Report of Foreign Bank and Financial Accounts FINCEN Form 114

2017 FBAR Deadline | FinCEN Form 114 FBAR Lawyer & Attorney

FinCEN recently confirmed the 2017 FBAR deadline and the automatic extension option.

2017 FBAR Deadline: FBAR Background

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, is commonly known as FBAR.  US taxpayers should use this form to report their financial interest in or signatory authority over foreign financial accounts. Failure to timely file the FBAR may result in the imposition of draconian FBAR penalties.

2017 FBAR Deadline: Traditional FBAR Deadline

Prior to 2016 FBAR, the taxpayers had to file their FBARs for each relevant calendar year by June 30 of the following year. No filings extensions were allowed. The last FBAR that followed this deadline was 2015 FBAR (its due date was June 30, 2016).

2017 FBAR Deadline: Changes to FBAR Deadline Starting 2016 FBAR

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) changed the FBAR deadline starting with 2016 FBAR.  Section 2006(b)(11) of the Act requires the FBARs to be filed by the due date of that year’s tax return (i.e. usually April 15), not June 30.

Furthermore, during the transition period, the IRS granted to US taxpayers an automatic extension of the FBAR filing deadline to October 15. The taxpayers do not need to make any specific requests in order for extension to be granted.

In other words, starting 2016 FBAR, the Act adjusted the FBAR due date to coincide with the federal income tax filing deadlines. Moreover, the new FBAR filing deadline will follow to the letter the federal income tax due date guidance. The federal income tax due date guidance states that, in situations where the tax return due date falls on a Saturday, Sunday, or legal holiday, the IRS must delay the due date until the next business day.

2017 FBAR Deadline

Based on the new law, the 2017 FBAR deadline will be April 17, 2018 (same as 2017 income tax return due date). If a taxpayer does not file his 2017 FBAR by April 17, 2018, then the IRS will automatically grant an extension until October 15, 2018. Failure to file 2017 FBAR by October 15, 2018, may result in the imposition of FBAR civil and criminal penalties.

2018 FBAR Criminal Penalties | FBAR Lawyer & Attorney

2018 FBAR criminal penalties should be on the mind of any US taxpayer who willfully failed to file his FBARs or knowingly filed a false FBAR. In this essay, I would like to do an overview of the 2018 FBAR criminal penalties that these noncompliant US taxpayers may have to face.

2018 FBAR Criminal Penalties: Background Information

A lot of US taxpayers do not understand why the 2018 FBAR criminal penalties are so shockingly high. These taxpayers question why failing to file a form that has nothing do with income tax calculation should potentially result in a jail sentence.

The answer to this questions lies in the legislative history of FBAR. First of all, it is important to understand that FBAR is not a tax form. The Report of Foreign Bank and Financial Accounts (“FBAR”) was born in 1970 out of the Bank Secrecy Act (“BSA”), in particular 31 U.S.C. §5314. This means that the initial primary purpose of the form was to fight financial crimes, money laundering and terrorism. In other words, FBAR was not created as a tool against tax evasion.

Hence, the FBAR penalties were structured from the very beginning for the purpose of punishing criminals engaged in financial crimes and/or terrorism. This is why the FBAR penalties are so severe and easily surpass the penalties of any tax form.

It was only 30 years later, after the enaction of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”), that the enforcement of FBAR was turned over to the IRS. The IRS almost immediately commenced using FBAR to fight the tax evasion schemes that utilized offshore accounts.

The Congress liked the IRS initiative and responded with the American Jobs Creation Act of 2004 (“2004 Jobs Act”). The 2004 Jobs Act further increased the FBAR penalties, including the creation of the non-willful penalty of up to $10,000 per violation.

2018 FBAR Criminal Penalties: Description

Now that we understand why the 2018 FBAR criminal penalties are so severe, let’s describe what they penalties actually look like. There are three different 2018 FBAR criminal penalties associated with different FBAR violations.

The first criminal penalty may be imposed under 26 U.S.C. 5322(a) and 31 C.F.R. § 103.59(b) for willful failure to file FBAR or retain records of a foreign account. The penalty is up to $250,000 or 5 years in prison or both.

When the willful failure to file FBAR is combined with a violation of other US laws or the failure to file FBAR is “part of a pattern of any illegal activity involving more than $100,000 in a 12-month period”, then the IRS has the option of imposing a criminal penalty under 26 U.S.C. 5322(b) and 31 C.F.R. § 103.59(c). In this case, the penalty jumps to incredible $500,000 or 10 years in prison or both.

Finally, if a person willingly and knowingly files a false, fictitious or fraudulent FBAR, he is subject to the penalty under 31 C.F.R. § 103.59(d). The penalty in this case may be $10,000 or 5 years or both.

