Bell assisted six taxpayers in filing fifteen tax returns using the Form 1099-OID scheme, collectively requesting $2.7 million in unwarranted refunds, and causing the IRS to mistakenly make refund payments exceeding $670,000.

At trial, Bell proceeded pro se (representing himself) and, according to the court, consistently refused to recognize the authority of the court or to participate in the proceedings.  At the end of trial, the district court delivered jury instructions, the government gave its closing argument, and Bell remained silent, effectively waiving his right to make a closing argument. The jury subsequently convicted Bell as charged. The district court calculated Bell’s sentencing guideline range to be 97 to 121 months, and accordingly sentenced him to 97 months of incarceration, followed by three years of supervised release. Ultimately, the U.S. Court of Appeals affirmed Bell’s conviction.

NLG Comment: This case is a prime example of the severe punishments taxpayers can incur when attempting to defraud the federal government. Not only can the IRS impose hefty civil fines and penalties, but it can also conduct criminal investigations, which can result in lengthy jail sentences. Furthermore, this case illustrates the importance of consulting with an experienced tax attorney to help navigate the intricacies of IRS investigations and any subsequent litigation that might arise.

Contact Nardone Law Group

Nardone Law Group routinely represents businesses and individuals who are undergoing an IRS audit or examination, including criminal investigations. If you have been contacted by an IRS revenue officer, or if you are currently facing a civil or criminal tax investigation, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professional staff have vast experience representing taxpayers before the IRS. We will thoroughly review your case and determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 31, 2014

Taxpayer's Failure to Substantiate Gambling Loss Deductions Results in Accuracy-Related Penalties

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise clients on tax law issues involved with gambling. One issue that taxpayers frequently encounter is the need to substantiate gambling losses before the IRS. Whether the taxpayer is a professional or recreational gambler, gambling losses can only be deducted to the extent of gambling winnings. Professional gamblers have the additional benefit of being able to deduct ordinary and necessary business expenses related to their gambling, such as travel, food, and lodging expenses. Amateur, recreational gamblers cannot deduct these expenses because they are considered personal in nature when the activity is not engaged for profit. Professional gamblers report their gambling winnings and losses on Schedule C, while recreational gamblers report their losses as itemized deductions.

Gambling is often a form of entertainment for most people and, as a result, they do not maintain detailed records of their gains and losses, like someone would for a business or other for-profit activity. Gambling losses usually exceed gambling winnings, so taxpayers often have issues substantiating their gambling losses. Adequate and thorough documentation is required to claim gambling losses, and can often help taxpayers substantiate and defend their claims to the IRS, should any discrepancies arise in an audit or examination. A recent decision by the U.S. Tax Court highlights the importance of adequate gambling records, as well as the IRS’ ability to assess accuracy-related penalties as a result of deficiencies.

Unsubstantiated Gambling Loss Deductions

In Jacqueline F. Burrell v. Commissioner, a recreational gambler was denied deductions for gambling losses beyond amounts conceded by the IRS for the years 2007 to 2009. The IRS’ determination found deficiencies of approximately $115,000 for the relevant period and, as a result, assessed accuracy-related penalties of nearly $23,000. The court found that the petitioner failed to properly substantiate additional losses, even though she submitted documents entitled “Cash Recycled” and “Cash Ledger.” The documents helped the court establish the amount of cash the taxpayer brought to the casinos each day, however, they did not show how much she left with at the end of the day.

Taxpayers are required to maintain permanent books of account or records, sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown on their federal income tax return. If taxpayers establish that an expense is deductible but are unable to substantiate a precise amount, the court may estimate the amount, bearing heavily against the taxpayer. In the case of gambling winnings and losses, taxpayers can substantiate their income and deductions by maintaining a detailed log.

The petitioner did not track her winnings and losses. However, based on casino letters and other documents, the IRS conceded that the petitioner was entitled to deduct approximately 70% of the total reported gambling losses for the three years involved. Since the petitioner had no records of her winnings and losses, the court held that the evidence was insufficient to entitle the petitioner to greater deductions for gambling losses than those conceded by the IRS. Consequently, the court found the petitioner liable for the accuracy-related penalty of $23,183.20.

