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How the IRS Audits Non-Reported Offshore, Crypto and Gambling Accounts

We recently posted that the IRS is requiring FBAR returns for Cryptocurrency Accounts as well as Online Gambling Accounts, in addition to the regular offshore banking accounts reporting. If these requirements are not complied with, the IRS will impose penalties depending on the willfulness of the taxpayer.

There are two types of FBAR violations for non-reporting offshore accounts: willful and non-willful and the IRS imposes very different penalties for each one. To put this into perspective:

  • A willfulness penalty is the greater of $100,000 OR 50% of the balance in the foreign account at the time of the violation.
  • A non-willful violation leads to a maximum penalty of $10,000.

What Am I Supposed to Do During an FBAR IRS Audit?

  • First off, the IRS is sending a clear message to the public. They are taking FBAR violations as serious and they will be using the case law as a tool during examinations.
  • Taxpayers who might want to convince the IRS revenue agent that their failure to report a foreign bank account was unwillful will face these judgments above head on.
  • The IRS agents will be fully cognizant of these court cases.
  • The IRS agents will rely on these judgments to support their position

Put differently, deniability in the form of ignorance of the FBAR obligation or insisting that you did not read or comprehend the tax return properly will in all probability not bring relief to anyone pinned in this position.

The key to turning these kinds of cases around is a clear understanding of what willfulness means in legal terms coupled with a clear understanding of what the government must produce to meet the required burden of proof.

 

And After an Examination?

  • It might also be very hard for taxpayers to appeal their cases administratively before the IRS Office of Appeals.
    • IRS officers that has to resolve cases in consideration of ‘litigation hazards’ will not accept mitigation that has been fully rejected in recent court judgments.
    • Appeals are normally upheld only if new evidence that was not considered during the civil examination comes to light.
  • You have to take action. Fast. If you have any undisclosed foreign bank accounts, ‘casino accounts’ or cryptocurrency accounts you should:
    • Hire a CPA to prepare a federal tax return
    • Disclose the existence of these foreign accounts to the CPA
    • Ask the CPA whether the income derived needs to be reported n federal income tax returns
    • File all the required foreign bank account reports.
    • If an FBAR examination does follow, a reasonable defense can be offered.
    • For delinquent FBARs the IRS Delinquent FBAR Submission Procedures can be considered.
  • If you already went through a civil examination, appoint a CPA to handle it from there on.
    • Your CPA will obtain a copy of the administrative file
    • He will review the evidence presented during the examination
    • After this review, he will discuss the situation with the appeals office
    • He will give very thoughtful consideration to the Internal Revenue Manual (IRM) in respect of Appeals and FBAR penalties.
    • He should have an expert knowledge especially of IRM8.11.6, FBAR Penalties.

In the KIMBLE case the courts made it clear exactly what the standards are for finding a willful violation of the FBAR requirements which then permits the imposition of a larger penalty.  This case is especially worth reading since it provides a useful roadmap for those seeking to litigate an FBAR case because it provides insight on the arguments that might work and on those that won’t work.

KIMBLE’S Argument

  • Willfulness is voluntary and intentional violation of a known legal duty.
  • The Government’s arguments makes the term willful redundant since it will result in every taxpayer who fails to file an FBAR to be considered as in willful violation.
  • She never read any of her tax returns
  • She had no knowledge of the FBAR
  • Hence her failure to report was by definition not willful.

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The Governments Position

  • A violation is willful where a taxpayer violates the law voluntarily and not accidentally.
    • She as in voluntary disregard because she signed her tax return knowing full well of her duty to report FBAR
    • She specifically instructed her Swiss Bankers (a numbered and thus hidden account) not to send any account related communication to the United States
    • She failed to inform her accountant of the same
  • Where the taxpayer is willfully blind to the duty to report
    • Willful blindness occurs when a person takes deliberate actions to remain unaware of something they reasonably should know is a fact.
    • She is required by law to have full knowledge of the representations made in her tax returns
    • There is a full section on FBAR in her tax return which required the disclosure of all foreign bank accounts
    • She claimed that she never read her tax returns or any documents pertaining to the Swiss Account signed by her
  • Behaves with reckless disregard of the legal duty to report
    • She was reckless (disregard) in her legal duty to file an FBAR, to answer Question 7 on her tax return that dealt with foreign accounts and by not asking her accountant for advice on any reporting requirements pertaining to her Swiss Bank Account.

 The Court’s Resolution

  • The court decided that Kimble’s failure to report her foreign accounts was willful
  • Kimble was therefore subject to the higher willfulness penalty
  • Citing the Supreme Court, willfulness was constructed by both knowledge and reckless violations of a standard.
    • Kimble failed to disclose her foreign accounts to her accountant until 2010
    • She never asked her accountant how to report foreign investment income
    • She failed to review her income tax returns for accuracy
    • Kimble falsely answered no to question 7(a) denying under penalty of perjury that she had any foreign bank accounts
    • Her failure in the above two requirements constituted a reckless disregard.
    • Despite there being no statutory duty on her to disclose information to or ash for information about IRS reporting requirements, her failure to do so DID NOT affect the court’s determination of her willful conduct.

It Is Important To Take Note Of:

  • The IRS is going for the maximum penalty against those individuals they consider to have been willfully blind or reckless by non-adherence to the FBAR reporting requirement.
  • The IRS position is that taxpayers are charged to have full and constructive knowledge of the contents of their signed income tax returns
  • A defense based on the assertion that “I did not read my tax returns” will therefore simply not stand up.

 

Tax Planning for U.S. Expats

What Can Your CPA Do To Improve Your Chances During An FBAR Civil Examination?

  • Try to resolve the case with the IRS Revenue Agent during the civil examination
  • A presentation should be made to the IRS Revenue Agent that includes the following
    • Provide documentation that supports that your actions were nonwillful
    • Provide signed affidavits under penalty of perjury
    • Factually distinguish your case from the published adverse cases
    • Educate the Agent to why the taxpayer’s conduct was not willful
    • Use a PowerPoint presentation that walks the agent through the evidence that shows why there were no willfulness in this case
    • The IRS is a document driven organization. Provide more documentation to state your case and prove your contention than mere signed affidavits.
  • Insist that your CPA or representative retain legal counsel
    • Insist that your CPA/representative retain counsel  to provide legal advice in order to mount a viable legal defense
  • Realistic Expectations
    • It is not guaranteed in any way that FBAR problems can be resolved during IRS Appeals
    • The existing case law impedes the Appeals process
    • Future litigation where the taxpayer wins balances the scales of justice will provide practitioners with enough developments to rely

Contact us for more info about U.S. Expats Obligations

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized In Tax Planning, International Business, Wealth Management and Offshore Banking. You can email him to fa@fascpaconsultants.com or follow us on Facebook : FAS CPA & Consultants.

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