Contact Sherayzen Law Office for Help With Past FBAR Violations

If you were required to file an FBAR but you have not done it, you need to contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options. Our international tax law firm specializes in FBAR compliance and we have helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws while reducing and, in some cases, eliminating their FBAR penalties.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

US Taxpayers’ Nightmare Continues: FBAR Penalty Inflation Adjustment

As if the FBAR penalties were not frightening enough, the Congress has mandated the IRS to adjust the FBAR penalties to account for inflation. As a result, the already complicated and severe system of FBAR penalties became even more complex and ruthless. In this article, I would like provide a general overview of the FBAR penalty inflation adjustment and what it means for noncompliant US taxpayers.

FBAR Penalty Inflation Adjustment: The “Old” FBAR Penalty System

The FBAR penalty system was already complex prior to the 2015 FBAR penalty inflation adjustment. It consisted of three different levels of penalties with various levels of mitigation. The highest level of penalties consisted of criminal penalties. The most dreadful penalty was imposed for the willful failure to file FBAR or retain records of a foreign account while also violating certain other laws – up to $500,000 or 10 years in prison or both.

The next level consisted of civil penalties imposed for the willful failure to file an FBAR – up to $100,000 or 50% of the highest balance of an account, whichever is greater, per violation. It is important to emphasize that the IRS has unilaterally interpreted the word “violation” to mean that a penalty should be imposed on each account per year, potentially going back six years (the FBAR statute of limitations is six years).

The third level of penalties were imposed for the non-willful failure to file an FBAR. The penalties were up to $10,000 per violation per year. It is also important to point out that the subsequent laws and IRS guidance imposed certain limitations on the application of the non-willful FBAR penalties.

Finally, there were also penalties imposed solely on businesses for negligent failure to file an FBAR. These penalties were up to $500 per violation; if, however, there was a pattern of negligence, the negligence penalties could increase ten times up to $50,000 per violation.

FBAR Penalty Inflation Adjustment: Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015

Apparently, the Congress did not believe that these FBAR penalties were sufficiently horrific. Hence, it enacted a law awkwardly named Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Inflation Adjustment Act”) to “improve the effectiveness of civil monetary penalties and to maintain their deterrent effect.”

The 2015 Inflation Adjustment Act required federal agencies to do two things: (1) adjust the amounts of civil monetary penalties with an initial “catch-up” adjustment; and (2) make subsequent annual adjustments for inflation. It is important to note that only civil penalties, not criminal, were subject to the inflation adjustment.

While the annual adjustment requirement is fairly clear, the “catch-up” adjustment requires a bit more explanation. In essence, the catch-up adjustment requires a federal agency to adjust the penalty (as it was last originally established by an act of Congress) for inflation from the time of establishment through roughly the November of 2015. In other words, a penalty would be adjusted in one year for all of the inflation that accumulated between the time the statutory penalty was created and the time the 2015 Inflation Adjustment Act was enacted. The adjustment was limited to 2.5 times of the original penalty.

The end result of the penalty adjustment was a massive increase in federal penalties in 2016. For example, one OSHA penalty went up from $70,000 to $124,709.

New System under the FBAR Penalty Inflation Adjustment

Luckily, the FBAR penalties were last revisited by Congress in 2004 and the increase in FBAR penalties, while very large (about 25%), was not as dramatic as some of the other federal penalties. Nevertheless, the FBAR penalty inflation adjustment further complicated the multi-layered system of FBAR penalties.

The key complication came from the fact that the FBAR penalty became dependent on the timing of the IRS penalty assessment, bifurcating the already existing FBAR penalty system (that was broadly described above) into two distinct parts: pre-November 2, 2015 and post-November 2, 2015.

If an FBAR violation occurred on or before November 2, 2015, the old FBAR penalty system applies. This is also true even if the actual IRS assessment of the FBAR penalties for the violation occurred after this date. In other words, the last FBAR violation definitely eligible for the old statutory penalties is the one concerning 2014 FBAR which was due on June 30, 2015. Obviously, FBARs for prior years are also eligible for the same treatment.

If an FBAR violation occurred after November 2, 2015 and the FBAR penalty would be assessed after August 1, 2016, the new system of penalties (i.e. the one after the FBAR penalty inflation adjustment) applies. In other words, all FBAR violations starting 2015 FBAR (which was due on June 30, 2016) are subject to the ever-increasing FBAR civil penalties.

With respect to these post-November 2, 2015 violations, the exact amount of penalties will depend on the timing of the IRS penalty assessment, not when the FBAR violation actually occurred. For example, if the IRS penalty assessment was made after August 1, 2016 but prior to January 15, 2017, then maximum non-willful FBAR penalty per violation will be $12,459 and the maximum willful FBAR penalty per violation will be the greater of $124,588 or 50% of the highest balance of the account.

