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by: Anthony Parent 2013-06-10
As you probably know, the IRS has a focus on FBAR penalty enforcement. This makes FBAR Penalty negotiation extremely important. In order to help you understand the most essential facts on how to get the best solution for you, here is a list of 5 things you must absolutely know about FBAR Penalty negotiation:
FBAR penalties can be very severe. The penalties are not based on tax avoided, but rather account size. This is completely unique. These are unlike any other IRS penalties.
The "ugly" FBAR penalty is $10,000. That penalty is assessed if you made an innocent mistake. Worse, there is nothing to stop the IRS from assessing this innocent mistake penalty multiple times. Say up to six times. So you could have made a completely innocent mistake and the IRS can penalize you $60,000. This is an outrage to us as well...unfortunately, it is the law.
The "disastrous penalty" is 50% of account value; that is assessed if the IRS feels you knew what you were doing. Like the "ugly "FBAR penalty, it too can be assessed multiple times. Meaning the IRS can assess FBAR penalties that wipe out your entire net worth.
Thanks to a change in the law in 2004, the IRS no longer has the burden of proof to prove willfulness. Rather, it is up to the taxpayer to prove non-willfulness, i.e. reasonable cause! Will there be a successful challenge to this law? We can't say, but recent court cases have proven that the Supreme Court is willing to grant the IRS incredibly wide authority to assess penalties.
Yes, you can claim your day in court, but first you must "exhaust your administrative remedies". Conversely, you can pay all assessments, and then filed a suit for refund in US District Court. We much more prefer exhausting administrative remedies with IRS appeals, and and filing suit in tax court. Why? (1) our clients don't have to pay FBAR penalties until the end, (2) a lot of times we are successful with administrative remedies, making tax court unnecessary (3) if administrative appeals is unsuccessful, as long as a case is properly supported and documented, and we find a receptive audience with IRS counsel we may be able to negotiate lower FBAR penalties, through FBAR Penalty negotiation, without having to go to trial.
The main purpose of the FBAR Amnesty/OVDP is to remove the threat of the ugly or disastrous FBAR penalties. This is unlike past Voluntary Disclosure Programs, which people would enter into to remove the threat of criminal charges. This is why it is important to use the OVDP for your FBAR Penalty negotiation. Within the OVDP, you will get a much more favorable review with your FBAR Penalty negotiation. Also, the IRS agrees to limit negotiations to just one FBAR penalty, which could be a victory in of itself.
Outside the OVDP, FBAR penalties will be determined in an FBAR audit, where the ground is not so friendly. First, as mentioned above, the IRS can assess multiple years, and second, the IRS is determined not to treat people who they catch (whether innocently or those who made an ill-advised "soft" or "quiet" disclosure) as favorable as those who have come forward. The IRS civil audit division can do nearly has much harm (or even more) to ones financial well-being than criminal court.
While you most likely need not to worry about prison time, having your entire wealth wiped out can be nearly as devastating. The reason you would enter into the OVDP and use FBAR Penalty negotiation is not because you think you are under a threat of criminal prosecution. The main appeal of the OVDP is that it limits the staggering penalties the IRS can assess. Under the OVDP, penalties are capped. You will never pay more than one 27.5% FBAR equivalent penalty (smaller penalties based on amount of unreported income also apply, but these are typically de minimus). If you need assistance with any unfiled or misfiled FBARs, contact us for a free, confidential consultation.