Appealing IRS Penalty Abatement Denials: Offshore Disclosure Penalties, OVDP Denials and Appeals

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Appealing IRS Penalty Abatement Denials: Offshore Disclosure Penalties, OVDP Denials and Appeals WEDNESDAY, NOVEMBER 1, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Anthony E. Parent, Founding Partner, Parent & Parent, Wallingford, Conn. Dennis N. Brager, Esq., Brager Tax Law Group, Los Angeles Robert Hanson, Esq., International Tax Attorney, Parent & Parent, Wallingford, Conn. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For CPE credits, attendees must participate until the end of the Q&A session and respond to five prompts during the program plus a single verification code. In addition, you must confirm your participation by completing and submitting an Attendance Affirmation/Evaluation after the webinar and include the final verification code on the Affirmation of Attendance portion of the form. For additional information about continuing education, call us at ext. 35.

4 Appealing IRS Penalty Abatement Denials: Offshore Disclosure Penalties, OVDP Denials and Appeals Dennis N. Brager, Esq., Brager Tax Law Group November 1, 2017 Copyright 2017, Brager Tax Law Group

5 - Ex-IRS Trial Lawyer - State Bar Certified Tax Specialist Years Tax Dispute Experience with IRS, EDD, BOE, FTB Problems - Nationally Recognized Tax Litigation Attorney Copyright 2016, Brager Tax Law Group 5

6 Dennis N. Brager Dennis Brager is a California State Bar Certified Tax Specialist and a former Senior Trial Attorney for the Internal Revenue Service s Office of Chief Counsel. In addition to representing the IRS in the United States Tax Court, he advised the Service on complex civil and criminal tax issues. He now has his own five-attorney firm in Westwood and has been featured as a Super Lawyer in the field of Tax Litigation by Los Angeles Magazine. He has been quoted as a tax expert by US News and World Report, Business Week, the Daily Journal, The Daily Beast, USA Today, the Los Angeles Daily Journal, Tax Analyst, The Chicago Tribune, CNN Money, Bloomberg BNA, Cannabis Daily, Accounting Today, Tax Notes Today, and The National Law Journal. Having worked for the IRS for six years, he gained valuable insight into the inner workings of that organization. This not only helps in developing the right strategies, but facilitates working with the system quickly and efficiently. Mr. Brager has limited his practice to representing clients having disputes with the IRS, the Franchise Tax Board, the State Board of Equalization, and the Employment Development Department both at trial and administrative levels. He has appeared on ABC Television s Good Morning America, Fox Business news, ABC Eyewitness News, and TV One Access. He has also spoken and given webinars before the IRS sponsored Nationwide Tax Forum, the California Continuing Education of the Bar, the California Society of CPAs, the UCLA Tax Controversy Institute, the California State Bar Tax Section, the Consumer Rights Litigation Conference the California Trial Lawyers Association, the National Association of Consumer Advocates, the American Bar Association, the Warner Center Estate and Tax Planning Council, and the National Association of Enrolled Agents. Dennis Brager has been an instructor at Golden Gate University s Masters in taxation Program and a guest speaker at the University of Southern California. Mr. Brager has also testified as an expert witness on Federal tax matters and has been a guest on KFWB. His articles have appeared in the California Lawyer, Marijuana Venture, Daily Journal, Taxation for Lawyers, Los Angeles Lawyer, The Consumer Advocate, Family law News, California Tax Lawyer, Journal of Tax Practice and Procedure, Journal of Taxation of Investments, and Accounting Today. They include Offshore Voluntary Disclosure The Next Generation, Partial Offshore Tax Amnesty Voluntary Disclosure 2.0. Anatomy of an OPR Case (Definitely Not R.I.P.), FBAR and Voluntary Disclosure, The Tax Gap and Voluntary Disclosure, Circular 230: An Overview, Recent Developments in Tax Procedure, Damages, Rescission and Debt Cancellation as Client Income, The Taxpayer Bill of Rights A Small Step Toward Reining in the IRS, Challenging the IRS Requires a Cohesive Strategy, The Innocent Spouse Defense, IRS Guidelines for Installment-Payment Agreements, IRS Tightens Inventory Rules for Marijuana Businesses, and What a Practitioner Needs to Know About Tax Assessment Dates. Mr. Brager received his undergraduate degree from Pace University (B.B.A., magna cum laude, 1975, Accounting/Finance), and his law degree from New York University (J.D., 1978). He is a former chair of both the Tax Compliance, Procedure and Litigation Committee of the Los Angeles County Bar Association and the California State Bar tax Procedure and Litigation Committee. He is admitted to practice before the U.S. Supreme Court, the Ninth Circuit Court of Appeals, U.S. Claims Court, U.S. Tax Court, U.S. District Court and the U.S. Bankruptcy Court. Copyright 2017, Brager Tax Law Group 6

7 Form 8938 Statement of Foreign Assets Specified persons must report interests in specified foreign financial assets (SFFAs) for tax years after March 18, 2010 Who must file? Specified persons with specified foreign financial assets greater than $50,000 at year-end or $75,000 at any point during the year When & how to file? Attach Form 8938, Statement of Specified Foreign Financial Assets, to tax return by due date (with extension) Copyright 2017, Brager Tax Law Group 7

