Report of Foreign Bank and Financial Accounts FINCEN Form 114

The Norman Case: Willful FBAR Penalty Upheld | FBAR Lawyers Miami

On November 8, 2019, the Federal Circuit Court of Appeals (the “Court”) upheld the decision of the Court of Federal Claims to uphold the IRS assessment of a willful FBAR penalty in the amount of $803,530 with respect to Ms. Mindy Norman’s failure to file her 2007 FBAR. The Norman case deserves special attention because of its facts and circumstances and how the Court interpreted them to uphold the willful FBAR penalty.

The Norman Case: Facts of the Case

Ms. Norman is a school teacher. In 1999, she opened a bank account with UBS bank in Switzerland. It was a “numbered account” – i.e. income and asset statements referred to the account number only; Ms. Norman’s name and address did not appear anywhere on the account statements. Between 2001 and 2008, the highest balance of the account ranged between about $1.5 million and $2.5 million.

The Court described how Ms. Norman was actively engaged in managing and controlling her account. She had frequent contacts with her UBS banker in person and over the phone; she decided how to invest her funds and she signed a request with UBS to prohibit investment in US securities on her behalf (which could have triggered a disclosure of the existence of the account to the IRS). In 2002, she withdrew between $10,000 and $100,000 in cash from the account. In 2008 she closed the account when UBS informed her that it would cooperate with the IRS in identifying noncompliant US taxpayers who engaged in tax fraud; it should also be noted that the IRS presented into evidence UBS client contact records which stated that Ms. Norman exhibited “surprise and displeasure” when she was informed about the UBS decision.

Sometime in the year 2008, Ms. Norman signed her 2007 US tax return which, it appears, contained a Schedule B which stated (in Part III) that she had no foreign accounts. Moreover, she signed this return after her accountant sent her a questionnaire with a question concerning foreign accounts.

Also in 2008, Ms. Norman obtained a referral to an accountant. It appears that the accountant advised her to do a quiet disclosure, filing her amended returns and late FBARs. The quiet disclosure triggered the subsequent IRS audit.

The Court found that, during the audit interview, Ms. Norman made numerous false statements, including denying the knowledge of the existence of her foreign account prior to 2009. She also submitted a letter to the IRS re-affirming her lack of knowledge about the existence of this account.

Then, after retaining an attorney, Ms. Norman completely reversed herself in her second letter, stating that she did in fact know about the existence of the account. She further explained that her failure to timely file her FBARs occurred due to her belief that none of the funds in the account were hers and she was not a de-facto owner of the account.

The Norman Case: Penalty Imposition and the Appeals

It appears that the false statements and radical shifts in claims about what she knew about her account completely damaged her credibility with the IRS agent in charge of the audit. Hence, the IRS found that Ms. Norman willfully failed to file her FBAR and assessed a penalty of $803,530.

Ms. Norman paid the penalty in full and filed a complaint with the Court of Federal Claims requesting a refund. The Court of Federal Claims sustained the penalty; hence, Ms. Norman appealed to the Federal Circuit Court of Appeals. The Court upheld the penalty imposition.

The Norman Case: Issues on the Appeal

Ms. Norman raised three issues on the appeal: (1) the Court of Federal Claims erred in finding that she willfully violated the FBAR requirement; (2) a 1987 Treasury regulation limits the FBAR willful penalty to $100,000; and (3) a penalty so high violates the 8th Amendment. The Court did not consider the 8th Amendment argument for procedural reasons.

The Norman Case: Recklessness as part of Willfulness

At the heart of the dispute over the imposition of the willful penalty was whether the IRS can use recklessness in its determination of willfulness. It is important to point out here that the IRS imposed the willful penalty even though it could not prove that Ms. Norman actually knew about the existence of FBAR. Rather, it relied on recklessness in its imposition of the willful FBAR penalty.

In the appeal, Ms. Norman argued that one can only violate the FBAR requirement if one has the actual knowledge of the existence of the form. She adopted a strict interpretation of willfulness as the one found in the Internal Revenue Manual (“IRM”): “willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.”

The Court, however, did not agree with this interpretation. First of all, it pointed to the well-established law that the IRM is not binding in courts. The courts in several circuits have determined that recklessness should be considered as willfulness. Second, the IRM itself stated that actual knowledge of FBAR is not required for the imposition of a willful penalty. Rather, the IRM allowed for the possibility of the imposition of a willful penalty where the failure to learn about FBAR is combined with other factors, such as attempts to conceal the existence of the account and the amounts involved.

