Appealing IRS Penalty Abatement Denials: Offshore...

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Appealing IRS Penalty Abatement Denials:

Offshore Disclosure Penalties, OVDP

Denials and Appeals

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, NOVEMBER 1, 2017

Presenting a live 90-minute webinar with interactive Q&A

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.

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FOR LIVE EVENT ONLY

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

- Ex-IRS Trial Lawyer

- State Bar Certified Tax

Specialist

- 30+ Years Tax Dispute

Experience with IRS,

EDD, BOE, FTB

Problems

- Nationally Recognized

Tax Litigation Attorney

Copyright © 2016, Brager Tax Law Group 5

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.


Form 8938

• 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)

Statement of

Foreign Assets


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.


• 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.


Form 8938 Statement of

Foreign Assets

9

• 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



Foreign Assets

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• 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



Foreign Assets

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• 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



Foreign Assets

12

• 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).



Foreign Assets

13

• 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.



Foreign Assets

14

PFICs Forms 8621 & 8621-A

• 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


Treaty Positions Form 8833

• 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. § 6114 – 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. § 6712

– For each failure, $1,000 or $10,000 for a corporation

– reasonable cause defense available

– CDP available


Foreign Corp.

Transfers Form 926

• 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


– CDP available


Foreign Corps. Form 5471

• 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, 6046. – 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


– CDP available


Foreign

Partnerships Form 8865

• 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.


– CDP available


For Trusts & Gifts Form 3520

• 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. § 6677

– 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%


– CDP available


For. Trusts - U.S.

Owner Form 3520-A

• 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 15th. A separate request on Form 7004 is required to obtain an extension.

– File with the Ogden, UT Service Center

• Penalties. I.R.C. § 6677

– 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)


– CDP available


Foreign DREs Form 8858

• 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 301.7701-2 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)



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.


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 Gratuitous transfers to foreign trusts and U.S. owners

of foreign trusts

§ 6048(a), (b)

Form 3520-A Distributions received by U.S. persons from foreign

trusts

§ 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


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 1.1298-1T (d).

• Effective Date. Returns filed after March 18, 2010, or returns filed on or before that date if the SOL

had not already expired.


Extension of SOL Based Upon

John Doe Summons

• I.R.C. § 7609(e)(2) suspends limitations for assessment under I.R.C.

§ 6501 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.


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 30th, 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. 16th.


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


Best Practices in Drafting Penalty

Abatement Requests (Cont.)

• Determine if there are any documents supporting your

request, and include copies. E.g. emails 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


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


Best Practices in Drafting Penalty

Abatement Requests (Cont.)

• Determine if there are any documents supporting your

request, and include copies. E.g. emails 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


Questions?

Dennis Brager, Esq. Brager Tax Law Group, A P.C.

(310) 208-6200 [email protected]

@TaxProblemEsq


BRAGER TAX LAW GROUP

Los Angeles

11400 W. Olympic Boulevard, Suite 750

Los Angeles, California 90064

Phone: 310.208.6200

Toll Free: 800.380.TAX LITIGATOR

Fax: 310.478.8030

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

@TaxProblemEsq

www.bragertaxlaw.com

www.taxproblemattorneyblog.com


http://www.bragertaxlaw.com/

http://www.bragertaxlaw.com/

ANTHONY E. PARENT, ESQ. PARENT & PARENT LLP CONTACT: [email protected]

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

mailto:[email protected]?subject=

mailto:[email protected]?subject=

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

REASONABLE CAUSE

THE REASONABLE CAUSE PARADOX ▸ We are talking about “reasonable cause” either for non-

willful 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

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

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

http://irs.gov

REASONABLE CAUSE


▸ The examiner landscape.

▸ Half the field auditors of 2008.

▸ And half of the remaining field auditors don’t want to deal

with international audits — because they are too

complicated!