8 Specified Foreign Financial Assets Reportable on Form 8938 Foreign Financial Accounts. E.g. Bank accounts, securities accounts Stock or securities issued by someone that is not a U.S. person Any interest in a foreign entity Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person Examples of other specified foreign financial assets include the following, if they are held for investment and not held in a financial account. o Stock issued by a foreign corporation. o A capital or profits interest in a foreign partnership. o A note, bond, debenture, or other form of indebtedness issued by a foreign person. o An interest in a foreign trust or foreign estate. Copyright 2017, Brager Tax Law Group 8

9 Form 8938 Statement of Foreign Assets Treasury Regulations under I.R.C. 6038D finalized on Dec. 12, 2014, adopt a number of changes to Form 8938: Dual resident taxpayers now exempt from filing Form 8938 if, in essence, the individual qualifies as a nonresident alien and claims treaty benefits; Definition of financial account now excludes certain accounts that are subject to the reporting requirements of a Model 1 or Model 2 intergovernmental agreement; Jointly owned specified foreign financial assets must now report the entire value of each jointly owned asset (regardless of marital status); and Nonvested property rights under I.R.C. 83 must be reported as of the first date the property is substantially vested in the person, unless an I.R.C. 83(b) election is made, in which case, it must be reported as of the date the property is transferred. Copyright 2017, Brager Tax Law Group 9

10 Form 8938 Statement of Foreign Assets Additional Treasury Regulations under I.R.C. 6038D finalized on Feb. 23, 2016, Require Specified Domestic Entities (SDE) to File Form 8938: Effective for Taxable years beginning in 2016, i.e. the 2017 filing season SDE are domestic entities that are formed or availed of for the purpose of holding directly or indirectly SFFAs A corporation or partnership meets this test if it is closely held by a specified individual, and at least 50% of the gross income is passive income, or at least 50% of the assets held by the entity are assets that produce or are held for the production of passive income. The percentage of assets held is a weighted average percentage Copyright 2017, Brager Tax Law Group 10

11 Form 8938 Statement of Foreign Assets Definitions: Closely Held. 80% of the voting power, or total value Constructive Ownership Rules of I.R.C. Section 267 (c) are applied, and also includes spouses Passive income. Dividends Interest Rents and Royalties, other than those derived in the active conduct of a business Annuities Capital gains from passive assets Capital gains from commodities transactions Certain other income Copyright 2017, Brager Tax Law Group 11

12 Form 8938 Statement of Foreign Assets Domestic Trusts are considered formed or availed of only if: It has one or more specified persons as a current beneficiary Current beneficiary means, with respect to the taxable year, any person who at any time during such taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust Current beneficiary also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder. Grantor trusts owned by one or more specified persons do not need to file Copyright 2017, Brager Tax Law Group 12

13 Form 8938 Statement of Foreign Assets Specified Domestic Entities Do Not Include: Publicly traded stock REITs RICs Banks IRAs Exempt Organizations under I.R.C. 501(a) the United States government or any wholly owned agency or instrumentality thereof, any State, the District of Columbia, any possession of the United States, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing any common trust fund (as defined in section 584(a)), and any trust which is exempt from tax under section 664(c), or is described in section 4947(a)(1). Copyright 2017, Brager Tax Law Group 13

14 Form 8938 Statement of Foreign Assets Penalties (I.R.C. 6038D) Generally, $10,000, but may increase up to $50,000 for failure after notice Reasonable cause defense available Able to be reviewed in CDP proceedings, if there has been no prior opportunity to dispute the penalty. Copyright 2017, Brager Tax Law Group 14

15 Forms 8621 & 8621-A PFICs Gains and losses in PFICs generally recognized each year Who must file? U.S. persons (individuals, corporations, and pass-through entities) who are direct or indirect shareholders in a PFIC When to file? Attach to shareholder s tax return by due date (with extension) How to file? Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Form 8621-A, Return by a Shareholder Making Certain Late Elections to End Treatment as a Passive Foreign Investment Company Penalty? None. Woo Hoo! But SOL Extension does apply to failure to file Copyright 2017, Brager Tax Law Group 15

16 Form 8833 Treaty Positions If a taxpayer takes the position that a treaty overrides or modifies an internal revenue law, the taxpayer must disclose such position on a return or if no return, on such form as the Commissioner prescribes. I.R.C Common for dual resident taxpayers. I.R.C. 7701(b) When and how to file? Attach Form 8833, Treaty-Based Position Disclosure Under Section 6114 or 7701(b), to income tax return by due date Penalties I.R.C For each failure, $1,000 or $10,000 for a corporation reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 16

17 Form 926 Foreign Corp. Transfers U.S. citizens, corporations, and estates and trusts must report certain transfers of property and cash to foreign corporations. I.R.C. 332 liquidation; I.R.C. 351 incorporation; I.R.C. 361 reorganizations; I.R.C. 355 spin-offs; I.R.C. 367(d) and (e) transactions When and how to file? U.S. transferor must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, with return for year of transfer. Penalties for failure to report transfers of property to a foreign corporation begin at 10% of the value of the property transferred to the corporation and can reach a maximum of $100,000 per return Reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 17

