FBAR Third-Party Verification and FATCA | FBAR Tax Lawyer Denver

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There is an interesting relationship between the FBAR Third-Party Verification problem and the enaction of FATCA that I would like to explore in this brief article.

Lack of FBAR Third-Party Verification

FBAR is undoubtedly one of the most important information returns administered by the IRS. It is the reigning king with respect to reporting of foreign financial accounts. Its requirements are broad and easy to violate. Its penalty system is unmatched in severity by any form created pursuant to the Internal Revenue Code making FBAR also one of the most effective tax enforcement tools in the IRS enforced tax compliance arsenal.

Yet, as an information return (as opposed to a tax enforcement mechanism), FBAR suffers from a very important defect that has limited its use with respect to collection of information – there is no FBAR Third-Party Verification. In other words, no third parties (such as banks and other financial institutions) are required to submit any data to the IRS so that the IRS can verify the information provided on the filed FBARs.

The fact that there is no FBAR Third-Party Verification stands in stark contract with most other reports required by the Bank Secrecy Act (which created the FBAR). CTRs, CTRCs and Forms 8300 all require banks, casinos and specified businesses to verify the data submitted on these reports. This makes the FBAR the only self-reporting information return with no third-party verification.

Without the FBAR Third-Party Verification, there is no direct way for the IRS to determine whether the information submitted on FBARs is correct. Of course, the IRS can verify the information in an indirect way (such as a treaty request during an investigation of a particular individual or if the information was shared by a financial institution pursuant for some specific reason), but it can only be done with respect to specific taxpayers with significant allocation of resources to each case.

FATCA As a Way to Correct the Lack of FBAR Third-Party Verification

While the Foreign Account Tax Compliance Act (“FATCA”) was not specifically tied to the problems with FBAR, the lack of FBAR Third-Party Verification provided an additional incentive for the enaction of FATCA.

As explained above, the IRS needed to somehow resolve the FBAR problems and find a way to standardize the verification of the foreign account information so that it could be applicable to all US taxpayers. FATCA became the most effective solution. On the one hand, FATCA forced all taxpayers with specified foreign assets to file Forms 8938 with their tax returns, while, on the other hand, it required all foreign financial institutions to verity this data through submission of FATCA-related information on an annual basis.

In other words, FATCA solved the FBAR Third-Party Verification problem. From 2011 on, the IRS acquired valuable tools to fill-in the information gaps left by FBAR. Furthermore, the information collected through FATCA may now be used by the IRS to verify the FBAR information and pursue noncompliant taxpayers for FBAR violations based on the FBAR draconian penalty system.

Contact Sherayzen Law Office for Help with US Tax Compliance Concerning Foreign Bank and Financial Accounts

If you have undisclosed foreign bank and financial accounts, contact Sherayzen Law Office for professional help as soon as possible. Through FATCA third-party information verification, noncompliant US taxpayers are now at a historically-high risk of detection by the IRS. If this happens, they may be subject to extremely high FBAR penalties, including criminal penalties.

Sherayzen Law Office can help you! We have successfully resolved hundreds of FBAR noncompliance cases for US taxpayers residing all over the world. Contact Us Today to Schedule Your Confidential Consultation!

Voluntary Compliance with US Tax Laws | International Tax Attorney Austin

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The IRS has repeatedly stated that the US tax system is a voluntary compliance system. Yet, what does “voluntary compliance” mean in this context? Does it mean that US taxpayers only need to comply with US tax laws whenever they wish to do it? Does it mean that any US taxpayer has a right to refuse to comply with US tax laws or file his tax returns whenever he feels like doing it?

A lot of people tried to take this position and failed. The IRS has always won on the issue that US taxpayers have an obligation to comply with US tax laws, whether they want to do it or not.

Then, what is so “voluntary” about our tax system? Let’s explore this question in more detail.

Voluntary Compliance with US Tax Laws is Obligatory

Let us start with the affirmative statement that the word “voluntary” does not refer to the actual obligation of US taxpayers to comply with US tax laws. In other words, the compliance with US tax laws is compulsory and any noncompliance with US tax laws is punishable to the extent permitted by the law. Intentional noncompliance may even result in incarceration of a noncompliant taxpayer.

The IRS Inability to Engage in Full Enforced Tax Compliance

Since the word “voluntary” does not apply to the actual obligation to comply with US tax laws, we must look at the assessment of US tax liability to understand what voluntary compliance means. In particular, our focus should be on what is known as “enforced tax compliance” – i.e. direct assessment of tax liability and the audit of tax returns.

Here, we encounter an obvious yet interesting fact: the IRS does not have the resources to audit every one of the hundreds of millions of US taxpayers (resident and non-resident, individual and business), especially on an annual basis. Similarly, the IRS also lacks the ability to audit every single tax return every year; in fact, it only audits about 3% of all tax returns per year.