If, however, the penalty was assessed after January 15, 2017 but prior to January 15, 2018, the maximum non-willful FBAR penalty will increase to $12,663 per violation and the maximum civil willful FBAR penalty will be the greater of $126,626 or 50% of the highest balance of the account.

Contact Sherayzen Law Office for Help with Avoiding or Reducing Your FBAR Penalties

Whether you have undisclosed foreign accounts on which the FBAR penalties have not yet been imposed or the IRS has already imposed FBAR penalties for your prior FBAR noncompliance, you should contact Sherayzen Law Office as soon as possible to secure professional help. We have helped hundreds of US taxpayers to reduce and, under certain circumstances, completely eliminate FBAR penalties through properly made voluntary disclosures. We have also helped US taxpayers to fight the already imposed FBAR penalties through appeals to the IRS Office of Appeals as well as in a federal court.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

Streamlined Submission Audit | SDOP Audit Tax Lawyer

An increasing number of submissions under the Streamlined Domestic Offshore Procedures are subject to an IRS audit (hereinafter “Streamlined Submission Audit”). In this article, I will explain what a Streamlined Submission Audit is and what a taxpayer should expect during the Audit.

Streamlined Submission Audit: Background Information on Streamlined Domestic Offshore Procedures

Streamlined Domestic Offshore Procedures (“SDOP”) is a voluntary disclosure option offered by the IRS since June of 2014 to noncompliant US taxpayers to settle their past tax noncompliance concerning foreign assets and foreign income at a reduced penalty rate. In order to participate in SDOP, a taxpayer must meet three main eligibility requirements – US tax residency, non-willfulness of prior noncompliance and absence of IRS examination.

SDOP is likely to be the most convenient and the least expensive voluntary disclosure option for taxpayers whose prior tax noncompliance was non-willful. SDOP is very popular; in fact, it has quickly surpassed the traditional IRS Offshore Voluntary Disclosure Program (“OVDP”) in the number of participants with over 18,000 submissions just in 2016.

The Origin of the Streamlined Submission Audit

Streamlined Submission Audit originates within the very nature of SDOP. Unlike OVDP, SDOP voluntary disclosures are not immediately subject to a comprehensive IRS review of tax return items (although, there is a review process which may lead to a Streamlined Submission Audit, but it is not as comprehensive as that of the OVDP prior to the Audit). Hence, the IRS reserved the right to audit any SDOP submission at any point within three years after the submission of the original SDOP voluntary disclosure package.

Streamlined Submission Audit: Process

The exact process of a Streamlined Submission Audit varies from case to case, but all of such audits have a similar format: initial letter with request for a meeting, meeting with an interview, review of submitted documents and (very likely) additional requests for information, interview of other involved individuals (such as a tax preparer) and, finally, the results of an audit are provided by the IRS to taxpayer(s) and/or the representative indicated on Form 2848.

A Streamlined Submission Audit commences in a way very similar to a regular IRS audit: a letter is sent to taxpayers and (if there is a Form 2848 on file) to their representative. The letter explains that the IRS decided to examine certain tax returns (usually all three years of amended tax returns) and asks for submission of all documentation and work papers that were used to prepare the amended returns. Additionally, the letter requests that the taxpayers’ representative (or taxpayers if not represented) contact the IRS agent in charge of the audit to schedule the initial meeting.

During the initial meeting, the IRS agent will review (at least to make sure he or she has what is needed) the documents supplied. In larger cases, the IRS will need a lot more time to later examine all of the submitted documents and see if additional documents are needed. If a case is very small, it is possible for an agent to cover everything in the first meeting, but it is very rare.

Also, during an initial meeting, there is going to be an interview of the taxpayer(s). I will discuss the interview separately in a different article.

Once the review of the initial package of documents is concluded, it is very likely that the IRS agent will have questions and additional document requests. The questions may be answered by the taxpayers’ attorney during a separate meeting with the agent; smaller questions may be settled over the phone.

If additional documentation is needed, an IRS agent will send out an additional request to taxpayers and/or their attorney. The answer will most likely need to be provided in writing.

Once the IRS completes its interview of other involved parties and reviews all evidence, it will make its decision and submit the results of the audit to the taxpayers and their tax attorney in writing. The taxpayers’ attorney will need to build a strategy with respect to the taxpayers’ response to the audit results depending on whether the taxpayers agree or disagree with the results of the audit.

Differences Between Streamlined Submission Audit and Regular IRS Audit

At first, it may seem that there are no big differences between a regular IRS audit and a Streamlined Submission Audit. While procedurally this may be correct, substantively it is not.

The greatest difference between the two types of IRS audits is the subject-matter involved. While a regular IRS audit will concentrate on the tax returns only, a Streamlined Submission Audit will involve everything: amended tax returns, FBARs, other information returns and, most importantly, Non-Willfulness Certification. In other words, a Streamlined Submission Audit will focus not only on whether the tax forms are correct, but also on whether the taxpayer was actually non-willful with respect to his prior tax noncompliance.

