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OVDP Closure Sets the Stage for a Dramatic Increase in IRS FBAR Audits

There has been virtually no discussion of the impact of the OVDP closure beyond how it affects the ability of willful taxpayers to settle their past noncompliance. This is very unfortunate, because there is a direct correlation between OVDP and IRS tax enforcement activities. In this article, I will discuss how the OVPD closure sets the stage for a dramatic increase in the IRS FBAR Audits as well as IRS audits of other US taxpayers with international tax exposure.

The Utility of the OVDP Program Prior to the OVDP Closure

The IRS flagship 2014 Offshore Voluntary Disclosure Program served various purposes prior to its closure on September 28, 2018. Let’s concentrate on its two most important roles.

First and foremost, it was an important information-gathering tool for the IRS. The taxpayers who participated in the OVDP disclosed not only their noncompliance with US tax laws, but also the identity of the persons and institutions who facilitated this noncompliance. In other words, the OVDP supplied to the IRS valuable, up-to-date information about foreign financial institutions and foreign financial advisors who participated and even set-up the various tax evasion schemes. This ever-growing mountain of evidence was later used by the IRS to target these schemes effectively and efficiently.

Second, the OVDP greatly enhanced the IRS tax enforcement activities in two different ways. On the one hand, the OVDP promoted the general awareness of FBAR requirements as well as voluntary disclosures of FBAR noncompliance by US taxpayers, thereby saving the IRS the time and resources that otherwise would have been unnecessarily spent on finding and auditing these taxpayers. On the other hand, by “weeding-out” these repentant taxpayers, the OVDP allowed the IRS to concentrate its enforcement efforts on the taxpayers who the IRS believed to be true and inveterate tax evaders.

Diminished Utility of the OVDP and the OVDP Closure in 2018

Over time, however, the IRS came to conclusion that, in precisely these two most important aspects, the OVDP had lost a substantial part of its prior utility. The full implementation of FATCA and the ever-spreading web of bilateral and multilateral information exchange treaties made the OVDP a relatively unimportant information collection tool by the end of 2017.

At the same time, due to the introduction of the Streamlined Filing Compliance Procedures and the fact that most willful taxpayers who wanted to take advantage of the OVDP had already done so, fewer and fewer taxpayers were entering the OVDP. In other words, by early 2018, the IRS was in the position to make the decision that the “weeding-out” process was substantially complete.

For these two reasons as well a number of other smaller reasons, the IRS decided to finally close the 2014 OVDP (which itself was a modification of the 2012 OVDP) on September 28, 2018. The OVDP closure did not happen suddenly; rather, the IRS gave a more than nine-month notice to the public that the OVDP was going to be closed. This was done very much according to the “weeding-out” concept – the IRS gave one last opportunity to certain groups of taxpayers to settle their prior US international tax noncompliance under the established terms of the OVDP program.

The Link Between the OVDP Closure and IRS FBAR Audits

At this point, after giving noncompliant US taxpayers their last chance to “peacefully” resolve their FBAR and other US tax problems, the IRS believes that it has completed its weeding-out process. The time has come for harsh IRS tax enforcement.

Based on my conversations with various IRS agents, I have identified the trend where the IRS currently encourages IRS agents to quickly close their voluntary disclosure cases and shift to doing field audits involving international tax compliance, including FBAR audits.

In other words, the OVDP closure frees up the critical resources that the IRS needs to conduct audits based on the mountains of information it has accumulated over the past decade. Some of this information came from the OVDP, the Swiss Bank Program, from FATCA and other  information exchange mechanisms.

What is worse (from the perspective of noncompliant taxpayers) is that the IRS now can justify the imposition of higher FBAR penalties since it can claim that the taxpayers had prior chances to resolve their prior FBAR noncompliance and intentionally failed to do so.

Sherayzen Law Office Predicted the Shift Toward Tax Enforcement a Long Time Ago

All of these developments – the OVDP closure and the shift toward stricter tax enforcement – were predicted years by Sherayzen Law Office ago. As early as 2013, Mr. Sherayzen made a prediction that the Swiss Bank Program and FATCA were likely to lead to higher levels of FBAR audits and FBAR litigation as well as the general shift of the IRS policy from voluntary disclosures to tax enforcement.

Contact Sherayzen Law Office for Professional Help With FBAR Audits and Other International Tax Audits

If you are being audited by the IRS and your tax return involves any international tax issues (including FBARs), you should contact Sherayzen Law Office for professional help. Our experienced international tax law firm has successfully helped hundreds of US taxpayers to settle their US tax affairs.