Then, the Court explained its reasoning for believing that Ms. Norman’s behavior was reckless: she opened the foreign account, actively managed it, withdrew money from it and failed to declare it on her signed 2007 tax return. The fact that Ms. Norman made contradictory and false statements to the IRS during the audit further damaged her credibility with respect to her non-willfulness claims.

The Norman Case: 1987 Treasury Regulation No Longer Valid

Ms. Norman also argued that a 1987 regulation limited the willful FBAR penalty to $100,000. The Court disagreed, because this regulation was rendered invalid by the language found in the 2004 amendment to 31 U.S.C. §5321(a)(5)(C).

The Norman Case: Most Important Lessons for Audited US Taxpayers with Undisclosed Foreign Accounts

The Norman case contains many important lessons for US taxpayers who have undisclosed foreign accounts and who are audited by the IRS. Let’s concentrate on the three most important ones.

First and foremost, do not lie to the IRS; lying to the IRS is almost certain to backfire. In the Norman case, the taxpayer had good facts on her side at the beginning, but her actions during the audit made them almost irrelevant. Ms. Norman’s false statements damaged her credibility not only with the IRS, but also with the courts. It made her appear as a person undeserving of sympathy; someone who deserved to be punished by the IRS.

Second, Ms. Norman fell prey to an incorrect advice from her accountant and did a quiet disclosure. Given how dangerous her situation was as a result of an impending disclosure of her foreign account by UBS, doing a quiet disclosure in 2008 was a mistake. Instead, a full open voluntary disclosure should have been done either through the traditional IRS voluntary disclosure option or a noisy disclosure (unfortunately, the 2009 OVDP was not yet an option in 2008).

Finally, the Norman case highlights the importance of having the appropriate professional counsel. During her quiet disclosure and the subsequent IRS audit Ms. Norman did not hire the right professional to assist her until it was too late – the damage to the case became irreversible. Instead of retaining the right international tax attorney, she chose to rely on an accountant. In the context of an offshore voluntary disclosure and especially an IRS audit involving offshore assets, relying on an accountant is almost always a mistake – only an experienced international tax attorney is right choice.

Contact Sherayzen Law Office for Professional Help With Your US Tax Compliance and an IRS Audit Concerning Foreign Accounts and Foreign Income

If you have undisclosed foreign accounts and you wish to resolve your US tax noncompliance before the IRS finds you, you need to secure competent legal help. If you are already subject to an IRS audit, then you need to retain an international tax attorney as soon as you receive the initial audit letter. As stated above, Ms. Norman paid a very high price for a failure to do so timely; you should avoid making this mistake.

For this reason, contact Sherayzen Law Office for professional help as soon as possible. Our team of tax professionals headed by the highly experienced international tax attorney, Mr. Eugene Sherayzen, have helped hundreds of US taxpayers to resolve their prior US tax noncompliance issues and successfully conclude IRS international tax audits. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

New FBAR Filing Verification Submission Process | FBAR Lawyer & Attorney

On November 19, 2019, the IRS announced changes to the current FBAR filing verification submission process. The change is technical, but not without importance.

New FBAR Filing Verification Submission Process: FBAR Background Information

FBAR is a common name for FinCEN Form 114 (formerly known as TD F 90-22.1), Report of Foreign Bank and Financial Accounts. US Persons must use this form to report their ownership of or signatory authority or any other authority over foreign bank and financial accounts as long as these accounts’ aggregate balance exceeds the FBAR filing threshold. Despite its official name, the IRS has administered the form since 2001, not FinCEN.

FBAR is one of the most important US international information returns. FBAR noncompliance may lead to the imposition of severe civil and criminal penalties. Hence, it is of absolute importance for US persons to timely and properly file this form.

New FBAR Filing Verification Submission Process: Rules Prior to November 19 2019

Prior to November 19, 2019, US persons who wanted to verify whether their FBARs were filed could obtain the relevant information for up to five FBARs by simply calling 1-866-270-0733 (the IRS FBAR Hotline) and selecting option 1. IRM 4.26.16.4.13(4). In this case, the IRS representatives would provide the verbal verification for free. The filers could make this request sixty days after the date of filing. Id.

If, however, a filer wished to request information concerning more than five forms or he wanted to obtain paper copies of filed FBARs, then he would need to do so in writing. For written verifications, there was a $5.00 fee for verifying five or fewer forms and a $1.00 fee for each additional form. Id. The IRS charged $0.15 per copy of the entire FBAR. Id. Written requests should have been accompanied by payment in accordance with IRM 4.26.16.4.13(4)(b).