This difference in the subject-matter examination will carry over to other aspects of a Streamlined Submission Audit: the taxpayers’ interview will focus on their non-willfulness arguments, third-party interviews of original tax preparers become a regular feature (this is very different from a regular IRS audit when tax preparers may never be interviewed), and the final IRS results must necessarily make a decision on whether to challenge the taxpayers’ non-willfulness arguments.

Failure by a taxpayer to sustain his non-willfulness arguments may result in a disaster during a Streamlined Submission Audit with a potential referral to the Tax Division of the US Department of Justice for a criminal investigation.

This is why it is so important for a taxpayer subject to a Streamlined Submission Audit to retain the services of an experienced international tax lawyer to handle the audit professionally.

Contact Sherayzen Law Office for Professional Help With A Streamlined Submission Audit

If your submission under the Streamlined Domestic Offshore Procedures is being audited by the IRS, you need to contact Sherayzen Law Office as soon as possible. Our international tax law firm is highly experienced in offshore voluntary disclosures (including OVDP, SDOP, SFOP, “noisy disclosures”, “quiet disclosures”, et cetera) and the IRS audits of a voluntary disclosure.
In fact, we have handled voluntary disclosure cases at every stage of the process of a Streamlined Submission Audit described above. We can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Manafort FBAR Violations Indictment | International Tax Lawyer & Attorney

On October 30, 2017, Mr. Paul Manafort was charged with FBAR violations among other charges. Manafort FBAR violations charges were filed as a result of an ongoing investigation led by special counsel Robert Mueller.

While the investigation should have been searching for possible ties between Mr. Manafort and the Russian government, it found something completely different. Instead of finding any ties to the Russians, it found that Mr. Manafort was lobbying on behalf of the Ukrainian government (currently the archenemy of Russia and involved in a civil war with its eastern provinces) without registering as a foreign agent.

Moreover, it has led to the IRS Criminal Investigation with respect to Mr. Manafort’s FBAR noncompliance. Let’s explore this part of the investigation in more detail.

Manafort FBAR Violations Indictment: Alleged Facts

According to the indictment, Manafort failed to report his interest in over a dozen foreign entities, primarily in Cyprus, and used those entities to hide millions of dollars in foreign bank accounts from the U.S. government. Over $75 million allegedly flowed through the accounts, but only a portion of it was accessed. Manafort was accused of using over $18 million of proceeds on personal expenses.

The government further alleges that, during 2008-2014, Mr. Manafort falsely stated on his tax returns that he did not have an authority over any foreign bank accounts (I believe the reference here is to Part III of Schedule B, Form 1040).

Furthermore, the government claims that Mr. Manafort lied, in writing, to Mr. Manafort’s tax return preparer in order to conceal his authority over the undisclosed foreign accounts. It is obvious that this accusation is meant to preempt the reasonable cause reliance defense against FBAR penalties.

The indictment includes seven counts of willful FBAR violations under 31 U.S.C. section 5322. It is possible that Mr. Manafort may try to throw out some of the counts on the basis of the FBAR Statute of Limitations, but not all facts of the case are known at this point to estimate the success of this defense.

Manafort FBAR Violations Indictment: No Tax Evasion Charges

It is very strange, but the indictment does not contain a separate tax evasion charge, which requires the approval of the DOJ’s Tax Division. This omission is even more puzzling in light of the fact that the government alleges in its indictment that Mr. Manafort did not pay taxes on any income related to undisclosed foreign accounts. The government even specifically states that he purchased properties in Virginia and took out loans for the purpose of having access to untaxed income.

Manafort FBAR Violations Indictment: How Was $18 Million Calculated

The Manafort case is very good in one aspect: it allows us to see the government methodology for identifying potential willful FBAR violations. The main tool in this case was the government’s analysis of Mr. Manafort’s lifestyle.

The government alleged that, between 2008 and 2014, Mr. Manafort made domestic expenses of close to $18 million dollars which the government believes came from undisclosed foreign bank accounts and should be directly tied to Mr. Manafort FBAR violations. Most of this money was spent on improving real estate as well as purchases at antique shops, car dealerships and so on.

Manafort FBAR Violations Indictment: A Political Case With Important Lessons

It is important to remember that, at this point, these are merely government allegations and Mr. Manafort is presumed to be innocent until found otherwise by a court of law or a jury. While it is too early to state whether the government can prove its allegations and the case does have a very strong political background, it is still important to study the lessons of this case with respect to the government’s ability to pursue FBAR violations. The government’s methodology in this case is somewhat unusual, and all international tax lawyers should follow this case closely to see how the courts react to the government’s strategy.