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2018 FBAR Audits Set to Increase | IRS FBAR Audit Lawyer & Attorney

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2018 FBAR audits are set to increase at a dramatic pace. In this article, I would like to discuss what the FBAR audits are and why 2017-2018 will be the period of time when we believe that the FBAR audits will gain as a percentage of the overall IRS audits compared to earlier years.

2018 FBAR Audits and Sherayzen Law Office Predictions

As early as 2011, Sherayzen Law Office predicted that the FBAR audits would become more commonplace than ever a few years after FATCA was implemented. Once FATCA was implemented in July of 2014, we confirmed our prediction and refined it to specifically identify 2017 and 2018 FBAR audits as the years of larger than average increases. Obviously, the increase in FBAR audits will go hand in hand with the jump in FBAR litigation by the US Department of Justice.

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2018 FBAR Audits: How Do FBAR Audits Differ from Regular IRS Audits?

The public is generally familiar to a certain degree with regular IRS Audits of US tax returns. In general, in a regular audit, the IRS contacts the taxpayer or his representative and conducts a thorough review of the taxpayer’s tax returns selected for examination.

So, are FBAR Audits different from the regular US tax return audits? The answer is: “yes” and “no”. In terms of the actual procedure (i.e. the IRS contacting the taxpayer and the taxpayer’s representative and doing a thorough examination), there are no large differences, though, the fact that FBARs come under Title 31 does affect certain procedures.

However, in terms of issues involved, the FBAR audits can be vastly different, because they would involve not only the issues that are a concern during a regular IRS audit of a tax return, but also FBAR-specific issues. In other words, the FBAR audit will likely involve all of the features of the audit concerning US tax returns (especially, with respect to verification that all foreign income was properly disclosed) and FBAR -specific issues concerning the accuracy of the reported foreign account and foreign income information.

Moreover, it should be remembered that FBAR has a draconian penalty system. Hence, the stakes in the FBAR audit are much higher than those of a regular IRS audit.

Finally, FBAR audits may often lead to FATCA compliance issues, particularly Form 8938 compliance. FBAR audits may also trigger the audit of other information returns, including Form 3520 with respect to foreign gifts and inheritance.

Thus, while FBAR audits may seem procedurally similar to regular IRS audits (though, as I had pointed out above, this similarity is superficial to a large degree), the scope of the FBAR audit, the issues involved, the “expansion” effect and the stakes involved (in terms of potential penalties) make FBAR audits far more dangerous to US taxpayers than regular IRS audits of US tax returns.

Why Should We Expect to See An Increase in 2017 and 2018 FBAR Audits?

The increase in 2017 and 2018 FBAR audits is driven primarily by FATCA and other automatic information exchange mechanisms (including those provided for in bilateral treaties). Since the UBS case in 2008, the IRS has seen a steady increase of data inflow from overseas concerning foreign accounts owned and/or controlled by US taxpayers.

This stream of data became a torrential river after the implementation of FATCA in 2014 and the increase in the bilateral and multilateral automatic information exchange mechanisms since 2011. In fact, the IRS has received so much data that it has not even been able to properly process and organize it yet.

However, even with the small percentage of the data that was actually properly processed, the IRS received a treasure trove of information concerning unreported foreign accounts and noncompliant US taxpayers. This new data has already led to a steady increase of IRS investigations during the years 2015-2016. Given the fact that a much larger amount of data will be processed in 2017 and 2018, the number of IRS investigations and FBAR audits should increase dramatically in 2017-2019.

An indirect confirmation of this conclusion is the recent surge in the US Department of Justice FBAR litigation. We fully expect the FBAR audits to follow the same path of intensification in 2017-2019.

What Should You Do If the IRS Selects You for FBAR Audit?

If the IRS contacts you concerning examination of your FBARs or your US tax returns with Forms 8938 and/or foreign income, you should contact Sherayzen Law Office for professional help as soon as possible. Our firm specializes in helping taxpayers like you with the IRS audits of any US international information returns, including FBARs and Forms 8938.

The owner of Sherayzen Law Office, Mr. Eugene Sherayzen, is an international tax attorney with an almost unique experience of helping US taxpayers at all stages of US international tax compliance: annual compliance, offshore voluntary disclosures, FBAR Audits and FBAR litigation in federal courts. This experience has allowed Mr. Sherayzen to have a unique perspective on FBAR Audits which allows him to be a highly effective advocate of his clients’ positions before the IRS.

Contact Us Today to Schedule Your Confidential Consultation!

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

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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.