18 Form 5471 Foreign Corps. U.S. citizens and residents (including entities) who are officers, directors, or shareholders in foreign corporations may need to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. See I.R.C. 6038, Officer or director if there are certain 10% changes in ownership by a U.S. person, Shareholders with certain 10% ownership changes in their own holdings Control person in a CFC for at least 30 days; A 10% or more owners of a CFC who owns stock for an uninterrupted period of 30 days or more during the tax year, AND who owned that stock on the last day of the year. When to file? Attach to timely filed return of the affected person Penalties I.R.C. 6038(b); 6038B(c) $10,000 per foreign corporation plus a $10,000 per month continuation penalty to a maximum of $50,000 Reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 18

19 Form 8865 Foreign Partnerships Certain U.S. persons who own or engage in transactions with certain foreign partnerships must file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. See I.R.C. 6038, 6038B, 6046A. U.S. person who, at any time: directly owned more than 50% interest in partnership's capital, profits, or losses; indirectly owned a 10% or greater interest in partnership s capital, profits, or losses; or contributes, acquires, disposes, or has a substantial change in proportionate interest. Numerous exceptions. When to file? Attach to timely filed return of the affected person Penalties I.R.C. 6038; 6038B For Category 1, 2 and 4 filers. $10,000 per foreign partnership plus a $10,000 per month continuation penalty. Maximum of $60,000 Reduction of Foreign Tax Credits For Category 3 filers. 10% of the FMV of the property contributed to the partnership Limited to $100,000 unless due to intentional disregard. In addition, the transferor must recognize gain on the property as if it had been sold for FMV. Reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 19

20 Form 3520 For Trusts & Gifts Grantors or beneficiaries with reportable transactions with foreign trusts or estates must file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See I.R.C. 679(c), 6048(a),(b). Many reportable transactions; e.g. formation of a foreign trust; transfer of property to a foreign trust; loans to a foreign trust; the receipt of any distribution by a U.S. beneficiary aggregate gifts or bequests from an NRA or foreign estate greater than $100,000 during a calendar year Gifts from foreign partnerships or foreign corporations of more than $15,601 When to file? Due at the same time as the tax return for the U.S. grantor or beneficiary It is filed with Ogden, UT Service Center. It is not attached to the tax return Penalties I.R.C Greater of 35% of the gross value of the distribution received from or transferred to a foreign trust 5% per month of the amount of foreign gifts or inheritances, up to 25% Reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 20

21 Form 3520-A For. Trusts - U.S. Owner A foreign trust with a U.S. owner pursuant to the grantor trust rules must file Form 3520-A, Annual Information of Foreign Trusts With a U.S. Owner. See I.R.C. 6048(b). When to file? Generally by March 15 th. A separate request on Form 7004 is required to obtain an extension. File with the Ogden, UT Service Center Penalties. I.R.C Greater of $10,000 or 5% of the gross value of the portion of the trust assets treated as owned by the U.S. person Continuation penalty of $10,000 per month may be imposed The penalty is imposed on the U.S. owner, not the foreign trust. I.R.C. Section 6677(b) Reasonable cause defense available CDP available Copyright 2017, Brager Tax Law Group 21

22 Form 8858 Foreign DREs Certain U.S. persons who own a foreign disregarded entity must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities. I.R.C. 6038B. A foreign DRE is an entity that is not created or organized in the U.S. and is disregarded as an entity separate from its owner for U.S. tax purposes. See Treas. Reg. Section and 3. When to file? Attach to timely filed return of the owner of the foreign DRE Penalties I.R.C. 6038(b) $10,000 per foreign disregarded entity plus a $10,000 continuation penalty per month, not to exceed $50,000. Also, subject to a 10% reduction of the available foreign tax credit. I.R.C. Section 6038(c) Reasonable cause defense available Copyright 2017, Brager Tax Law Group 22

23 Undisclosed Foreign Financial Asset Understatement IRS 6662(j) In the case of any portion of an underpayment which is attributable any undisclosed foreign financial asset understatement, the penalty is 40% (instead of the standard 20%)of the underpayment of tax. Undisclosed foreign financial asset means any asset for which information was required to be provided under I.R.C. 6038, 6038B, 6038D, 6046A or 6048 and was not disclosed. Reasonable cause defense available. Copyright 2017, Brager Tax Law Group 23

24 International Reporting Forms That Trigger The Extended Statute of Limitations IRS Form Reporting Obligation I.R.C. Section Form 926 Nonrecognition transfers to foreign corporations 6038B Form 3520 Form 3520-A Gratuitous transfers to foreign trusts and U.S. owners of foreign trusts Distributions received by U.S. persons from foreign trusts 6048(a), (b) 6048 (c) Form 5471 U.S. persons who control foreign corporations $ 6038 Form 5471 U.S. persons who become officers or directors of a foreign corporation and certain 10% or more shareholders 6046 Form 5472 U.S. corporations 25% or more foreign owned 6038A Form 8621 Shareholder of a PFIC 1298 (f) Form 8858 Foreign Disregarded Entities 6038, 6038B Form 8865 U.S. persons with certain 10% or more ownership changes 6046A Form 8865 U.S. persons who control foreign partnerships 6038 Form 8938 Specified Persons required to Report Specified Foreign Financial Assets Section 6038D 6038D Copyright 2017, Brager Tax Law Group 24