NLG Comment: This case exemplifies the importance of keeping detailed records, for both professional and recreational gamblers. Adequate documentation of financial gains and losses can help taxpayers substantiate claims on their federal income tax returns, as well as defend against potential liabilities in the event of an IRS audit or examination.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals who are undergoing an IRS audit or examination, including professional and amateur gamblers. If you have been contacted by an IRS revenue officer, or if you have questions regarding deductions for gambling losses, contact one of our tax attorneys today. Our tax lawyers and professional staff have vast experience representing and advising professional and non-professional gamblers regarding substantiating gambling losses. Adequate documentation is vital to ensuring compliance with all relevant tax reporting requirements. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 27, 2014

What Taxpayers Need to Know About IRS Audits and Examinations, And the Possibility of Penalties

Nardone Law Group’s experienced tax attorneys, in Columbus, Ohio, routinely assist individuals and businesses that become subject to an Internal Revenue Service audit or examination. An IRS audit or examination occurs when the IRS selects a tax return and reviews the taxpayer’s records from which the reported information on the tax return is derived. One of the most important things taxpayers can do to avoid a potential audit or examination is to maintain adequate personal and business records. While many tax practitioners advise clients to maintain tax records for seven years, Nardone Law Group recommends that tax records be retained indefinitely.

When taxpayers are subjected to an audit or examination, properly retained and organized records will help to effectively defend against the possibility of an assessment of additional taxes, as well as accuracy-related penalties. Proper documentation allows taxpayers to substantiate all business or personal expenses deducted on a tax return and will help to resolve any discrepancies that may arise. A recent U.S. Tax Court decision, which upheld an accuracy-related negligence penalty against a military service member, exemplified the IRS’ ability to assess penalties against negligent taxpayers.

Tax Court Upholds IRS Determination Regarding Charitable Deductions

In Thad D. Smith v. Commissioner, the U.S. Tax Court addressed the issue of tax deductions for charitable donations and the IRS’ ability to assess accuracy-related penalties for negligently unsubstantiated deductions. The petitioner, a pro se military service member, timely filed a federal income tax return for 2009, on which he claimed itemized deductions of $52,810. Upon audit, the IRS determined that $35,238 of these deductions should be disallowed due to a lack of substantiation. While the case was being considered by the IRS Appeals Office, the petitioner submitted an amended 2009 return, increasing his claimed deduction for noncash charitable contributions from $490 to $27,767. He based this new amount on clothing and other household items that he allegedly donated to the American Veterans National Service Foundation (AMVETS) in 2009.

NLG Comment: IRS determinations in a notice of deficiency are generally presumed correct, so taxpayers bear the burden of proving that determinations are erroneous. Taxpayers must demonstrate their entitlement to deductions and are required to substantiate their claims.

For noncash charitable contributions, the substantiation requirements become increasingly more stringent as the gifts increase in value. The most basic requirement provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with a “contemporaneous written acknowledgement of contribution by the donee organization.” This acknowledgment must include a description of any property other than cash.

The petitioner did not maintain written records establishing when or how the items were acquired, or what their cost bases were. Furthermore, he obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. The court held that the petitioner failed to satisfy the “contemporaneous written acknowledgement” requirement, and subsequently disallowed any portion of the additional deduction claimed on his amended 2009 return.

Accuracy-Related Negligence Penalty

Internal Revenue Code §6662 imposes a 20% penalty upon the portion of any underpayment attributable to negligence or the disregard of rules or regulations by a taxpayer. “Negligence” includes any failure to make a reasonable attempt to comply with the tax laws, and “disregard” includes any careless, reckless, or intentional disregard. With respect to an individual taxpayer’s liability for a penalty, the IRS bears the burden of proving that the penalty is appropriate. Once the Commissioner meets this burden of production, the taxpayer must prove that the determination is incorrect.

As a result of the petitioner’s unsubstantiated deductions, the IRS’ notice of deficiency assessed an accuracy-related penalty of $1,881. The petitioner acknowledged at trial that he had no basis for claiming most of the deductions, effectively discharging his burden of production. Therefore, the court upheld the IRS’ imposition of the accuracy-related penalty.

NLG Comment: This case is an excellent example of why taxpayers need to carefully organize and retain their personal and business records. Detailed records and files will help taxpayers defend against the assessment of additional taxes or penalties.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in a multitude of federal tax matters, including taxpayers who are subjected to an IRS audit or examination. If you are facing an IRS tax audit or examination, or if you wish to learn more about how to adequately maintain your records, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professions have vast experience representing clients undergoing IRS audits and examinations. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 24, 2014

Recent 'Innocent Spouse Relief' Case Displays Requirement Threshold

The experienced tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated on the Internal Revenue Service’s efforts to collect federal tax liabilities, including advising taxpayers on the various collection alternatives that may be available. These collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. When taxpayers are contacted by an IRS revenue officer, we recommend that taxpayers thoroughly scrutinize the liabilities to ensure accuracy.