New FBAR Filing Verification Submission Process: New November 19 2019 Rules

On November 19, 2019, the IRS issued a memorandum which contained interim guidance concerning the process by which the IRS would accept the requests for FBAR filing verifications. The memorandum introduced the following revisions to the FBAR filing verification process.

Effective as of the date of this memorandum, the IRS no longer accepts verbal verification requests; all requests must be submitted in writing. Hence, the existing fee structure in IRM 4.26.16.4.13(4)(b) now applies to all verification requests.

The IRS has stated that this procedural change is necessary to provide documentary evidence of all verification inquiries and IRS response to them. This new interim guidance will be incorporated into IRM 4.26.16 within the next two years from the date of issuance of the memorandum.

New FBAR Filing Verification Submission Process: Making a Proper Written Request

The written request for FBAR filing verification should include the filer’s name, Taxpayer Identification Number, and filing period(s). Tax practitioners requesting verifications for their clients must also make these requests in writing, and provide a copy of the Form 2848, Power of Attorney and Declaration of Representative, authorizing them to receive the FBAR information. The same fee structure as described above (i.e. a $5.00 fee for verifying five or fewer forms, a $1.00 fee for each additional form, and copies for an additional fee of $0.15) will continue to apply. Checks or money orders should be made payable to the “United States Treasury”.

Written requests and payments for FBAR filing verifications and copies of filed FBARs should be mailed to:

IRS Detroit Federal Building
Compliance Review Team
Attn.: Verification
P.O. Box 32063
Detroit, MI 48232-0063

In response to written requests, the IRS will send a letter stating whether the record shows that an FBAR was filed and if so, the date filed. If a copy of a paper-filed FBAR was requested, a copy will be included with IRS letter.

Contact Sherayzen Law Office for Professional Help with FBAR Compliance

The new FBAR filing verification process will be especially relevant in the context of offshore voluntary disclosures. Oftentimes, taxpayers do not have copies of their prior FBARs; and it is necessary to obtain these copies in order to properly calculate the penalty exposure as well as use them as evidence of non-willfulness (or find out if the IRS may use them as evidence of willfulness).

If you are required to file FBARs and you have not done so, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers with their FBAR compliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Child’s FBAR Requirements | FBAR Tax Lawyer & Attorney

I often receive questions concerning a child’s FBAR requirements. Many taxpayers automatically assume that, if their children are below the age of majority, these children do not have to file FBARs. Unfortunately, this is not the case – a child’s FBAR requirements are every bit as extensive of those of his parents.

Child’s FBAR Requirements: FBAR Background Information

A US Person must file FinCEN Form 114, the Report of Foreign Bank and Financial Account, commonly known as “FBAR”, if he has a financial interest in or a signatory authority or any other authority over a foreign financial account and the highest value of this account (in the aggregate with any other foreign accounts of this US person) is in excess of $10,000. FBAR is filed separately from the tax return.

Failure to file FBAR can lead to very high penalties. In fact, FBAR has the most severe penalty system in comparison to any other forms related to foreign accounts; it includes even criminal penalties. Even when a person was not willful in his non-filing of FBAR, he may still be subject to FBAR non-willful civil penalties of up to $10,000 (as adjusted for inflation) per account per year.

Child’s FBAR Requirements: Age Does Not Matter

The gruesome consequences of a failure to file FBAR make the determination of who is required to file FBARs one of the most important tasks of an international tax lawyer. This is why understanding a child’s FBAR requirements is so important. Let’s clarify this issue right now.

The rule is that a US Person is subject to the FBAR filing requirement regardless of his age. In other words, even an infant must file an FBAR.

Hence, it is important for an international tax lawyer (and his clients) to always check whether minor children have any foreign accounts. A typical fact pattern in this context involves situations where grandparents set up foreign savings accounts for their US grandchildren.

It is especially important to keep this in mind during an offshore voluntary disclosure. Oftentimes, a voluntary disclosure is focused on parents; children’s accounts are often neglected.

Child’s FBAR Requirements: FBAR Filing

Generally, a child is responsible for filing his own FBAR. Again, this responsibility arises irrespective of the age of the child.

The IRS understands, however, that a child would normally be unable to file his own FBARs. In such cases, the responsibility for filing FBARs is placed on the legally responsible person (such as parents, guardians, et cetera). The legally responsible person will be allowed to sign and file FBARs on behalf of the child.

Contact Sherayzen Law Office With Respect to Your Child’s FBAR Requirements

If your child has foreign accounts, contact Sherayzen Law Office for professional FBAR help. We have helped hundreds of US taxpayers around the world with their FBAR obligations, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

IRS Issues FBAR Fact Sheet | FBAR FATCA Tax Lawyer & Attorney

On April 4, 2019, the IRS issued the FBAR Fact Sheet in order to acquaint US taxpayers with this highly important reporting requirement for foreign accounts held by US persons. Let’s analyze the new fact sheet in more detail.

