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IRS Wins Against a Lawyer’s Motion to Dismiss FBAR Penalties | FBAR Tax Lawyer

On May 3, 2017, the IRS scored an important victory in United States v. Little, 2017 U.S. Dist. LEXIS 67580 (SD NY 2017) by defeating a Motion to Dismiss FBAR charges made by the defendant, Mr. Michael Little. The motion was based on an argument that is often used by opponents of FBAR penalties – the unconstitutionality of the FBAR penalties based on a tax treaty and the vagueness of the FBAR requirement as applied to the defendant. While I do not intend to provide a comprehensive analysis of the Motion to Dismiss FBAR Charges and the reasons for its rejection, I do wish to outline certain important aspects of the judge’s opinion.

Brief Overview of Important Facts

The Motion to Dismiss FBAR Charges was made by Mr. Little, a UK citizen and a US permanent resident. Mr. Little was a UK lawyer who also became a US lawyer and practiced in New York. During this time, he helped Mr. Harry G.A. Seggerman’s heirs hide millions in offshore accounts. For his services, he was paid hundreds of thousands of dollars which were never disclosed to the IRS.

In 2012 and 2013, Mr. Little was charged with willful failure to file FBARs and his US tax returns. He was further charged with various crimes arising out of his alleged assistance to Mr. Seggerman’s heirs in a scheme to avoid the taxes due on their inheritance held in undeclared offshore accounts.

Motion to Dismiss FBAR Penalties Based on “Void for Vagueness” Standard

The key argument of the Motion to Dismiss FBAR Penalties was based on the so-called “Void for Vagueness” Standard. The court cited United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) to define the standard as follows: “the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.”

In the first part of the Motion to Dismiss FBAR Penalties, Mr. Little essentially argued that, in his circumstances, the application of the FBAR requirement was too vague due to the 2008 changes in the definition of the required FBAR filers, particularly with respect to exclusion of persons “in or doing business in the United States”.

The Court dismissed the argument stating that whatever was an issue with respect to “in or doing business” provision, a lawful alien resident of ordinary intelligence (whether or not he was “doing business in the United States”) would have understood that the FBAR requirement applied to him because the definition of the “United States resident” includes green card holders. Hence, the vagueness of the original FBAR definition was inapplicable to a lawful alien resident such as Mr. Little.

Motion to Dismiss FBAR Penalties and Other Criminal Counts: No Vagueness in Criminal Statutes Because Willfulness Must be Proven Beyond Reasonable Doubt

The Motion to Dismiss FBAR Penalties also contained several more “void for vagueness” arguments (related not just to FBARs, but also to Mr. Little’s failure to file US tax returns and his role as an “offshore account enabler”). Among these arguments, Mr. Little especially relied on several US-UK tax treaty provisions which led him to believe that he was not a US tax resident (in particular, he believed that he was in the United States temporarily and he interpreted the treaty as stating that he was not a US tax resident even though he had a green card).

The Court dismissed Mr. Little’s treaty-based arguments based on its interpretation of how a person of ordinary intelligence would have understood these provisions. Here, I wish to emphasize one of the most important parts of the decision – the affirmation that the worldwide income reporting requirement was not vague. The Court found that “the U.S. statutes and regulations that require alien lawful permanent residents (green card holders) to either (a) file a tax return and pay taxes on worldwide income, or (b) file a tax return reporting worldwide income and indicate that he or she is taking a particular protection under the Treaty, are not unconstitutionally vague as applied”.

The most interesting aspect of the Court’s decision, however, was in its last part. Here is where judge Castel dealt a death blow to all of Mr. Little’s void-for-vagueness arguments. The Court stated that, since a conviction can only be achieved if the government proves willfulness beyond reasonable doubt, none of the relevant criminal tax provisions (including criminal FBAR penalties) can be deemed as vague.

The reason for this conclusion is very logical – in order to prove willfulness, the government must establish that: “the defendant knew he was legally required to file tax returns or file an FBAR, and so knowing, intentionally did not do so with the knowledge that he was violating the law.” Obviously, if such knowledge and intention of the defendant are proven beyond the reasonable doubt, the defendant “cannot complain that he could be convicted for actions that he did not realize were unlawful”.

