The IRS Requires Now FBAR Filing for Cryptocurrency and Online Gambling Accounts or Face Severe Penalties
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Foreign Bank and Financial Accounts (FBAR)
An FBAR filer according to the IRS is an individual that owns or co-owns with a spouse, a foreign financial account that requires the filing of an FBAR for the reportable year. In typical cryptic language the IRS is requiring all U.S. taxpayers to file a form 114 if your foreign bank account balance exceeds $10,000 at any time during the year.
Cryptocurrency and Online Gambling
There is a problem however. The IRS and FINCEN now allege that a foreign online poker account must henceforth be reported as a foreign financial account. The rationale seems to be that they now consider an online poker account as a “casino account” that is reportable.
And the same goes for non-U.S. Cryptocurrency Exchanges. If you have or had more than $10,000 in a foreign Cryptocurrency exchange any time during the year, it is precautious to file an FBAR to disclose the same.
This requirement has already been tested in court. In United States v. Hom the court upheld the requirement to file an FBAR. This means that you will be subject to a substantial penalty if you fail to file an FBAR. But just filing is not enough. In filing your Form 114 must be fully completed. Nothing can be left out, and this is where the problems start.
Form 114 requires an address for the entity where you have your Cryptocurrency and/or where your “casino” account is held. This is difficult to comply with. In the first place, most of these entities do not publish their addresses. Even when you contact them (email) and request the addresses required for tax purposes, they often simply do not respond, or if they do, they often politely deny your request and you are left stranded without an address as per requirement for Form 114.
It is then up to the filer to find and supply the correct address or face a stiff penalty. Also, FINCEN does not accept a DBA (doing business as) when filing. FINCEN wants the registered entity’s name. On the other hand, Treasury – for Form 8938 does require the registered name as well as the DBA.
What if the IRS comes calling?
The trouble will start when the IRS sends you a letter to schedule an appointment to examine your compliance with the requirements to file FINCEN Report 114 (FBAR).
Despite it not being an income tax examination this could be perilous and lead to liability for severe penalties for failure to comply to 31 U.S.C. Section 5314.
Thus far the IRS has resorted to imposing maximum FBAR willfulness civil penalties for those who attained adverse results during an IRS examination. The same severity followed those who attained adverse results after administrative appeals.
This resulted in taxpayers turning to the courts for relief, and it often did not turn out well for the applicants. The courts, in many incidents, upheld the maximum FBAR willfulness penalty. Arguments for the implementation of a reasonable cause standard or for the lesser nonwillful penalty fell on deaf ears.
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 nonwillful violation leads to a maximum penalty of $10,000.
If you are selected for an IRS Audit because of FBAR, the first thing you should is try to resolve the case with the IRS Revenue Agent:
- 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 non-willful
- 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 on during civil examinations or administrative appeals
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