25 Extended SOL Triggered by Failure to Timely File Foreign Information Forms, or Disclose Income from Specified Foreign Financial Assets I.R.C. Section 6501(c)(8) as amended by the HIRE Act, provides that if certain information related to foreign transactions is not provided to the IRS then the SOL remains open with respect to any tax return, event, or period to which such information relates. That is, the SOL is extended for the entire tax return. Prior to amendment, I.R.C. Section 6501(c)(8) provided that the SOL only remained open with respect to any event or period to which such information relates, but not the entire tax return. If, however, the taxpayer is able to show the failure to file the required foreign information reporting form was due to reasonable cause and not willful neglect, the extended SOL only applies to the item or items that should have been reported on the foreign information reporting form, and not the entire tax return. The HIRE Act also amended I.R.C. Section 6501(c)(8) to provide that the failure to file IRS Form 8938 to report foreign financial assets is an additional basis for extending the SOL for 3 years from the date such information is reported to the IRS. The SOL extension is applicable not only in the case of the non-filing of the appropriate form, but if the information listed on the form is incomplete. See Temp. Treas. Reg. Section T (d). Effective Date. Returns filed after March 18, 2010, or returns filed on or before that date if the SOL had not already expired. Copyright 2017, Brager Tax Law Group 25

26 Extension of SOL Based Upon John Doe Summons I.R.C. 7609(e)(2) suspends limitations for assessment under I.R.C for the John Doe class on the 6-month anniversary of service of the summons until final resolution of response or a withdrawal of the summons. John Doe Summons Outstanding for more than 6 Months include: UBS Stanford HSBC India Coinbase, Inc. Copyright 2017, Brager Tax Law Group 26

27 FBAR Statute of Limitations Six Years from the date that the FBAR is due without regard to whether it was filed late, or not at all. Due date was June 30 th, and no extensions. Beginning with the 2016 tax year the FBAR is due April 15th. In 2016 the IRS granted an automatic extension to Oct. 16 th. Copyright 2017, Brager Tax Law Group 27

28 Best Practices in Drafting Penalty Abatement Requests Understand the law including recent case law, and IRS guidelines if any Make sure you carefully question your client about the facts. See our willfulness factor questions below Each year of a multiple year case must be addressed Consider SOL issues Consider including a declaration from your client signed under penalty of perjury If you re client states that she relied on a third party interview that person (usually the tax preparer) Obtain a declaration from the third party if possible Set forth those cases and guidelines which you believe support your client s case Distinguish any cases that are not helpful to your cause Copyright 2017, Brager Tax Law Group 28

29 Best Practices in Drafting Penalty Abatement Requests (Cont.) Determine if there are any documents supporting your request, and include copies. E.g. s between your client and the tax preparer Obtain copies of any organizer that your client filled out, and sent back to the tax preparer Include a request that the IRS contact you before any decision is made File a Freedom of Information Act (FOIA) Request if an appeal is necessary Copyright 2017, Brager Tax Law Group 29

30 Best Practices in Drafting Penalty Abatement Requests Understand the law including recent case law, and IRS guidelines if any Make sure you carefully question your client about the facts. See our willfulness factor questions below Each year of a multiple year case must be addressed Consider SOL issues Consider including a declaration from your client signed under penalty of perjury If you re client states that she relied on a third party interview that person (usually the tax preparer) Obtain a declaration from the third party if possible Set forth those cases and guidelines which you believe support your client s case Distinguish any cases that are not helpful to your cause Copyright 2017, Brager Tax Law Group 30

31 Best Practices in Drafting Penalty Abatement Requests (Cont.) Determine if there are any documents supporting your request, and include copies. E.g. s between your client and the tax preparer Obtain copies of any organizer that your client filled out, and sent back to the tax preparer Include a request that the IRS contact you before any decision is made File a Freedom of Information Act (FOIA) Request if an appeal is necessary Copyright 2017, Brager Tax Law Group 31

32 Dennis Brager, Esq. Brager Tax Law Group, A P.C. (310) Dbrager@bragertaxlaw.com Copyright 2017, Brager Tax Law Group 32

33 BRAGER TAX LAW GROUP Los Angeles W. Olympic Boulevard, Suite 750 Los Angeles, California Phone: Toll Free: TAX LITIGATOR Fax: Tax Litigation & Tax Controversy Services We Provide Criminal Tax Defense FBAR and Offshore Account Problems Office of Professional Responsibility (OPR) Defense Tax Audits & Tax Appeals Tax Fraud Defense Tax Preparer Penalty Defenses Innocent Spouse Defenses California Sales Tax Problems IRS and California Payroll Tax Problems Offers in Compromise Installment Payment Agreements Copyright 2017, Brager Tax Law Group 33

34

35 ANTHONY E. PARENT, ESQ. PARENT & PARENT LLP CONTACT: PART II: MENTAL STATES FOR INTERNATIONAL PENALTIES The high burden of reasonable cause. When you can win. The four FBAR mental states. Effective representation to make litigation unnecessary. 35

36 INTRODUCTION TAKING EXPERTS WITH A GRAIN OF SALT I was too stupid to know I couldn t win cases that I won. If I only knew these cases were hopeless I could have saved a lot of time and effort. My first win, in fact. 36