Motion to Dismiss FBAR Penalties Based on Vagueness Versus Non-Willfulness Arguments

It is important to emphasize that the vagueness arguments contained in Mr. Little’s Motion to Dismiss FBAR Penalties can still be utilized to establish the defendant’s non-willfulness even though the Motion to Dismiss was denied. In other words, while the void-for-vagueness arguments were insufficient to challenge the criminal tax provisions, they may be important in establishing the defendant’s subjective perception of these provisions and his non-willful inability to comply with them.

I believe that the defendant’s motion in this case was destined to be denied. In reality, the defendant might have made this motion not to win, but in order to establish the base for asserting the same arguments in a different context of undermining the government’s case for willfulness. The Court itself stated that one of the Defendant’s arguments (reliance on advice received from her Majesty’s Revenue and Customs”) was in reality a potential affirmative defense to failure to file US tax returns, not an argument against the constitutionality of the laws in question.

Related-Statute IRC §6103(h) Violation As a Defense Against FBAR Audit

International tax lawyers should focus not only on substantive, but also on procedural defenses against the results of an FBAR audit. One such potential defense against FBAR audit is a related-statute IRC §6103(h) violation.

Related-Statute IRC §6103(h) Violation: Background Information

In a previous article, I already discussed the fact that IRC §6103(a) limits somewhat the ability of the IRS to use tax returns in an IRS FBAR Audit, because IRC §6103(a) designates all tax return information as confidential. However, IRC §6103(h) provides a limited exception to IRC §6103(a) by allowing the IRS employees the disclosure of tax return information for the purposes of tax administration.

Under IRC §6103(b)(4), tax administration is interpreted broadly to cover administration, management and supervision of the Internal Revenue Code and “related statutes”. This means that, if the IRS determines that the Bank Secrecy Act (“BSA”) is a related statute for the purposes of a particular FBAR audit, it can release the tax return information to be used against the taxpayer.

The IRS will deem the BSA as a related statute only if there is a good-faith determination that a BSA violation was committed in furtherance of a Title 26 violation or if such a violation was part of a pattern of conduct that violated Title 26. See IRM 4.26.14.2.3 (07-24-2012). In other words, the tax violation and the FBAR violation has to be related in order for the IRS to disclose tax return information to be utilized in an IRS FBAR Audit.

Related-Statute IRC §6103(h) Violation: Procedural Aspects of Related-Statute Determination

The Internal Revenue Manual (“IRM”) sets forth very specific procedures for making a related-statute determination in the preparation of an IRS FBAR Audit. Generally, this is a two-step process.

First, the examiners are required to prepare a Form 13535, Foreign Bank and Financial Accounts Report Related Statute Memorandum, to establish why the IRS believes that an apparent FBAR violation was in furtherance of a Title 26 violation. Form 13535 must describe tangible objective factors and provide adequate documentation.

Then, Form 13535 goes to the examiner’s Territory Manager. The Territory manager should make his decision at that point. If he believes that the related-statute test was not met, tax returns and return information may not be disclosed for the purposes of starting an IRS FBAR Audit. On the other hand, if the Territory Manager determines that the apparent FBAR violation was in furtherance of a Title 26 violation, then all of the tax returns and tax return information will be released to the IRS agent who conducts the audit.

Can Related-Statute IRC §6103(h) Violation Be Utilized as a Defense in FBAR Audit?

We are now about to answer the question that is at the center of this article: if the IRS fails to follow the IRM procedures for related-party determination pursuant to IRC §6103(h), can it be used as a defense in FBAR Audit? Perhaps, the best way to answer the question above is to look at an analogy of whether the failure to follow IRM procedures for related-party determination under IRC §6103(h) can be utilized to support a claim for damages for unauthorized disclosure under IRC §7431.

Generally, the failure by the IRS to follow IRM procedures and make a related-party determination is likely to be insufficient to support a claim under IRC §7431. In Hom v. United States, 2013 U.S. Dist. LEXIS 142818, 2013-2 U.S. Tax Cas. (CCH) P50,529, 112 A.F.T.R.2d (RIA) 6271, 2013 WL 5442960 (N.D. Cal. 2013), aff’d, 645 Fed. Appx. 583, 2016 U.S. App. LEXIS 5528, 117 A.F.T.R.2d (RIA) 1119, 2016 WL 1161577 (9th Cir. Cal. 2016), the court held that the failure of the IRS to make a related-statute determination as required by the IRM did not provide the plaintiff with a claim for damages under IRC §7431. Rather, a plaintiff would have to prove that the failure to file an FBAR was clearly not in furtherance of a Title 26 violation – i.e. the plaintiff would have to prove that BSA was not a related statute in his case.