This means that the IRS does not have the capacity to sustain a system of enforced tax compliance and the vast majority of US taxpayers operate outside of this system.

The Definition of Voluntary Compliance

This lack of the IRS ability to engage in 100% enforced tax compliance leads to the inevitable conclusion that it has to rely on US taxpayers to timely file their own tax returns, assess their own tax liability and pay this tax liability to the IRS. It is precisely in this sense that US tax compliance system is “voluntary”.

In other words, voluntary compliance means that US taxpayers do their own self-assessment of their US tax liability (hopefully, in accordance with the IRS guidance) instead of the IRS doing it for each of them. Underlying this voluntary compliance, however, is the threat that the IRS can audit the tax returns and impose noncompliance penalties.

Contact Sherayzen Law Office for Professional Help with Your Voluntary Compliance Concerning US International Tax Laws

The IRS focus on the enforced tax compliance regarding the US international tax obligations of US taxpayers has caused an unprecedented rise in the voluntary compliance in this area of law. Noncompliant US taxpayers are at a historically-high risk of detection by the IRS and may face draconian IRS penalties, including jail time.

This means that, if you have foreign assets and foreign income, you need the professional help of Sherayzen Law Office to bring your tax affairs into full compliance with US tax laws. Our firm is highly experienced in the area of US international tax compliance with hundreds of successful cases closed and millions of dollars saved in US taxes and potential penalties! We can help you!

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Why the IRS Loves FBAR | International Tax Attorney Houston

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The IRS loves FBAR. Undoubtedly, FATCA Form 8938 is a very serious rival, but even this form cannot match the FBAR’s popularity among the IRS agents with respect to foreign accounts. What is behind this popularity? Or, stated in another way, why does the IRS love FBAR and prefers them to any other international tax enforcement mechanism for undisclosed foreign accounts?

First Reason Why the IRS Loves FBAR

The first reason why the IRS loves FBAR is because FBAR used to be the main and almost only form that dealt directly with foreign accounts. Until 2011, when Form 8938 appeared for the first time, there was simply no form created pursuant to the Internal Revenue Code that would match the FBAR’s reach with respect to foreign bank and financial accounts.

Second Reason Why the IRS Loves FBAR

The second reason why the IRS loves FBAR is the ease with which a taxpayer can commit an FBAR violation. First, since FBAR comes from Title 31 and it is not part of the Internal Revenue Code, it is a fairly obscure requirement. Obviously, it is much better known now after the IRS voluntary disclosure programs. Still, there are many taxpayers and even accountants who simply do not know of FBAR’s existence.

Second, FBAR has a very low reporting threshold. As long as the highest aggregate balance on the foreign accounts was $10,000 or more at any point during a year, all of the accounts must be reported on FBAR. In essence, any more or less active use of an account is likely to trigger the FBAR requirement.

Third Reason Why the IRS Loves FBAR

The third reason why the IRS loves FBAR is the wide net that the FBAR casts over taxpayers. Not only does the FBAR define the term “account” in a very broad manner (including in this term such odd “accounts” as life insurance policies, bullion gold investments and so on), but its penalty structure forces compliance among all levels of taxpayers irrespective of their earnings or their willfulness (or lack thereof) with respect to FBAR violations.

Fourth Reason Why the IRS Loves FBAR

Finally, the fourth reason why the IRS loves FBAR is its draconian penalty structure that may result in the imposition of penalties that far exceed the balance (to emphasize: not the earnings, but the balance) of the unreported accounts. FBAR imposes high penalties of up to $10,000 even with respect to non-willful violations. Criminal penalties, including jail time, may be possible for willful violations.

In other words, FBAR is the ultimate punishment that the IRS can hammer out on noncompliant US taxpayers. This is probably the most important reason for the popularity of FBAR among IRS agents and even US Department of Justice prosecutors.

Contact Sherayzen Law Office for Professional Help with Undisclosed Foreign Accounts and Foreign Assets

If you have not disclosed your foreign accounts on FBARs or you have other unreported foreign assets, contact Sherayzen Law Office for professional help as soon as possible. Our legal and accounting team is led by one of the best international tax lawyers in the country, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers around the world with their FBAR compliance and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Legislative History | FBAR Tax Attorney Minneapolis

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Exploring the FBAR legislative history is not just a theoretical adventure which should interest only legal scholars. Rather, the FBAR legislative history allows us to understand the theoretical and historical basis for the high FBAR penalties and the legal arguments that may serve best to combat the imposition of these severe penalties.

FBAR Legislative History: The Bank Records and Foreign Transactions Act and the Bank Secrecy Act

The obligation to file a Report of Foreign Bank and Financial Accounts (FBAR) originated from the Bank Records and Foreign Transactions Act, which, together with subsequent amendments, is commonly known as the Bank Secrecy Act.

