Is the IRS Going Easier on Taxpayers with Foreign Accounts?

By George W. Connelly

Noooo!  But the IRS does seem to be getting more rational in a couple of respects.

On May 18, an IRS Associate Area Counsel for Philadelphia explained that the IRS may send warning letters in lieu of asserting penalties for failure to file a Form TD F 90-22.1, also known as an FBAR.  This will occur in situations where the IRS concludes a letter would be “sufficient to bring the individual into compliance.”  The speaker indicated that the IRS Office of Chief Counsel reviews every proposed FBAR penalty to ensure “that adequate facts exist to support the proposed assessment.”  The largest penalties apply to persons who willfully violate FBAR requirements, and go as high as 50% of the value of the unreported account.  When applying the willfulness penalty, the speaker indicated that the IRS looks for circumstantial evidence that the taxpayer had knowledge of a filing obligation – such as a prior warning letter or penalties.  If a person who conducts all his banking in the U.S. suddenly decides to open an account in a foreign country, the IRS will be interested in the reasons for opening the account.  The IRS will also take into account whether the account is “inherited” and how the taxpayer treated other inherited accounts.

On June 28, 2012, the IRS issued IR 2012-65, and announced new procedures for U.S. and dual citizens who live abroad and fail to file tax returns and FBARS.  The Notice was issued because the IRS became aware that many U.S. taxpayers living abroad failed to timely file U.S. federal income tax returns or FBARS, and have only recently become aware of their filing requirements and want to comply.  The new procedures will allow taxpayers who are “low compliance risks” to get current with their tax requirements without facing penalties or additional enforcement action.  These are individuals who have “simple tax returns” and owe $1,500 or less in tax for any of the covered years.  The new procedure is also intended to resolve issues related to certain foreign retirement plans, such as those under the Canadian Registered Retirement Savings Plan system, where tax treaties allow for income deferral under U.S. tax law in the event of a timely election. Under the new procedures, the taxpayers will be required to file delinquent returns along with appropriate related information returns for the past three years, plus delinquent FBARSs for the past sis year.  Taxpayers who present “higher compliance risk” will be subject to more thorough review and potentially an audit, perhaps beyond the three years. These provisions are effective September 1, 2012.

Finally, the IRS issued e-mailed technical advice on April 27, 2012 to the effect that the penalty under I.R.C. § 6038D for failure to disclose information on foreign assets is not subject to the “deficiency procedures” and is simply assessable.  That means that the IRS need not issue a Notice of Deficiency to the taxpayer before assessing these penalties, and that the taxpayer cannot take them to the United States Tax Court.  This means that, once such a penalty is assessed, a taxpayer is expected to pay the penalty (and any interest) in full before filing a claim for refund or pursuing the matter in United States District Court or the Court of Federal claims.  The advice did not address whether the taxpayer would have an opportunity to protest the penalty before it is assessed or collection activity begins.

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