If we use this analogy, then it seems that the procedural failures by the IRS to follow the related-party determination under IRC §6103(h) would not be sufficient to be used as a defense in an IRS FBAR Audit. There is a possibility, however, that if the FBAR violation was clearly not related to Title 26, then it may be used as a defense to exclude evidence.

Contact Sherayzen Law Office for Help with Your FBAR Audit

If your FBARs are being audited by the IRS, contact Sherayzen Law Office for professional help. Sherayzen Law Office is an international tax law firm that is dedicated to helping businesses and individuals with their US international tax obligations, including FBARs. We have helped hundreds of US taxpayers around the world and we can help you!

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What to do if the IRS Audits Your Quiet Disclosure | FBAR Lawyer Madison

This essay is concerned with a situation where the IRS audits your quiet disclosure of foreign assets and foreign income. The IRS audit can be an absolute nightmare in this case. Not only will the audit examine the accuracy of the disclosure, but the IRS may actually raise the issue of willful and non-willful FBAR penalties as well as the potential income tax fraud penalty.

So, is everything lost if the IRS audits your quiet disclosure? The answer is “no”. While the situation may undoubtedly be dire, it is not hopeless if the case is handled properly. While it is not possible to discuss in this article the whole spectrum of strategies available to taxpayers in such a situation, this article attempts to line out the three most important steps that you should do if the IRS audits your quiet disclosure.

1. If the IRS Audits Your Quiet Disclosure, You Should Not Panic

An IRS audit is always a stressful event. The stress increases exponentially if the audit involves a quiet disclosure of foreign assets and foreign income.

While your situation may be difficult, you should try to resist the panic. Panic is an emotional condition where a person starts acting irrationally and may follow a course of action that may worsen the already difficult situation.

2. If the IRS Audits Your Quiet Disclosure, Do Not Try to Handle the Audit by Yourself

Do NOT attempt to solve the IRS audit of your quiet disclosure by yourself, even if you believe that you were non-willful in your original noncompliance. This is extremely dangerous and may result in imposition of non-willful or even willful penalties. US international tax law is so complex that you may easily get yourself in trouble even if you believe that you are doing well.

There is a myth that the IRS is somehow gracious when a taxpayer represents himself and will be willing to reduce the penalties – this is completely false, especially in a situation involving a quiet disclosure. The IRS agents follow procedures and they will follow them ruthlessly until they run into a legal defense built by a lawyer. Without such a defense, there is nothing to stop the IRS from imposing penalties to the extent an agent believes is justified by the facts of the case.

3. If the IRS Audits Your Quiet Disclosure, You Should Immediately Find and Retain an International Tax Lawyer

Get yourself an international tax lawyer to help you with an IRS audit of your quiet disclosure. This can be a highly complex situation and you should have a professional by your side to guide you throughout the process. This is the best way to assure that your case will be handled properly.

In this case, a professional must be an international tax lawyer, not an accountant. I am always suspicious of cases where accountants start to go beyond their professional capacity and take on the legal defense of their clients’ cases. While it may be tolerable in simple domestic cases (though still not recommended), it may result in a horrific outcome where the IRS audits a quiet disclosure.

Sherayzen Law Office Can Be Your International Tax Lawyer if the IRS Audits Your Quiet Disclosure

If the IRS audits your quiet disclosure, you should consider retaining Sherayzen Law Office, PLLC as your international tax lawyer to represent you during the IRS audit. Sherayzen Law Office is an international tax firm which focuses on helping its clients with their voluntary disclosures and the audits of these voluntary disclosures. The firm is not only a leader in the field, but it has also extensive experience in combating and reducing the IRS penalties associated with prior tax noncompliance.

IRS FBAR Audit and IRC Section 6103 | FBAR Tax Attorney Minneapolis

This article explores a certain relationship between tax returns and an IRS FBAR Audit. In particular, the critical question that I seek to answer in this writing is when the IRS is able to use US tax returns as evidence to support and/or commence an IRS FBAR Audit.