The Bank Secrecy Act (BSA) was first enacted in 1970. The BSA created various financial reporting obligations to identify and collect evidence against money laundering, tax evasion and other criminal activities. One of these reporting obligations is U.S. Code Title 31, Section 5314 which directly discusses what became known as the FBAR.

31 U.S.C. §5314 requires a U.S. person to file reports and keep records regarding this person’s foreign financial accounts maintained with a foreign financial institution: “the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.” The statute identifies the basic information required to be reported on FBAR and authorizes the U.S. Department of Treasury to prescribe the requirements, including identifying the classes of persons who should file FBARs and the threshold amount triggering this reporting requirement.

FBAR Legislative History Prior to 2001

Prior to 2001, the FBAR legislative history does not reflect any major changes. In fact, the most important development in the FBAR legislative history prior to 2001 came not from Congress, but from the United States Supreme Court.

Prior to 2001, the BSA required that, in order to impose civil and criminal FBAR penalties, the U.S. government had to prove willful failure to file an FBAR. Here is where the Supreme Court made its decisive contribution in Ratzlaf v. United States, 510 U.S. 135, 149 (1994). In that case, the Court established the willfulness standard as a “voluntary, international violation of a known legal duty”. The Court further held that merely structuring a transaction to avoid the applicability of the BSA did not constitute willfulness.

In other words, after 1994, the DOJ (the U.S. department of Justice) had to show that the defendant structured the transactions with knowledge that such structuring was in itself unlawful. Such a high standard was difficult to satisfy and the FBAR-related indictments became relatively rare.

FBAR Legislative History After 2001

The terrorist attacks on September 11, 2001, resulted in significant changes in the FBAR legislative history which propelled the FBAR to its current prominence. Let’s focus on three such changes.

1. USA PATRIOT Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) charged the U.S. Treasury Department with improving FBAR enforcement, particularly with respect to illegal offshore banking activities. The USA PATRIOT Act reflected the Congress’s findings that terrorist funding was successfully concealed through offshore banking activities which provided secrecy and anonymity of the parties involved. It is worth noting that the focus of the USA PATRIOT Act was still on the money-laundering and terrorist activities, not tax enforcement.

The USA PATRIOT Act further required the Treasury Department to submit recommendations to improve FBAR policies and procedures.

2. Treasury Reports and the Delegation of FBAR Enforcement to the IRS

In response to the Congress’ request, the Treasury Department released three reports between 2002 and 2004. The importance of these reports lies in the evolution of the FBAR role from the original purpose of fighting terrorism to international tax compliance.

The first report was released in 2002 complained that, due to the small probability of imposition of civil penalties and limited FBAR filing guidance, compliance with the FBAR was lower than 20% (in retrospect, this was still a very generous assessment because FBAR compliance was, in reality, much lower). Therefore, the Treasury Department outlined a number of objectives to improve FBAR policies and procedures, such as improving forms, enhancing outreach and strengthening enforcement.

Most importantly, for the first time, the Treasury Department suggested delegating the enforcement of civil FBAR penalties from FinCEN to the IRS. While nothing yet expressly suggested in the FBAR legislative history that FBAR should be used for tax enforcement, it is difficult to interpret the Treasury Department’s report in any other way. At the very least, the first report hinted at such a possibility.

The second report issued by the Treasury Department (in 2003) was much more direct. The report noted that the civil enforcement of FBAR was already delegated to the IRS and contained the key statement: “one could argue the FBAR is directed more towards tax evasion, as opposed to money laundering or other financial crimes, that lie at the core mission of FinCEN”. This was the first time the IRS officially stated the true purpose of FBAR in the post-9/11 world.

It is worth noting that the final report of the Treasury Department (issued in 2004) happily related to the Congress that the FBAR filings had increased in 2003 by 17% from the year 2000 as a result of the IRS enforcement action, confirming the correctness of the Department’s original objectives stated in the first report.

3. American Jobs Creation Act of 2004

No summary of the post-2001 FBAR legislative history would be complete without discussion of the American Jobs Creation Act of 2004 (“2004 Jobs Act”). The 2004 Jobs Act was enacted partially as a result of the Treasury Department’s reports and its complaints about the difficulty of imposing civil sanctions for a failure to file FBAR and partially seeking an increase revenue. As a result of the 2004 Jobs Act, the Congress made one of the most important changes to FBAR by significantly increasing the FBAR penalties, including the imposition of a non-willful penalty for up to $10,000 per violation.

FBAR Legislative History: New FBAR Deadline Starting 2016 FBAR

The most recent change in the FBAR Legislative History came from the innocently-sounding “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015″ that was enacted on July 31, 2015. As a result of this new law, starting with the 2016 FBAR, the FBAR deadline moved from June 30 to April 15 (with an extension possible for the first time in the FBAR legislative history).