40

REASONABLE CAUSE


▸ 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

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

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

FBAR PENALTIES

▸ 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

CIRCUMSTANTIAL EVIDENCE USUALLY PROVES INTENT UNLESS…

FBAR PENALTIES

▸ “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

CIRCUMSTANTIAL EVIDENCE USUALLY PROVES INTENT UNLESS…

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

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

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

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

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

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

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

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 1983. 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 emails 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

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

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 top-

notch 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

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

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

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

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

FBAR PENALTIES

DEVELOPING FACT PATTERNS - FBAR PENALTIES ▸ We don’t know yet either!

▸ Follow us on www.irsmedic.com 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

PART III: THE AUDIT, THE APPEAL, AND BEYOND

Robert V. Hanson, Esq.

Parent & Parent LLP

Contact: [email protected]

THE RELEVANT STATUTES

‣ Statutes

‣ 31 USC §5314 – FBAR Filing

‣ 31 USC §5321 – Civil Penalties

‣ 31 USC §5322 – Criminal Penalties

‣ Regulations

‣ 31 CFR 1010.420

‣ 31 CFR 1010.430

‣ 31 CFR 1010.440 63

THE RELEVANT GUIDANCE

1. Internal Revenue Manual

‣ 4.26 Bank Secrecy Act

‣ 4.26.16 Report of Foreign Bank and Financial Accounts

‣ 4.26.17 Report of Foreign Bank and Financial Accounts

Procedures

2. IRS Memorandum

‣ Number 200603026, Release Date 01/20/2006

https://www.irs.gov/pub/irs-wd/0603026.pdf

64

THE RELEVANT CASE LAW

‣ THE GOOD

‣ Ratzlaf v. US, 510 US 135 (1994)

‣ Bedrosian v. US, 2017 Dist. LEXIS 15625 (E.D. Pa. 2017) (E.D.

Penn. 2017)

‣ US v. Hom, 2016 U.S. App. LEXIS 13269 (6th Cir. 2016)

‣ US v. Pomerantz, (6/8/17 WD WA 2:16cv00689)

‣ US v. Park, 2017 US Dist. LEXIS 165173 (N.D. Ill. 10/5/17)

65

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 43979 (W.D. WA 2015)

‣ US v. Sturman 951 F.2d 1466 (6th Cir. 1991)

‣ US v. Poole, 640 F.3d 114 (4th Cir. 2011)

‣ Cheek v. US 498 US 192 (1991)

66

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

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

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 30-60 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

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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

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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

THE INTERVIEW

‣ Why the focus on the facts?

‣ Building the record

‣ Examiner’s expertise?

‣ Examiner’s immediate guidance?

‣ Statutory penalties?

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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


‣ IRM 4.26.16.6.5.1 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


‣ IRM 4.26.16.6.5.1 (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


‣ IRM 4.26.16.6.5.2 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

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

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 (non-will) 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

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

THE APPLICABLE GUIDANCE

‣ Exhibit 4.26.16-1

FBAR Penalty Mitigation Guidelines for Violations Occurring

After October 22, 2004

‣ Split between Non-willful and Willful

‣ Split into Aggregate Account Balance Levels

80

THE MITIGATION GUIDELINES

Non-willful

1. $0-50,000

‣ $500 per, not over $5,000

2. $50,000-250,000

‣ $5,000 per violation

3. Over $250,000

‣ $10,000 per violation

Willful

1. $0-50,000

‣ $1,000 or 5%

2. $50,000-250,000

‣ $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

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

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”

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THE DISTINCTION

‣ IRM 4.26.16.6.1 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.

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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

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

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

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.”

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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

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

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.

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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

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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, 2006.

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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

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THE BFS

‣ Three options at the BFS

1. Full Pay

2. Payment Arrangement

‣ 36 Month repayment term

‣ Treasury will also garnish wages/SSA up to 15%; for SSA, garnishment will not

reduce monthly payment below $750

‣ Will happen even if there is a payment plan

‣ Additional interest charged

3. Dispute

‣ Provide documents and fill out the dispute form laying out the reasons you do not

owe the debt, the BFS will send it to the originating agency (IRS) who will review

your dispute, make the decision to accept or reject your reasons, and then send the

case back to the BFS

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THE BFS

‣ The BFS is just the collection arm of the Department of the

Treasury

‣ They work on the assumption that the taxpayer has been

given due process already

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