The IRS has released its annual report on the activities of the Criminal Investigation (CI) section. Claiming a 91.5 % conviction rate in the cases that actually go to indictment, the types of cases fall into a wide range of categories ranging from traditional tax cases to narcotics, financial institution fraud and even terrorism. Over 150 non-filers were sentenced to an average of 36 months incarceration. Payroll tax cases sent 77 people to jail for an average sentence of 21 months. Abusive return preparers numbering 194 were sentenced to an average of 26 months confinement. False refund claims sent 555 persons to prison for an average of 30 months. Identity theft resulted in 550 perpetrators receiving an average of 34 months. For a complete breakdown, visit: https://www.irs.gov/pub/foia/ig/ci/2017_criminal_investigation_annual%20report.pdf
The report has information for each CI office and examples of their most important cases. It also sets out specialized units that focus on highly sophisticated types of crimes. As always, the message is, if you are charged with a tax or other crime under the jurisdiction of the IRS, there is a high probability that you will go to jail. Obviously, if you are ever contacted by a person identifying themselves as an IRS agent, you should decline to be interviewed, request a business card from that person and immediately seek experienced counsel. A favorite joke often repeated at seminars on this subject goes as follows:
An attorney receives a frantic call from a prospective client who says “Two IRS criminal agents just left my house!” The attorney responds “Oh, my gosh! You didn’t tell them anything did you?” The prospective client says “No, of course not!” The attorney then asks, “How long were they there?” The prospective client responds “Two hours.” Don’t be that prospective client.
There has been a series of cases that bode ill for taxpayers who failed to file foreign bank account reports (FBARs). To review, the law requires taxpayers who have foreign bank accounts with a total balance of $10,000 at any point in a calendar year to file an FBAR the following year. Until recently, that return was due by June 30 with no extensions. Recent changes now make the return due at the same time your income tax is due and it is automatically extended to October 15 if you file an extension for your income tax return.
A non-willful failure to file can result in a penalty of up to $10,000 per account per year. However, the IRS has adopted procedures to reduce the amount pursuant to mitigation guidelines depending upon the total amount held in the accounts in any one year. The agent also has the authority to recommend a single $10,000 penalty regardless of the number of accounts or years. Further, if reasonable cause is demonstrated by the taxpayer, no penalty can be assessed for that year. Typically, taxpayers demonstrate reasonable cause in this area by showing they relied upon their tax preparers or advisors who failed to advise them to file. To succeed in making this showing, taxpayers must show the advisor was presented with all pertinent facts, that the advisor was competent to give advice on the subject and that the taxpayer relied, in good faith upon that advice. A recent bankruptcy case has held that if the advisor was aware of the foreign accounts, but failed to advise that FBARs were required to be filed, that the taxpayer could rely upon the failure to advise as if there had been a specific discussion about the requirement. It stated that to hold otherwise would require an advisor to review every possible form and filing requirement with a taxpayer and tell him whether it had to be filed. This, the court ruled, was not required by the law.
Unfortunately, those taxpayers charged with willful failure to file an FBAR do not have the opportunity to show reasonable cause. Somewhat illogically, the statute prohibits it. Yet one might argue (as the author and others have) that if you meet the elements of reasonable cause, you cannot have willfully failed to file. The penalties for a willful failure to file can be draconian. They are $100,000 per account per year or 50% of the balance in the account per year. With a six-year statute of limitations to assess the penalty, theoretically, a taxpayer could be assessed 300% of the highest balance. The IRS, has, however, graciously agreed that they won’t take more than 100%. To further add to the potential misery, there are no mitigation provisions for a willful failure to file an FBAR.
Not surprisingly, this has led to litigation on the issue of willfulness. Although FinCen has delegated the authority to the IRS to investigate and assess FBAR violations, the IRS has no mechanism to collect any assessment it may make, except possibly offsetting a taxpayer’s income tax refund by deducting the penalty as a debt owed to another Federal agency. Instead, The Treasury Department, through the Department of Justice, must file an action in Federal district court to obtain a judgment. The taxpayer may be able to pursue refund procedures in either the district court or the Court of Claims. Most of the reported cases have gone against the taxpayer. The facts in many of the cases involve taxpayers who have been convicted of tax evasion or who have admitted they intentionally concealed the foreign accounts to also conceal unreported income. These facts alone would seem to be all that would be necessary to sustain the willful FBAR penalty.
However, the courts are going further, unnecessarily in the author’s opinion, and are creating what almost appears to be a strict liability rule. Essentially, they state that when a taxpayer signs a return, he states he has read it and it is correct. Then they point to Schedule B, Part III, which contains the questions about foreign trusts and bank accounts. The courts continue that it contains a warning that other returns may need to be filed. Thus, say the courts, the taxpayer either had actual knowledge of the duty to file an FBAR or is guilty of “willful blindness” in not pursuing the matter further to determine what his obligations are under the law. An argument could be made that this is “dicta’ (comments by the court unnecessary to the ruling), but it is far from clear. Under this standard, a taxpayer who signs an income tax return and fails to file an FBAR may be, per se, deemed to be willful. Interestingly, the IRS has an internal rule that says simply failing to mark the box on the Schedule B, or marking it “no” is not enough. Perhaps that is why the courts that have made created this rule have spent a significant amount of time in their opinions setting forth the “bad acts” of the taxpayers in those cases. Unfortunately, they don’t state that to be the case. Very recently, one district court held in favor of a taxpayer where, it held, the facts did not rise to the level that it believed was intended by Congress when they passed the law. The author was advised by an Appeals officer in Tampa, Florida, that the Government was going to appeal the decision.
All the above, together with the implementation of FATCA in countries around the world, the continuing expansion of the Foreign Institutions and Facilitators list ( a list of banks and people that assisted taxpayers in setting up off-shore accounts or trusts, etc. that the IRS has determined should result in a 50% instead of a 27 ½ % off-shore penalty under an OVDP submission) point to the need for individuals who have foreign bank accounts, trusts or other off-shore assets or foreign unreported income to seek advice and seriously consider participation in the Off-shore Voluntary Disclosure Program (OVDP) where many of these penalties can be avoided or substantially reduced.
ORLANDO, FLORIDA – ShuffieldLowman recently announced that attorney Ross V. O’Bryan has joined the firm, working in the Orlando office in corporate, securities and tax law. O’Bryan, previously with a technology consulting firm, brings experience in the complex areas of venture capital investment, financial reporting and monitoring of financial markets.
O’Bryan holds his J.D. from Boston College School of Law, and two degrees from the University of South Florida, a B.S., cum laude, in Finance, and a B.A., cum laude, in International Business. While in law school he was a regional finalist in the American Bar Association’s national Negotiation Competition and was a member of the Business Law Society and the Intellectual Property and Technology Forum.
ShuffieldLowman’s four offices are located in Orlando, Tavares, DeLand and Port Orange. The firm is a 40 attorney, full service, business law firm, practicing in the areas of corporate law, estate planning, real estate and litigation. Specific areas include, tax law, securities, mergers and acquisitions, intellectual property, estate planning and probate, planning for families with closely held businesses, guardianship and elder law, tax controversy – Federal and State, non-profit organization law, banking and finance, land use and government law, commercial and civil litigation, fiduciary litigation, construction law, association law, bankruptcy and creditors’ rights, labor and employment, environmental law and mediation.