FBAR Fact Sheet: Organizational Structure of the Fact Sheet

The IRS FBAR Fact Sheet can be divided into seven parts: (1) introduction to FBAR and the need to report foreign accounts to the IRS; (2) identification of who needs to file FBARs; (3) explanation of how to file FBARs (including special cases such as joint accounts and the determination of highest balances); (4) discussion of Form 8938 and FBAR; (5) amended and late FBARs; (6) description of FBAR recordkeeping requirements; and (7) more IRS resources concerning FBAR. These parts are not clearly delineated in the Fact Sheet; rather, they are summaries of various information that this brochure contains.

FBAR Fact Sheet: Introduction to FBAR

The IRS FBAR Fact Sheet commences with the warning to US taxpayers that they are required to report their foreign bank and financial accounts even if they do not produce any interest income. April 15 is identified as the critical deadline for these taxpayers. Later, the IRS also states that there is an extension available for FBARs. Again, the IRS did not do a very good job in organizing the Fact Sheet.

FBAR Fact Sheet: Who Needs to File FBARs?

Then, the IRS Fact Sheet finally introduces FBAR and states that it was created by the 1970 Bank Secrecy Act; there is no discussion of the significance of this legal history. Then, the IRS focuses on the persons who may have to file FBARs and introduces the concept of “US Person”. It defines US person as a “citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, limited liability company, estate or trust.”

There is a hidden trap in this IRS definition. “Resident of the United States” does not only include US permanent residents (as most non-lawyers would read it), but also US tax residents. I encourage the readers to read this article with respect to the definition of “resident” for FBAR purposes.

The IRS also defines “United States” for FBAR purposes. The readers can read this article published by Sherayzen Law Office for a more detailed analysis of this concept.

FBAR Fact Sheet: How to File FBARs

This part of the FBAR Fact Sheet focuses on the details concerning how to file FBAR electronically. The IRS cautions taxpayers that FBAR should not be filed with their federal tax returns.

Then, the IRS discusses in more detail certain special cases such as joint accounts and US retirement accounts. The IRS finishes this part of the FBAR fact sheet with the discussion on the determination of the highest value of a foreign account.

FBAR Fact Sheet: Form 8938 & FBAR

In this part of the Fact Sheet, the IRS introduces taxpayers to an existence of another requirement concerning foreign accounts, FATCA Form 8938. The IRS urges the readers to search the IRS website with respect to this form and how it compares to FBAR.

FBAR Fact Sheet: Amended and Late FBARs

The next part of the Fact Sheet focuses on amended and late FBARs. First, the IRS discusses how to amend an FBAR. Then, the IRS states that, as soon as a taxpayer learns that he did not file the required FBARs, he needs to e-file them. At that point, the IRS casually discusses that there is space available on the form to explain the reason for late filing. Finally, the IRS describes the severe FBAR criminal penalties, stating the following: “the IRS will not penalize those who properly report a foreign financial account on a late filed FBAR, and the IRS finds they have reasonable cause for late filing.”

Sherayzen Law Office believes that the IRS has not done a good job in this part of the Fact Sheet. It has completely failed to emphasize the importance of seeking a legal advice prior to filing a late FBAR. A taxpayer may get the wrong impression that he should file a late FBAR as soon as possible before exploring the options on how to do it in a way that protects him from excessive FBAR penalties.

Moreover, the IRS also failed to emphasize the importance of offshore voluntary disclosure with respect to late FBARs. Besides a casual mention of an “IRS compliance program”, there is nothing about the various available voluntary disclosure options for US taxpayers who are filing late FBARs. The IRS does not refer at all to the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

FBAR Fact Sheet: Recordkeeping Requirements

In the next part of the Fact Sheet, the IRS discusses how many years the FBAR filers need to keep the supporting documentation and copies of FBARs. Curiously, the IRS states that the filers should keep the documents for five years from the due date of FBAR, but the FBAR Statute of Limitations is six years.

Sherayzen Law Office does not believe that the IRS advice is correct here. We urge FBAR filers to keep their FBAR records and copies of the filed FBARs for six to ten years.

FBAR Fact Sheet: IRS Resources

The IRS concludes its FBAR Fact Sheet with the discussion of additional available resources to US taxpayers, including FBAR hotline and Publication 4261.