Contact Sherayzen Law Office for FBAR Legal and Tax Help

If you have not complied with the FBAR requirement in the past or you need to determine whether FBAR applies in your situation, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their FBAR compliance and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Usefulness of FBARs for the IRS and DOJ | International Tax Law Firm

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The usefulness of FBARs for the U.S. tax enforcement agencies may seem to be an odd issue, but, in reality, it concerns every taxpayer with foreign bank and financial accounts. Why the FBAR is important and how the IRS and the U.S. Department of Justice (“DOJ”) utilize it in their prosecution tactics is the subject of this essay.

Two Periods of the Usefulness of FBARs

In describing the usefulness of FBARs, one can distinguish two distinct periods of time. The first period lasted from the time FBAR came into existence in the 1970s through most of the year 2001. It is definitely a simplification to place this entire period of time into one category, but this simplification is intentional in order to contrast this first period of usefulness of FBARs with the second one.

The second period commenced right after the FBAR enforcement function was turned over to the IRS in 2001 and it continues through the present time. In this period of time, the usefulness of FBARs was expanded to a completely different level. It is important to point out, however, that it has not lost its original usefulness that dominated the first period of time of its existence.

Usefulness of FBARs Prior to 2001

Prior to 2001, the main purpose of FBAR had been the enforcement leverage in prosecution of financial crimes. This leverage came from the draconian FBAR penalties which often would offer a worse outcome than the statute associated with a criminal activity (especially after a plea deal). Moreover, it was much easier for prosecutors to establish an FBAR violation (any failure to report a foreign account on the FBAR would do) than to prove specific criminal activity.

The usage of FBAR prosecutions was particularly useful in money laundering cases where it was difficult to prove specified unlawful activities and certain criminal tax cases where it was difficult to establish the receipt of illicit income. In such criminal cases, instead of charging criminals solely with tax evasion or money laundering activities, the prosecutors would opt for charging the criminals with a (willful and/or criminal) failure to file an FBAR that occurred while the defendants engaged in a criminal activity. It was easier to get a plea deal this way, because, obviously, criminals would not report the foreign accounts used in a criminal activity on FBARs.

Why was the usefulness of FBARs limited to being an enforcement leverage; in other words, why were FBARs not used for collection of data? After all, FBAR was born out of the Bank Secrecy Act and its stated purpose was to collect data with respect to foreign bank and financial accounts owed by US persons.

The answer is fairly simple – there was no third-party verification mechanism for the data submitted on FBARs. In other words, the FBAR reporting was completely dependent on honest self-reporting (in fact, this is one of the reasons for the creation of FATCA) and, unless, an investigation was conducted with respect to a specific individual, there was no direct way for FinCEN to corroborate the information submitted on FBARs.

It is important to emphasize that, in this first period of its existence, the usefulness of FBARs was primarily non-tax in nature. It was not until after September 11, 2001, that FBAR commenced to acquire a new level of usefulness with which we are familiar today.

Usefulness of FBARs After 2001

The usefulness of FBARs underwent a tremendous change after the September 11, 2001 terrorist attacks in the United States. Soon after the 9/11 attacks, the enforcement of FBARs was taken away from FinCEN and given to the IRS.

The IRS decided to shift the scope of the usefulness of FBARs from financial crimes to tax evasion. The Congress wholeheartedly agreed and further expanded the already-severe FBAR penalties in the American Jobs Creation Act of 2004 to their current draconian state. From that point on, FBAR became the top international tax compliance enforcement mechanism for the IRS.

The potential FBAR penalties were so extreme that even non-willful taxpayers preferred to enter the IRS Offshore Voluntary Disclosure Program (and, later, Streamlined Compliance Procedures) and pay the appropriate Offshore Penalties rather than to directly confront the potential consequences of FBAR noncompliance. In other words, the usefulness of FBARs expanded further to indirect tax enforcement.

Furthermore, the UBS case victory in 2008 and the enaction of FATCA in 2010 meant that the IRS could now obtain FBAR-required information from third parties (foreign financial institutions) and verify a taxpayer’s compliance with the FBAR requirements. This further reinforced the FBARs already dominant position in US international tax compliance.

This FBARs dominance in the tax enforcement with respect to foreign accounts continues even today despite the appearance of a rival – Form 8938 (born out of FATCA). While Form 8938 has a broader scope of reportable assets, its penalty structure is highly inferior to the terrifying FBAR penalties.

Contact Sherayzen Law Office for Help with FBAR Compliance

If you have foreign bank and financial accounts that were not disclosed on FBARs as required, you should contact Sherayzen Law Office, Ltd. as soon as possible. Sherayzen Law Office is an experienced international tax law firm that has helped hundreds of US taxpayers with their delinquent FBARs, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!