In our prior article on Innocent Spouse Relief, we discussed how one may potentially avoid such tax liabilities if they fulfill the requirements to be considered an “innocent spouse.” Under the pertinent federal law, IRC section 6015, a spouse may seek relief from joint and several liability if they satisfy five conditions. This article will provide a brief overview of these five conditions and will summarize a recent case that provided an analysis of each requirement. To know if you qualify, it is important to carefully review each of the five requirements.

Innocent Spouse Relief Requirements

Under section 6015(b), a qualifying spouse may seek relief from joint and several liability. Taxpayers bear the burden of proving whether they are entitled to relief and are required to satisfy five conditions:

  1. A joint return was filed for the taxable year;
  2. There is an understatement of tax attributable to erroneous items of the taxpayer’s spouse;
  3. The taxpayer establishes that in signing the return, he or she did not know, and had no reason to know, that there was an understatement;
  4. Taking into account all facts and circumstances, it would be inequitable to hold the taxpayer liable for the relevant deficiency; and
  5. The taxpayer timely files for relief under section 6015(b).

In determining whether a taxpayer is entitled to relief, the court will thoroughly review the case and relevant facts in their entirety. If the court determines that the spouse has failed to satisfy one or more of the conditions, then the spouse is not entitled to relief from joint and several liability under section 6015(b). These cases can often be complex, however, and the taxpayer is not necessarily liable if they fail to meet the five requirements. The spouse may be able to seek equitable relief under section 6015(f), but this, too, involves a stringent requirement threshold. To better understand the requirement threshold for innocent spouse relief, it is often helpful to review cases that discuss the subject in greater detail. The following recent case, Irene K. Wang, et vir. v. Commissioner, provides an excellent example of a taxpayer who failed to meet the strict innocent spouse relief requirements.

Wife/Former Chemical Engineer/Homemaker Denied Relief

Recently, a Tax Court decision denied a woman innocent spouse relief from joint liabilities for years she and her husband claimed law firm business deductions for personal expenses. The petitioner wife, a homemaker and former chemical engineer, and her husband, a subsequently disbarred attorney, filed joint federal income tax returns for 2007 and 2008, and have continued to file jointly since. The IRS commenced audits of the couple’s 2007 and 2008 returns, and eventually issued notices of deficiency. The IRS determined deficiencies in tax and accuracy-related penalties of nearly $44,000 for the relevant period. The petitioner wife claimed that she met all five of the relevant requirements and should, therefore, be afforded relief as an innocent spouse.

The Tax Court denied her relief, however, concluding that she participated extensively in the firm’s business during the years at issue. Therefore, the court held that she failed to prove that she did not know, or had no reason to know, of the understatement, due to her heavy involvement in the business. Further, the fact that she had a high level of education and chose not to question the husband, regarding the tax filings, weighed heavily against her. Although she claimed that her husband was deceptive and intentionally withheld information from her, the court found no credibility in her testimony, which was constantly contradictory.

The court’s full opinion can be found here: Irene K. Wang, et vir. v. Commissioner

NLG Comment: As you can see, spouses bear a high burden of proof when seeking relief from joint liabilities. It is important to consult with an experienced tax attorney to find out whether you qualify and what options are available.

Contact Nardone Law Group

Nardone Law Group routinely represents individuals and businesses in federal tax issues, including spouses seeking innocent spouse relief. If you have been contacted by an IRS revenue officer and believe you might have a claim for innocent spouse relief, contact one of our tax attorneys today. The tax attorneys at Nardone Law group have vast experience representing clients before the IRS. We will thoroughly review your case and determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 16, 2014

FBAR Penalties: The Significant Impact Taxpayers Can Face When Failing to Report Foreign Financial Accounts

The tax attorneys at Nardone Law Group in Columbus, Ohio are continuously monitoring the latest developments and updates in the Internal Revenue Service’s efforts to uncover taxpayers with undisclosed foreign accounts, assets, or entities. One option available to taxpayers who want to come forward and report a previously undisclosed foreign account, is the IRS’ Offshore Voluntary Disclosure Program. As part of the Offshore Voluntary Disclosure Program, taxpayers have to address their failure to file the commonly referred to: FBAR form.