37 REASONABLE CAUSE THE REASONABLE CAUSE PARADOX We are talking about reasonable cause either for nonwillful FBARs or international reporting forms. A taxpayer needs to possess enough expertise to hire the right expert. But not possess enough expertise to have avoided the mistake. But mistakes, happen right? 37

38 REASONABLE CAUSE A RECENT EXAMPLE A taxpayer living in Switzerland receives a FATCA letter. Asks Swiss accountant about it. Advises doesn t need to do anything about it. Asks local attorney. Advised nothing needs to be done. Asks friend who practices corporate law in Massachusetts. Advises nothing need to be done. Not reasonable cause because if taxpayer asked an expert, the expert would have said to disclose properly. (we re appealing) 38

39 REASONABLE CAUSE SO WHEN CAN YOU WIN? Advice of a tax professional is very iffy. Look for something the IRS did or didn t do. If previously audited, did auditor know what they were doing? Did client make a phone call to the IRS? If you called ACS right now and asked about a late FBAR filing, what do you expect their answer to be? At best visit irs.gov for more info. But was something else said to client? Get into record. 39

40 REASONABLE CAUSE SO WHEN CAN YOU WIN? The examiner landscape. Half the field auditors of And half of the remaining field auditors don t want to deal with international audits because they are too complicated! 40

41 REASONABLE CAUSE SO WHEN CAN YOU WIN? An opt-out auditor or LB&I auditor will likely know forms. Don t expect a domestic auditor to know. Can you use this to prove that if an IRS auditor doesn t know about foreign reporting? If IRS examiner is confused wouldn t taxpayer be allowed some degree of confusion?(btw we represent IRS employees with Streamlined Disclosures) Do you have facts or could you create facts that could embarrass the IRS? If so, then you likely have a win. 41

42 FBAR PENALTIES FBAR MENTAL STATES FOR INDIVIDUALS Reasonable cause Non-Willful - default position Willfully blind - IRS examiners often conflate Title 26 negligent disregard with Title 31 willful blindness Look for this. Negligence is NOT willful blindness. Willfull. 42

43 FBAR PENALTIES CIRCUMSTANTIAL EVIDENCE USUALLY PROVES INTENT UNLESS You can t use an MRI or scoop out someone s brain to say Ah there s the intent. So circumstantial evidence is used to prove intent. Unless your client opens their big fat mouth and says something stupid. Ex.: I was really stressed out and I could be bothered. I was dealing with a divorce and I just couldn t get to it. These are the worst things to say! 43

44 FBAR PENALTIES CIRCUMSTANTIAL EVIDENCE USUALLY PROVES INTENT UNLESS Statement against interest. Slam dunk case for government. They admitted they knew about and didn t do it even though they could have. I don t know. I don t recall. I guess I am just really stupid. Are the most underused answers during FBAR exams. But tax clients who are not criminally versatile are terrible with interrogations. They feel they need to explain. And the IRS exploits this. Here s a typical trick question that get clients to start talking and talking and talking: 44

45 FBAR PENALTIES CIRCUMSTANTIAL EVIDENCE USUALLY PROVES INTENT UNLESS You are smart guy. How did you ignore Schedule B Part III Line 7? Answer A: Why answer well I was really busy and I just didn t understand it? Answer B: Compare with I don t know. Or I don t remember seeing it. Do you see how Answer A can lead to a litany of follow-up questions? Where as the only follow-up to Answer B is a sarcastic really? 45

46 FBAR PENALTIES FACT PATTERN 1 Taxpayer moved $2.0 million to Switzerland. Never files FBAR. Account is his name. Earns about 1% interest per year. Taxpayer self-prepared US returns never including Swiss income. FBAR audit commenced. 46

47 FBAR PENALTIES FACT PATTERN 1 Here s the twist. Taxpayer died. No evidence of intent at all. No banker, CPA, or taxpayer. No family member knows anything. What s the likely FBAR penalty? 47

48 FBAR PENALTIES FACT PATTERN 1 Non-willful. $10,000 Not filed. This is the default position. And with Pomerantz, courts clearly putting an account in your own name is an awful way to hide it. Mitigation doesn t apply as over $1.0 million No evidence of reasonable cause as taxpayer took that with him. Reasonable cause is our burden. And recall how difficult it was to win reasonable cause with informational returns. I guess we should look at his account history just to see if there was an audit. IRS can assess Form 8938 penalties. I would expect those for years of audit. Again to undo, we need reasonable cause. 48

49 FBAR PENALTIES FACT PATTERN 2 Client born in England. Come to US 20 years ago. Has investment scheme in England. Researched FBAR filings. Determined he really should file on his investment scheme. Upheaval in his live. Brother dies. Many things to take care of. At FBAR audit he is asked why he didn t file a timely FBAR. He says I had a lot going on at the time, lots of emotions, I couldn t be bothered with my taxes. What is his likely penalty, if any? 49

50 FBAR PENALTIES FACT PATTERN 2 Willful! He admitted to knowing about the FBAR and he admitted to not filing it. Reminder. There is no late FBAR filing penalty. FBAR penalty can be asserted for a FBAR a day late. He was pro se. Hopefully he d do better with a professional representing him. 50