We possess profound knowledge and understanding of US international tax law as well as the IRS procedures. We have experience in every stage of IRS enforcement: from offshore voluntary disclosures and IRS administrative appeals to IRS audits (including FBAR audits and audits of Streamlined disclosures) and federal court litigation.

We are a leader in US international tax compliance and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Noncompliance & Taxpayer’s Options | FBAR Lawyer & Attorney

FBAR noncompliance is the worst nightmare for US taxpayers due to enormous FBAR penalties even for non-willful taxpayers. US Taxpayers who are not facing an IRS examination or a DOJ (US Department of Justice) lawsuit have three options with respect to their FBAR noncompliance: (1) do nothing with respect to correcting their prior FBAR noncompliance, close the accounts and hope that the IRS will never discover them; (2) do a quiet disclosure; and (3) come forward and voluntarily disclose their unfiled FBARs.

I already explored the highly-risky strategy of a quiet disclosure in another article. In this article, I will focus on option #1 – doing nothing about prior FBAR noncompliance. In the next article, I will discuss the option of Offshore Voluntary Disclosure as a way to deal with prior FBAR noncompliance.

This article does not constitute legal advice, but merely provides information for educational purposes.

Advantages of Doing Nothing With Respect to Prior FBAR Noncompliance

Doing nothing with respect to FBAR noncompliance is a position that some taxpayers prefer, because it requires no action, no immediate legal expenses and no immediate payment of IRS penalties.

In other words, if a taxpayer chooses to do nothing with respect to his late unfiled FBARs and his strategy is successful, he stands to gain in two aspects: (1) he spends no effort, time or money on correcting his past FBAR noncompliance; and (2) if (and this is big “if”) the IRS never finds out about his past FBAR noncompliance, he will not pay any penalties. This whole strategy is based on the hope that the IRS will not find out about their FBAR noncompliance.

Disadvantages of Doing Nothing With Respect to Prior FBAR Noncompliance Even If the Strategy Is Successful

From legal perspective, this strategy of doing nothing can be classified as very risky. If unsuccessful, a noncompliant taxpayer who chooses to do nothing stands to lose a lot more than he could ever gain if his strategy works.

Let’s analyze the disadvantages of doing nothing based on two scenarios: the strategy is successful and the strategy is unsuccessful.

Even if the strategy is ultimately successful and the IRS does not find out about FBAR noncompliance, there is still a heavy psychological price to pay for this success, because the taxpayer will not find out about the success of his strategy until the FBAR statute of limitations expires. In other words, for six long years, the taxpayer will not have any peace of mind and will constantly worry about his potential FBAR penalty exposure. If the taxpayer does not close his foreign accounts, the waiting period could be extended even further.

Moreover, if FBAR noncompliance is combined with income noncompliance and failure to file other US international information returns, the statute of limitations on the tax returns might be open for an indefinite period of time (especially if the IRS can assert a fraud claim against the noncompliant taxpayer).

I have personally seen the psychological effects of such pressure on some of my clients. It was simply destroying their lives. Eventually, they could not live like this and came to me to do offshore voluntary disclosure to resolve their prior FBAR noncompliance.

Disadvantages of Doing Nothing With Respect to Prior FBAR Noncompliance Where the Strategy Fails

If the success of this strategy exhorts such a heavy price, its failure may potentially result in disastrous consequences. Let’s explore the main two reasons why the strategy of doing nothing is so disfavored among international tax lawyers.

First, as described above, the current international tax enforcement structure severely undermines the entire basis for the strategy – i.e. hope that the IRS will not find out about FBAR noncompliance is simply too risky in the contemporary world dominated by FATCA, CRS and a widely-spread web of bilateral and multilateral automatic information exchange treaties. It is still possible that the IRS will not find out about a US person’s foreign accounts, but it is becoming less and less likely.

Second, since the strategy of doing nothing implies a taxpayer’s conscious choice not to comply with the FBAR requirements, it may turn a relatively simple and non-willful situation into a complex and willful one. In other words, under these circumstances, if the IRS is able to find out about prior FBAR noncompliance, the IRS may pursue willful and, in extreme circumstances, even criminal FBAR penalties.

Contact Sherayzen Law Office for Professional Help With Resolving FBAR Noncompliance Issues

If you never filed your required FBARs and other US tax forms, contact Sherayzen Law Office for professional help. Our legal team is headed by one of the most experienced international tax lawyers in this area – Mr. Eugene Sherayzen. He has helped hundreds of US taxpayers around the world to successfully resolve their prior FBAR noncompliance, and He can help You!

Contact Us Today to Schedule Your Confidential Consultation!

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!