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September 10, 2019

FBAR Penalty and Impact of Taxpayer’s Failure to Disclosure Foreign Assets and IRS’s Assessment of Penalties

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As a criminal and civil tax attorney, I like to report on and advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign and domestic financial accounts and the importance of reporting previously undisclosed accounts or income. Although the reporting and enforcement involving the Internal Revenue Service (“IRS”) and taxpayers has been highlighted for over a decade now, the failure to report continues—subjecting taxpayers to significant penalties.  As discussed below, a recent federal district court, Schwarzbaum (DC Fl 8/23/2019), rejected an individual's claim that FBAR penalties assessed against him should be set aside because they were assessed after the limitations period expired.

Background

If a taxpayer has a financial interest in, or signature authority over, a foreign financial account, a taxpayer may be required to report the account to the IRS. It is important to understand that those who fail to meet the IRS’s requirements could face criminal or civil penalties.  Generally, U.S. persons who maintain a financial account in a foreign country—foreign financial account—must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury's Financial Crimes Enforcement (FinCEN) division. An FBAR is required for all foreign financial accounts a taxpayer maintained that had a balance exceeding $10,000 at any time during the previous calendar year. Under Title 31 USC § 3521(a)(5)(A), a taxpayer’s willful failure to file an FBAR may result in a significant penalty. And, as the Schwarzbaum court pointed out below, an FBAR penalty may be assessed at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty was assessed.

Facts in Schwarzbaum Case

As I understand it, between 2006 and 2009, the taxpayer, Isac Schwarzbaum, maintained several foreign financial accounts. According to the case reporting, the taxpayer failed to file FBARs for his accounts in Switzerland.  See the link for the actual case from the district court. In 2011, the taxpayer submitted an Offshore Voluntary Disclosure request, attempting to avail himself of the Offshore Voluntary Disclosure Initiative (OVDI). As part of his participation in the OVDI, the taxpayer signed an extension of the limitations period to assess and collect taxes and penalties related to his 2006-2009 returns.  The taxpayer then opted out of OVDI and underwent full examinations of his returns.

Nardone Comment: From my perspective, opting out was probably the first major mistake for the taxpayer. But, without knowing all the facts and circumstances, or the motivations of the taxpayer, there may have been very good reasoning for opting out at the time. So, it is hard to say.

As part of the examination, the IRS asserted a willful FBAR penalty against the taxpayer, which is not unusual in a case where a taxpayer opts out and puts the IRS through additional hoops and forces the government to continue to work the case. Thus, no one should be surprised that that the IRS took this position and assessed the penalty. Either way, the FBAR penalties (for tax years 2006-2009) were assessed in September 2016.

The taxpayer argued that the FBAR penalty assessments were time-barred. The IRS argued that the taxpayer voluntarily signed a consent to extend the limitations period to assess and collect taxes related to his 2006-2009 returns.  The Schwarzbaum court held that the taxpayer’s argument that the FBAR penalties assessed against him were time-barred was meritless. The court found that it was taxpayer’s burden to show that his voluntary agreement to extend the limitations period to assess FBAR penalties was invalid since that was the taxpayer’s affirmative defense. According to the court, the taxpayer failed to point to any legal authority to support his argument that the agreement he signed was invalid.  The Schwarzbaum court further highlighted that a taxpayer—who fails to press a point by supporting it with pertinent authority or by showing why it is sound despite a lack of supporting authority or in the face of contrary authority—forfeits the point. (Melford v Kahane & Assocs., (DC FL 2019) 371 F Supp 3d 1116)

Nardone Comment: In November 2018, the IRS replaced the OVDI with an updated voluntary disclosure program. If you would like more information on UVDP, see our previous blog article.

Conclusion

We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their foreign or domestic financial accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported financial accounts or income. But, taxpayers must be diligent when it comes to communicating with the IRS. That is why it is important to seek help from an attorney who has vast experience representing taxpayers before the IRS. Ultimately, if you have undisclosed foreign financial accounts, or would simply like more information regarding your filing obligation, contact me at vnardone@nardonelimited.com and I would certainly be happy to discuss.

 

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September 10, 2019

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