51 FBAR PENALTIES DEVELOPING FACT PATTERNS - MURDER A great CLE on Criminal Appeals, I still remember from 15 years ago. Case loaded with bad facts. Double-homicide. Kind of grisly. Really no doubt your client did it. Jury found him guilty. Looking through the record, you see one possible issue. Looks like perhaps one male juror was disqualified on race. So how do we start our brief? 51

52 FBAR PENALTIES DEVELOPING FACT PATTERNS - MURDER I m a brand new attorney. I raise my hand in front of 100 experienced appellate attorneys. I cleared my throat and said Probably on a bus in Alabama. He said You got it. This case isn t about some terrifying double murderer, it is about a black man who has been denied his right to sit on a jury simply because of the color of his skin. He won the appeal, and was able to get his client off a death row. (Yep, you take your wins when you can in criminal law and there s one a reason I don t practice criminal law anymore). 52

53 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES The Bank Secrecy Act of 1970 was passed in order to give law enforcement a tool to bring down organized crime, drug and human traffickers, and terrorist financing. Client John Johnson is an MD. He stashed millions overseas since Money he earned from his medical practice. Testimony from Swiss banker was that he was trying to hide the money from the US. CPA testifies he asked him about foreign accounts, and has s from Dr. Johnson where he says no. Even ex-spouse will testify that Dr. Johnson was trying to hide the money from the US. He did not file an FBAR. He did not report any income it generated. Once detected at audit however, he made no further attempts to hide is assets. He came clean during the audit. So where do we start? 53

54 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES I m curious about his medical practice. What does he do? If he is an oncologist who have saved hundreds of people, don t you think that is a good place to start? The purpose of the FBAR is to take down drug kingpins who have illegal source income, no? So what if we make that a big deal. He is not the type of person the FBAR penalty was intended to punish. At all. FBAR penalties aren t supposed to be a stand-in for Title 26 penalties, are they? Before you laugh There s a recent FBAR case Bedrosian. Robert will talk about that. As I read the facts, I was certain the court was going to impose willful FBAR penalties, but it didn t. The facts were sort of there. So what happened? 54

55 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES I m convinced the court liked Mr. Bedrosian more than the IRS. As I went through the court file, a few things came clear that didn t make it into the opinion. Mr. Bedrosian got a topnotch legal team once he realized he had a problem. His team created a great record. They cooperated with the original auditor. The Revenue Agent and Group Manager seemed to like Mr. Bedrosian who showed up in person for the interview. But then something interesting happened. 55

56 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES Non-willful penalties were suggested. But then suddenly, the examiner had a emergency medical absence and a new auditor was assigned, with without interviewing anyone, reached the opposite conclusion. That Mr. Bedrosian was willful! A little advice on emergency medical absences. The court didn t like the IRS. Taxpayer wins. 56

57 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES So back to Dr. Johnson. Are there other facts that could make the court like him? Well I was sandbagging one fact. And this is true. Dr. Johnson used to be a CIA agent who provided cover for other agents in the Middle East in the 1980s while he was working on his medical device business. One day he was hijacked by Iranian terrorists while flying back from Saudi Arabia. A three day ordeal where the US government would not pay the ransom. And his family couldn t wire the ransom to the hijackers because of US banking controls. 57

58 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES If the the hijackers knew he was a CIA agent he d be dead on the spot. Amazingly he was let go. He still suffers PSTD. Since that day he vowed to always have money handy so he could take care of himself and his family. Switzerland is the place for that. So now what do you think? 58

59 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES The story is about an American hero, isn t it? A brilliant, hard-working guy who saves lives and will risk his own life for his country! We need more people like him, not less! The BSA is suppose to punish terrorists, not punish people who have volunteered to fight terrorists, right? So how it is going to work out? 59

60 FBAR PENALTIES DEVELOPING FACT PATTERNS - FBAR PENALTIES We don t know yet either! Follow us on to find out the conclusion as soon as we do! Remember the FBAR is a terrible law that has never been used against its intended targets. The IRS can t get the people they want, so they apply it against the people they can. And that s not right to beef up some meaningless statistic. Remember you always have the moral high ground. 60

61

62 Robert V. Hanson, Esq. Parent & Parent LLP Contact: PART III: THE AUDIT, THE APPEAL, AND BEYOND

63 THE RELEVANT STATUTES Statutes 31 USC 5314 FBAR Filing 31 USC 5321 Civil Penalties 31 USC 5322 Criminal Penalties Regulations 31 CFR CFR CFR

64 THE RELEVANT GUIDANCE 1. Internal Revenue Manual 4.26 Bank Secrecy Act Report of Foreign Bank and Financial Accounts Report of Foreign Bank and Financial Accounts Procedures 2. IRS Memorandum Number , Release Date 01/20/

65 THE RELEVANT CASE LAW THE GOOD Ratzlaf v. US, 510 US 135 (1994) Bedrosian v. US, 2017 Dist. LEXIS (E.D. Pa. 2017) (E.D. Penn. 2017) US v. Hom, 2016 U.S. App. LEXIS (6th Cir. 2016) US v. Pomerantz, (6/8/17 WD WA 2:16cv00689) US v. Park, 2017 US Dist. LEXIS (N.D. Ill. 10/5/17) 65