Background on FBAR Form

Federal tax law requires taxpayers with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing a Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1), commonly referred to as the “FBAR.” Taxpayers fulfill U.S. tax reporting obligations, relating to foreign financial accounts, by both disclosing the account on the taxpayer’s income tax return and by filing the FBAR. Failure to comply with the FBAR filing requirements can result in civil and criminal penalties, which, as illustrated in the case below, can be quite severe depending on the circumstances. First, we will provide a brief overview of the FBAR filing requirements, followed by discussion of a recent case that demonstrated the potential penalties facing non-compliant taxpayers.

FBAR Filing Requirements

U.S. taxpayers who have a financial interest in, or signature authority over, a foreign financial account must file the FBAR if the aggregate value of the account exceeds $10,000 at any time during the calendar year. The FBAR for any particular calendar year is to be filed on or before June 30 of the following year. Additionally, the taxpayer must also disclose the foreign financial account on Schedule B of the taxpayer’s individual income tax return.

A “financial account” includes any securities, brokerage, savings, demand, checking, deposit, or other account maintained within a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. A “foreign financial account” is a financial account located outside the United States, including correspondent accounts. To better understand why it is so important to comply with the FBAR requirements, it’s helpful to understand the potential penalties.

Potential FBAR Penalties

The determination of whether a taxpayer has an obligation to file the FBAR is crucial, because a failure to properly do so can have significant consequences. For instance, failure to file the FBAR can result in severe civil, and sometimes criminal, penalties. For non-willful violations of the FBAR filing requirements, the IRS will impose a civil penalty of $10,000 per violation.  For willful violations, the maximum civil penalty is the greater of $100,000 or 50% of the balance in an unreported foreign financial account, per year, for up to six years. Additionally, the criminal penalty for a willful FBAR violation is a fine of up to $250,000 and/or imprisonment of up to five years, depending on the circumstances.

NLG Comment: For violations to be considered “willful,” the government must prove the failure to file was a voluntary, conscious, and intentional act. This can include a conscious effort by a taxpayer to avoid learning about the FBAR reporting and recordkeeping requirements.

Although these penalties are not imposed upon taxpayers very frequently, you can see that they have the potential to be significant. The following recent case demonstrates just how severe the FBAR penalties can be.

FBAR Penalties in Action

In June 2013, the U.S. government filed a complaint against Carl R. Zwerner for his alleged failure to timely report his interest in a foreign financial account. [See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (S.D. Florida, June 11, 2013)].  Zwerner, an 87-year-old U.S. citizen, had a financial interest in a Swiss bank from 2004 to 2007, the balance of which exceeded $10,000 at all times. Zwerner attempted to voluntarily come into compliance through the filing of amended returns and original FBARs, but was subsequently subjected to an IRS audit. The government assessed civil FBAR penalties against Zwerner in the amount of 50% of the highest account balance at the time of the violations for each year, aggregating to the total amount of $3,488,609.33.  At trial, the jury returned a verdict finding Zwerner “willful” as to the years 2004, 2005, and 2006, and thus liable for $2,241,809 in FBAR penalties. This is quite a severe penalty, considering the apparent high balance of Zwerner’s account was $1,691,054 during the relevant time period.

The Zwerner verdict is a significant win for the government in its efforts to encourage taxpayers with undisclosed foreign financial interests to come into compliance with reporting and filing requirements. As you can see, the IRS has a broad scope to assess penalties when the failure to disclose a foreign financial account is deemed willful. Time will tell whether the government begins a pattern of assessing substantial FBAR penalties similar to Zwerner. One thing is certain: waiting to come into compliance is not a feasible option for taxpayers.

How Nardone Law Group Can Help

The tax attorneys at Nardone Law Group routinely represent businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. The Offshore Voluntary Disclosure Program and FBAR are a prime example of how taxpayers can come into compliance relating to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorney’s today. One day can mean the difference between the benefits of voluntary disclosure and the severe penalties one can incur from a willful violation. Nardone Law Group has vast experience representing clients before the IRS. Our tax attorneys will thoroughly review your case to determine what options and alternatives are available.  

Contact us today for a consultation to discuss your case.

October 02, 2014

Ohio Society of CPAs Lima CPE Day

Vince Nardone recently spoke at the Ohio Society of CPAs Lima CPE Day. Vince spoke on representing financially distressed businesses and individuals in front of the Internal Revenue Service. This is a topic that routinely impacts our clients, including those involved in an IRS audit, appeal, or litigation with the Internal Revenue Service. We thank the Ohio Society of CPAs for allowing us to participate in the event.