Sherayzen Law Office’s View of the FBAR Fact Sheet

We believe that the FBAR Fact Sheet can serve only as a general introduction to FBAR, but it is not sufficient to provide US taxpayers with sufficient guidance on how to properly deal with late FBARs. On the contrary, a US taxpayer may actually put himself in a worse legal position if he only relies on the Fact Sheet to file his late FBARs.

If you should have filed FBARs but you have not done so, contact Sherayzen Law Office for professional help. As the IRS states in its FBAR Fact Sheet, the FBAR penalties are extremely severe. Hence, it is important to approach any FBAR violations with an extreme caution and retain Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world to deal with late FBARs, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Taylor Lohmeyer Law Firm Clients Face Potential IRS Audit | FBAR News

On May 15, 2019, a Texas federal court ruled that the IRS can enforce John Doe summons for client information from Taylor Lohmeyer Law Firm because the firm failed to demonstrate that the attorney-client privilege protected this information. This is bad news for Taylor Lohmeyer Law Firm clients who now may have to face a potential IRS audit.

How and Why Taylor Lohmeyer Law Firm Clients Face IRS Pressure

This entire affair arose as a result of an IRS audit of an unnamed client of Taylor Lohmeyer law firm. During the audit, the IRS determined that this client owed more than $2 million in taxes with respect to about $5 million of undisclosed foreign income.

Moreover, the IRS agent who conducted the audit discovered that the taxpayer received an advice from Taylor Lohmeyer law firm with respect to evasion of US taxes on his foreign income. It appears that the IRS agent also received additional information confirming the involvement of the firm in illegal tax-avoidance schemes from a former partner of the firm.

As a result, the IRS agent was able to build the case that Taylor Lohmeyer law firm helped its clients build offshore trust structures and beneficial ownership schemes for the purpose of evading US taxes. The IRS then made the logical conclusion that other Taylor Lohmeyer law firm clients may have used the firm to hide their taxable income in foreign jurisdictions through foreign bank accounts and foreign entities.

Why the Court Approved the John Doe Summons for the Identities of Taylor Lohmeyer Law Firm Clients

Based on this information, the court ruled that the government had sufficient evidence to establish that the summons was made with the legitimate purpose of combating tax evasion. The court also said that the burden to show the government made a wrongful summons was on the Taylor Lohmeyer law firm, and the firm failed to satisfy its burden of proof.

It was not just the IRS work that convinced the court to approve the IRS summons for the names of the Taylor Lohmeyer Law Firm clients. Rather, it appears that the firm was overly confident and did not properly assert the attorney-client privilege to protect its clients. The court specifically objected to what it believed to be a “blanket assertions of privilege” for the firm’s clients. It wanted the firm to establish that the attorney-client privilege applied to each specific client and each specific document.

Will There Be an Appeal?

It is not clear if the firm will appeal the court’s decision, but it appears that such an appeal would be the least that the firm can do to protect its clients. From a broader perspective, it would be too dangerous to let the IRS further chip away at the attorney-client privilege.

What Should Taylor Lohmeyer Law Firm Clients Do?

The clients of the firm should not simply wait for what happens next in this case, whether the firm will appeal the decision or simply disclose their names. They are right now in a very dangerous situation and should immediately explore their voluntary disclosure options to limit their exposure to IRS criminal penalties, including FBAR criminal penalties. Moreover, a voluntary disclosure may allow them to reduce their exposure to civil penalties.

They must also prepare for the possibility that they may not be able to do a classic voluntary disclosure and prepare for an IRS audit. Even in a willful situation, it may be possible to significantly reduce the exposure to FBAR and other IRS penalties if the case is handled correctly.

In other words, whether their earlier noncompliance was willful or non-willful, the clients of this law firm should immediately contact an international tax attorney who specializes in offshore voluntary disclosures and IRS audits.

Taylor Lohmeyer Law Firm Clients Should Contact Sherayzen Law Office for Professional Help With Their Offshore Voluntary Disclosures and IRS Audits

If you are a client of Taylor Lohmeyer law firm, you should contact Sherayzen Law Office for professional advice with respect to your offshore voluntary disclosure options and IRS audit preparation. Sherayzen Law Office is a highly-experienced international tax law firm with respect to both of these subjects.

Our founder is an international tax attorney who possesses deep knowledge and understanding of US international tax law and its application in the context of an IRS audit and offshore voluntary disclosures. In fact, Mr. Eugene Sherayzen has helped hundreds of US taxpayers around the world to bring their tax affairs into full compliance with US tax laws through an offshore voluntary disclosure. Moreover, he has handled a great variety of IRS audits, including audits of undisclosed offshore assets.

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!