66 THE RELEVANT CASE LAW THE BAD Williams, 489 Fed. Appx. 655 (4th Cir. 2012) McBride, 90 F. Supp. 2d 1186 (D. Utah 2012) Moore, 2015 U.S. Dist. LEXIS (W.D. WA 2015) US v. Sturman 951 F.2d 1466 (6 th Cir. 1991) US v. Poole, 640 F.3d 114 (4th Cir. 2011) Cheek v. US 498 US 192 (1991) 66

67 THE SCENARIO A taxpayer comes to you after entering the OVDP. She comes from India, has a Master s degree in computer science, has been a US person since 2010, has $245,000 in accounts in India and the UK, never filed FBARs or reported worldwide income, and freaked out after coming across a news story about FATCA and applied to the OVDP. After reviewing the rest of her facts you feel that she was non-willful but she is facing a 27.5% penalty. What should you do? 67

68 THE EXAMINATION When will you need to defend an FBAR audit? Opt out from the Offshore Voluntary Disclosure Program (OVDP) Rejection from entering the OVDP Examiner is alerted to the existence of foreign assets during a domestic tax audit Rejected Streamlined Submission New audit 68

69 THE EXAMINATION What will happen? Columbo not Rambo. Opt out from OVDP The Revenue Agent assigned to the case will issue the proposed closing agreement You send the official letter requesting to opt out of the penalty structure of the OVDP The Agent sends the case and her write-up to her supervisor and then to the reviewing committee A scheduled phone interview with the taxpayer, representative, and the IRS Agent Interview lasts minutes Agent may contact third parties (like CPAs) without your consent Limited additional documentation is requested Audit is limited to the FBARs, typically the tax issue is left alone You will write up your summation and argument, citing the relevant facts and IRS guidance 69

70 THE EXAMINATION From all others May be a phone or may be an in-person interview at an IRS office Audit is not necessarily limited to FBARs The Agent may request information for domestic or foreign assets, tax or FBAR information Audit may be under oath IRS counsel may be present 70

71 THE INTERVIEW How to prepare? Call client, review facts, review facts, review facts Checklist: Citizenship/Resident Status Education: Highest degree? Major? Work history: Industry? Duties? Title? Licenses? Tax prep history: Schedule B? Organizer? Conversation? Why the mistake? When/how did you discover your mistake? What did you do after your discovery? How quickly did you act? What kind of accounts/assets abroad? Why did you open them? Why did you keep them open? Funded? What did you do with the funds? Transfers? Reliance? Any tax non-compliance? How much? 71

72 THE INTERVIEW Why the focus on the facts? Building the record Examiner s expertise? Examiner s immediate guidance? Statutory penalties? 72

73 THE STATUTORY PENALTY Section 5321(a) (5) Foreign financial agency transaction violation..... (B) Amount of penalty. (i)in general. Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000. (ii)reasonable cause exception. No penalty shall be imposed under subparagraph (A) with respect to any violation if (I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported. (C) Willful violations. In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314 (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of (I) $100,000, or (II) 50 percent of the amount determined under subparagraph (D), and (ii) subparagraph (B)(ii) shall not apply. 73

74 THE RELEVANT GUIDANCE IRM Defining Willfulness The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. A finding of willfulness under the BSA must be supported by evidence of willfulness. The burden of establishing willfulness is on the Service. Willfulness is shown by a person s knowledge of the reporting requirements and the person s conscious choice not to comply... The person only need to know that a reporting requirement exists. If a person has that knowledge the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR. 74

75 THE RELEVANT GUIDANCE IRM (Cont.) Under the concept of willful blindness, willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. Willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign bank on Schedule B of his Federal income tax return. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, in itself, to establish that the FBAR violation was attributable to willful blindness. 75

76 THE RELEVANT GUIDANCE IRM Willful FBAR Violations Evidence Copies of bank statements Notes of the examiner s interview Correspondence with tax return preparer Documents showing criminal activity related to non-filing of the FBAR Promotional material Credit card statements that sow the holder used the funds to cover everyday living expenses in a manner that conceal the source of the funds 76

77 YOUR TASK Put your client in the best light possible Counsel your client on what to say and what not to say Demonstrate How the client s education and work history do not involve tax, law, finance, or accounting How the client has a close connection to the country or countries with accounts How the client did not know of the legal duty How the client did not intend to violate any legal duty How, if possible, the client did not rely on the undisclosed funds for US living expenses 77

78 YOUR TASK Try to fight against willful blindness a conscious effort to avoid learning about the FBAR filing obligations Much easier to show than actual willfulness Gets equated with recklessness The line between recklessness (willful) and negligence (nonwill) has been blurred Try to stay on the side of negligence Find out when an opting out makes sense purely on the penalty amount 78

79 THE PENALTY OPTIONS OVDP Penalty 27.5% on the single highest account balance of the past eight years Willful Mitigation Can be as low as $1,000 per year and as high as 50% of the highest account balance Non-willful Mitigation Can be as low as $500 per year but no more than $10,000 per year 79

80 THE APPLICABLE GUIDANCE Exhibit FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 Split between Non-willful and Willful Split into Aggregate Account Balance Levels 80

