IRS Warning Letters May Be Sufficient for Some Non Willful Violations for Failure to File an FBAR

In a Tax Notes Today report of statements made at the Eastern Pennsylvania Working Together Conference in Malvern, PA, Jason Kuratnick, IRS Associate Area Counsel (Philadelphia), Small Business/Self-Employed Division is reported to have said.

The IRS may send a warning letter in lieu of asserting penalties for failure to file a Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” if it would be sufficient to bring the individual into compliance, an IRS official said May 17.

The report seems to indicate that the IRS may be reasonable in applying non willful penalties in civil audits involving offshore bank accounts. The more difficult question is whether to “opt out” of the offshore voluntary disclosure initiate if the failure to file FBARs is not willful.

The 2009 OVDP offered taxpayers dissatisfied with the penalty structure of 20% of the highest aggregate foreign account balance the opportunity to “opt out” of the program. On June 1, 2011, the IRS issued a memorandum (the “Opt-Out Memo”) that stated a “taxpayer should not be treated in a negative fashion merely because he or she chooses to opt out” of the 2009 OVDP. However, taxpayers have no reason to feel easy about opting, given the provisions of FAQ #34, which stated that for those who opt out:

All relevant years and issues will be subject to a complete examination. At the conclusion of the examination, all applicable penalties (including information return and FBAR penalties) will be imposed. Those penalties could be substantially greater than the 20-percent penalty (available to those who did not opt out).

Under these circumstances, opting out does not seem like a risk free option considering the potential large penalties. The “opt-out” memo cautioned that “to the extent that issues are found upon a full scope examination that were not disclosed, those issues may be the subject of review by the Criminal Investigation Division.”

Vic Abajian, a former IRS tax attorney, continues to assist taxpayers with foreign account and asset issues before the IRS and Franchise Tax Board. He currently represents several clients with offshore bank accounts within the IRS offshore voluntary disclosure initiate (OVDI) and those that are involved in civil audits. He also represents several clients who have received grand jury subpoenas requesting information related to offshore bank accounts. To learn more about options and how to make a voluntary disclosure of an offshore bank account, please contact Tax Attorney Vic at 818-396-5059. We have offices in Irvine and Glendale, California.