IRS FBAR Audit and the IRS Examination of US tax Returns

In discussing the relationship between the US tax returns and IRS FBAR Audit, the focus is on the information uncovered by the IRS during the examination of US tax returns that may be used to commence or advance an IRS FBAR Audit. It is possible, however, for the IRS to use a taxpayer’s tax returns in other contexts, not just examinations, to further an IRS FBAR Audit.

In a previous article, I already discussed the enormous amount of useful information that US tax returns contain and that can be used by the IRS to commence an IRS FBAR Audit. In addition to the obvious Schedule B, the tax returns contain foreign income documents, tax fraud evidence, patterns of noncompliance and other useful evidence that can be used in an IRS FBAR Audit.

This means that, in a lot of cases, there is a direct relationship between tax returns and the subsequent IRS FBAR Audits.

Tax Return Confidentiality Under IRC §6103(a) Prevents Automatic Disclosure for the IRS FBAR Audit Purposes

Despite their utility, there is one problem with the ability of the IRS to use tax return information in an IRS FBAR audit – US tax return information is confidential and protected from disclosure under IRC (Internal Revenue Code) §6103(a). This protection extends to the disclosure of tax returns and tax return information within the IRS, especially for use in investigating a Bank Secrecy Act (“BSA”) violation. Why are we discussing the BSA? The reason is simple – BSA is the legislation that created FBAR.

In other words, the tax return information (which is collected under U.S.C. (United States Code) Title 26 cannot be automatically shared within the IRS for the purposes of Title 31 FBAR violation. Rather, the IRS has to find a legal justification for the disclosure of this information. The usual proper statutory basis for this justification can be found in IRC §6103(h).

IRC §6103(h) and Authorization to Share Tax Return Information for the IRS FBAR Audit Purposes

The exploration of §6103(a) exceptions under §6103(h) leads us into a complicated world of tax analysis. I will try to simplify this analysis while reducing as much as possible the risk of leaving out important details.

In general, under IRC §6103(h), disclosure of returns and return information is authorized without written request to officers and employees of the Treasury Department as long as these officers’ and employees’ official duties require such disclosure for tax administration purposes. “Tax administration” is a term of art in this context – it is a fairly broad term that covers the administration, management and supervision of the Internal Revenue Code and “related statutes”, including assessment, collection and enforcement under the IRC and these “related statutes.” See §6103(b)(4).

The key question then is whether BSA is a “related statute”. If it is, then the IRS employees can use tax return and return information to commence an IRS FBAR Audit.

IRS FBAR Audit: Is BSA a “Related Statute”?

From the outset, it is important to emphasize that the IRS does not treat BSA as a “per se” related statute, because BSA reports are required a variety of purposes, not just tax compliance. For example, FBARs can be used for such government purposes as counter-terrorism, money-laundering investigations and law enforcement in general.

Therefore, the IRS will deem the BSA as a related statute only if there is a good-faith determination that a BSA violation was committed in furtherance of a Title 26 violation or if such violation was part of a patter of conduct that violated Title 26. See IRM 4.26.14.2.3 (07-24-2012). In lay terms, the FBAR violation has to be related to a tax violation in order for the IRS to be able to utilize the taxpayer’s tax returns and tax return information in an IRS FBAR Audit.

Unfortunately, there is no clear-cut straightforward answer to when the FBAR is related to a tax violation. Rather, this determination should be made based on the facts and circumstance of each case.

IRS FBAR Audit vs. DOJ Criminal Investigation: IRC §6103(i)

It is important to emphasize that the “related-statute” limitation applies only to IRS examiners in a civil IRS FBAR Audit. If, however, a taxpayer is the subject of a criminal Department of Justice (“DOJ”) grand jury investigation, then the DOJ prosecutors are not subject to §6103(h). Instead they can use §6103(i) to access the taxpayer’s tax returns and tax return information.

Contact Sherayzen Law Office for Professional Help with an IRS FBAR Audit

If you are subject to an IRS FBAR Audit, you should contact Sherayzen Law Office as soon as possible for professional help. Without proper representation, an IRS FBAR Audit can lead to disastrous consequences to the taxpayer’s financial life due to imposition of the draconian FBAR Penalties.

Our experienced and highly-knowledgeable legal team, headed by Mr. Eugene Sherayzen, can help you! Contact Us Today to Schedule Your Confidential Consultation!