81 THE MITIGATION GUIDELINES Non-willful 1. $0-50,000 $500 per, not over $5, $50, ,000 $5,000 per violation 3. Over $250,000 $10,000 per violation Willful 1. $0-50,000 $1,000 or 5% 2. $50, ,000 $5,000 or 10% 3. $250,000-$1,000,000 10%YE or 50% at violation 4. Over $1,000,000 50% at violation or $100,000 81

82 THE SCENARIO The taxpayer became your client and you opted out of the OVDP You prepped your client and reviewed the facts with her Despite putting forth a compelling case for a non-willful determination, the Revenue Agent recommended willful penalties (through willful blindness) What to do? 82

83 THE APPEAL Request an appeal Draft a letter stating your disagreement with exam, the reason why, and your request At appeal Focus on law increases Risks of litigation 83

84 THE DISTINCTION IRM FBAR Penalty Authority When performing these functions, the IRS is not acting under Title 26 but, instead, is acting under the authority of Title 31. Provisions of the Internal Revenue Code generally do not apply to FBARs. 84

85 THE LAW TO DISTINGUISH Williams Taxpayer plead guilty to criminal tax evasion and signed a statement saying that he knew of his FBAR filing obligations but chose not to file because he intended to hide his foreign income Court held that a person s conduct meant to conceal or mislead can show willfulness, but that willful blindness requires both being subjectively aware of a high probability of the existence of a tax liability and the purposeful act of avoiding learning the facts to point to such a liability 85

86 THE LAW TO DISTINGUISH McBride The defendant, a partner in a manufacturing company, contacted a financial management firm who put him in an elaborate and obviously fraudulent transfer pricing scheme and he did not file FBARs. After being contacted, he failed to cooperate during an audit and is on record repeatedly lying to the examiner. The court held that the defendant committed a willful violation because he actually knew of the FBAR requirement and did not file. The court went on to use the willful blindness definition from the Williams case. 86

87 THE LAW TO CITE Bedrosian v. US Taxpayer learned of his FBAR obligation from his CPA in the mid-1990s, was told you can t un-break the law, and not to bother filing FBARs now because his estate could clear it up later. The court applied Williams and McBride and the preponderance of the evidence standard, but ruled in the taxpayer s favor 87

88 THE LAW TO CITE Ratzlaf v. US The defendant was convicted of violating Title 31, and then appealed. The Supreme Court held that the willfulness provision of Title 31 required that the government prove that the defended acted with knowledge that his conduct was unlawful. A term appearing in several places in a statutory text is generally read the same way each time it appears. 88

89 THE IRS UNDERSTANDING IRS Memo (Cont.) First Question There are no cases in which the issue presented is construing willful in the civil penalty context. Ratzlaf v. United States, 510 U.S. 135 (1994), is a Supreme Court case that addressed the standard for willfulness in the context of a criminal violation of a structuring provision of the Bank Secrecy Act (BSA). The standard applied in Ratzlaf, at 141, was a voluntary intentional violation of a known legal duty ; that is, the government had to prove that the defendant had acted with knowledge that his conduct was unlawful in order to establish he had willfully violated the anti-structuring law. It was not enough that he knew the bank had a duty to report the transactions. In his dissenting opinion, Justice Blackmun argued for a lower standard (one where the person has knowledge of the third party s reporting requirement but not specific knowledge of the illegality of his own actions). 89

90 THE IRS UNDERSTANDING The IRS Memo (Cont.) First Question [I]n the case of the FBAR penalty, in order for there to be a voluntary intentional violation of a known legal duty, the accountholder would just have to have knowledge that he had a duty to file an FBAR, since knowledge of the duty to file an FBAR would entail knowledge that it is illegal not to file the FBAR. A corollary of this principle is that there is no willfulness if the accountholder has no knowledge of the duty to file the FBAR. We agree that cases involving willful FBAR violations will generally have to rely on circumstantial evidence. Also, as noted in the memorandum, willfulness can be inferred where an entire course of conduct establishes the necessary intent. An example of where such an inference was made in the context of a criminal FBAR violation can be found in United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991). 90

91 THE SCENARIO You finish the appeal and the Appeals Officer used his discretion and lowered the proposed penalty, but your client has fallen on hard times. Hard times which leave her unable to make this payment. 91

92 AFTER APPEAL Court The IRS has two years after the assessment of a Title 31 FBAR penalty to initiate judicial proceedings to collect the penalty There must be a judgment against the taxpayer before collection action begins 92

93 AFTER APPEAL US Tax Court Jurisdiction? The United States Tax Court is a court of record established by Congress under Article I of the U.S. Constitution. When the Commissioner of Internal Revenue has determined a tax deficiency, the taxpayer may dispute the deficiency in the Tax Court before paying any disputed amount. The Tax Court s jurisdiction also includes the authority to re-determine transferee liability, make certain types of declaratory judgments, adjust partnership items, order abatement of interest, award administrative and litigation costs, redetermine worker classification, determine relief from joint and several liability on a joint return, review certain collection actions, and review awards to whistleblowers who provide information to the Commissioner of Internal Revenue on or after December 20,

94 THE BFS The Bureau of the Fiscal Service Established in 2012 Operate[s] the federal government s collections and deposit systems, overseeing a daily cash flow of over $89 billion. Adds 28% on top of the amount owed as soon as it comes to them 94