September 19, 2014

IRS 'Streamlined Filing Compliance Procedures' Provide Taxpayers a Process for Offshore Account Disclosure

The tax attorneys at Nardone Law Group in Columbus, Ohio are committed to keeping taxpayers updated and informed about the various programs the Internal Revenue Service offers that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations. In our prior article on the IRS’ Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Program, we provided a brief overview of the significant changes and expansions to those programs, which accommodate a broader group of U.S. taxpayers. As part of those expansions, the Streamlined Filing Compliance Program is now available to both non-U.S. residents and U.S. residents. There are specific requirements that pertain to both groups of taxpayers. This article is intended to provide a summary of the Streamlined Filing Compliance Procedures and the general eligibility requirements that apply to both non-U.S. residents and U.S. residents. In upcoming articles, we will provide a more detailed look at the requirements for residents and non-residents.

General Eligibility Criteria

The Streamlined Filing Compliance Procedures are designed to provide U.S. taxpayers: (1) a streamlined procedure for filing an amended or delinquent tax return, and (2) terms for resolving the taxpayer’s tax liability and any subsequent penalties. The following are a few general eligibility criteria for use of the streamlined filing procedures.

1. Individuals Only – The Streamlined Filing Compliance Procedures are designed for only individual taxpayers, including estates of individual taxpayers.

2. U.S. Residents or Non-Residents – As part of the recent expansion, the streamlined filing procedures are now available to both non-U.S. residents (the “Streamlined Foreign Offshore Procedures”) and U.S. residents (the “Streamlined Domestic Offshore Procedures”).

3. Non-Willful Conduct - When utilizing the streamlined filing procedures, the taxpayer must certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. The IRS defines non-willful conduct as conduct that is due to negligence, inadvertence, or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.

NLG Comment: It is important to understand that this certification must be carefully reviewed and thoroughly understood before making such certification. Intentionally falsifying this certification or negligently failing to conduct the necessary due diligence to determine whether a particular taxpayer qualifies, may place that particular taxpayer in significant harm. As an example, and discussed below, if the taxpayer ultimately does not qualify for the Streamlined Filing Compliance Program, the taxpayer will not be eligible for the Offshore Voluntary Disclosure Program. In addition, if the Internal Revenue Service determines that the taxpayer intentionally falsified the certification, the taxpayer may be prosecuted.

4. Taxpayer Identification Number – All tax returns submitted under the streamlined procedures must have a valid Taxpayer Identification Number. For U.S. citizens and resident aliens, as an example, the proper Taxpayer Identification Number is a valid Social Security Number. For individuals who are not eligible for a Social Security Number, an Individual Taxpayer Identification Number is a valid Taxpayer Identification Number. Tax returns submitted without a valid Taxpayer Identification Number will not be processed under the streamlined procedures.

5. IRS Examination Voids Eligibility – If, prior to the taxpayer’s disclosure under the Streamlined Filing Compliance Procedures, the IRS has initiated a civil examination or criminal investigation of a taxpayer’s returns for any taxable year, the taxpayer will not be eligible to use the streamlined procedures, regardless of whether the examination relates to undisclosed foreign financial assets

6. Coordination with the Offshore Voluntary Disclosure Program – Once a taxpayer makes a submission under the Streamlined Filing Compliance Procedures, the taxpayer may not participate in the Offshore Voluntary Disclosure Program. Similarly, a taxpayer who submits an Offshore Voluntary Disclosure Program voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined process.

However, a taxpayer eligible for treatment under the streamlined procedures who submits, or has submitted, a voluntary disclosure letter under the Offshore Voluntary Disclosure Program prior to July 1, 2014, but does not yet have a fully executed closing agreement, may request treatment under the applicable penalty terms available under the Streamlined Filing Compliance Procedures. In such a situation, the taxpayer does not need to opt out of the Offshore Voluntary Disclosure Program, but will be required to certify, as discussed above, that the failure to report was due to non-willful conduct. The IRS will review the facts and circumstances of the taxpayer’s case and determine whether to incorporate the streamlined penalty terms in the Offshore Voluntary Disclosure Program closing agreement. 

Contact Nardone Law Group

Nardone Law Group routinely represents clients before the Internal Revenue Service. As you can see, there are many factors to consider when deciding whether to participate in the Streamlined Filing Compliance Procedures. If you have an undisclosed foreign account, asset, or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax attorneys will thoroughly review your case to determine which options and alternatives are available, including the Streamlined Filing Compliance Procedures.

Contact us today for a consultation to discuss your case.

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