IRS FBAR Audits Caused by Tax Returns | FBAR Audit Lawyer

IRS FBAR Audits can lead to catastrophic consequences for noncompliant US taxpayers. While there may be a numbers of factors that influence the IRS decision to commence such an audit, one of the leading sources of the IRS FBAR Audits are the US tax returns. In this article, I would like to explore the main types of documents that the IRS is searching for during a tax return examination in order to uncover the information that may lead to the commencement of IRS FBAR Audits (I will not discuss here the right of the IRS to disclose US tax return information for Title 31 FBAR Audit; this topic is reserved for a subsequent article).

IRS FBAR Audits and IRS Title 26 Examinations

From the outset, it should be made clear that filing of US tax returns does not automatically lead to IRS FBAR Audits. Rather, a great percentage of the IRS FBAR Audits arise from the IRS Title 26 Examinations of these returns– i.e. IRS examinations and audits of US tax returns pursuant to the various provisions of the Internal Revenue Code. During these examinations, the IRS analyzes the audited tax returns and may uncover information related to FBAR non-compliance which usually serves as a cause of the subsequent FBAR audit.

Tax Return Information that May Trigger IRS FBAR Audits

So, what kind of evidence is the IRS looking for that may trigger IRS FBAR audits? First and most logical is Schedule B, particularly looking at whether box in Part III (which has questions related to foreign accounts and foreign trusts) is checked. If there is a discrepancy between the information provided to the IRS and Schedule B, this may lead to IRS FBAR Audits.

Second, foreign income documents from the tax examination administrative case file (which includes the Revenue Agent Reports). Here, the IRS is looking for income related to foreign bank and financial accounts that was not reported. A combination of unreported foreign income and undisclosed foreign accounts is precisely the toxic mix that lays the foundation for IRS FBAR Audits.

Third (and this is a very interesting strategy), copies of tax returns for at least three years before the opening of the offshore account and for all years after the account was opened, to show if a significant drop in reportable income occurred after the account was opened. The analysis of the returns for three years before the opening of the account would give the examiner a better idea of what the taxpayer might have typically reported as income before the foreign account was opened. This strategy shows just how analytical and creative the IRS can be in looking for cases that should be subject to IRS FBAR Audits.

Fourth, copies of any prior Revenue Agent Reports that may show a history of noncompliance. This strategy confirms once again the notion that a large history of noncompliance may lead to more frequent IRS examinations, including IRS FBAR Audits.

Fifth, IRS is also looking into “cash accounting’ – two sets of cash T accounts (a reconciliation of the taxpayer’s sources and uses of funds) with one set showing any unreported income in foreign accounts that was identified during the examination and the second set excluding the unreported income in foreign accounts.

Finally, the IRS makes a connection between tax fraud and FBAR noncompliance – the IRS is looking at any documents that would support fraud in commencing IRS FBAR Audits. Such documents include: false explanations regarding understated or omitted income, large discrepancies between actual and reported deductions of income, concealment of income sources, numerous errors which are all in the taxpayer’s favor, fictitious records or other deceptions, large omissions of certain types of income (personal service income, specific items of income, gambling winnings, or illegal income), false deductions, false exemptions, false credits, failure to keep or furnish records, incomplete information given to the return preparer regarding a fraudulent scheme, large and frequent cash dealings that may or may not be common to the taxpayer’s business, and verbal misrepresentations of the facts and circumstances.

Of course, the IRS is not limited to these six types of tax return documents; however, this is the most common evidence that the IRS uncovers during a tax return examination that may lead to subsequent IRS FBAR Audits.

Contact Sherayzen Law Office for Legal Help with IRS FBAR Audits

If you are subject to an IRS FBAR Audit or a tax return examination that involves foreign assets and foreign income, or you have undisclosed foreign assets and you are looking for a way to bring your legal situation into compliance with US tax laws, then you should contact the international tax law firm of Sherayzen Law Office, PLLC. Sherayzen Law Office is one of the best law firms in the world dedicated to helping US taxpayers with foreign assets and foreign income. Our highly experienced team of tax professionals, headed by an international tax attorney Eugene Sherayzen, provides effective, knowledgeable and reliable legal and tax help to its clients throughout the world, and we can help you deal with any IRS problem.

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