New FBAR Form 114 and Revised IRS Appeals Procedures re FBAR Penalties
On October 28, 2013 the IRS revised the Internal Revenue Manual (IRM) providing guidance and clarification regarding the administrative review of FBAR penalties by the IRS Office of Appeals. See https://www.irs.gov/irm/part8/irm_08-011-006.html
The IRM is essentially the operational manual providing guidance and procedures for the various functions carried out by the IRS. The Office of Appeals serves as the administrative dispute resolution forum for any taxpayer contesting an IRS compliance action. It has long been Appeals’ mission to “resolve tax controversies, without litigation, on a basis that is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.” See IRM 184.108.40.206(1).
The Financial Crimes Enforcement Network (FinCEN) delegated its enforcement authority for penalties imposed under Title 31, Sections 5314 – 5321 for the failure to file Form 114, Report Of Foreign Bank And Financial Accounts (FBAR) to the IRS. This delegation was effective April 8, 2003, by memorandum of agreement between FinCEN and IRS. With respect to FBAR penalties being considered for resolution by IRS Appeals, the revised IRM 8.11.6 provisions reference:
(1). New FBAR – FinCEN Form 114 and 114(a). FinCEN Form 114 has replaced the former Report of Foreign Bank and Financial Account (FBAR), Form TD F 90-22.1 (Form TD F 90-22.1 is now obsolete). FinCEN Report 114, Report of Foreign Bank and Financial Accounts, is used to electronically report a financial interest in or signature authority over a foreign financial account. New FinCEN Form 114(a), Record of Authorization to Electronically File FBARs, is for filers who submit FBARs jointly with spouses, or desire to submit them via third-party preparers.
Effective July 1, 2013, the FBAR must be filed electronically through the Bank Secrecy Act E-File System and must be received by on or before June 30th of the year immediately following the calendar year being reported. The June 30 filing date may not be extended. The reference to FBAR Form TD F 90-22.1 has been replaced with a reference to FinCEN Form 114 on Schedule B, Line 7b of Form 1040 for tax year 2013.
(2). IRS FBAR Administrative File. The IRS administrative file provided to Appeals will contain a brief summary memorandum explaining the FBAR violation(s) containing statistical information which will include a discussion of the FBAR violations, the number of penalty assessments, the dollar amounts involved, and the FBAR case disposition; A Form 13535, Foreign Bank and Financial Accounts Report Related Statute Memorandum, signed by the designated Program Manager affirming that the information shows the FBAR violations were committed in furtherance of income tax violations, when appropriate; A copy of any delinquent FBAR(s) secured during the examination; FBAR issue workpapers; the FBAR 30-Day Letter (Letter 3709 for pre-assessment; Letter 3708 for post-assessment); the Taxpayer’s protest; the representatives FBAR/Title 31 Power of Attorney Form 2848, if applicable; an IRS Counsel Opinion memo for FBAR penalties larger than $10,000 (for willful penalties only).
(3). Limited Jurisdiction for Post-Assessed FBAR Penalties. Post-assessed FBAR penalties in excess of $100,000 cannot be compromised by Appeals without approval of the Department of Justice (DOJ). See 31 USC 3711(a)(2) and 31 CFR §902.1(a) and (b). Once assessed, the FBAR penalty becomes a claim of the U.S. Government. Typically, the FBAR penalty case will usually be received in Appeals pre-assessment. However, upon request, Appeals will also conduct post-assessment hearings as provided in Title 31 CFR 5.4 and 900 to consider FBAR penalty liability and collection issues.
Post-assessment FBAR penalty cases will be handled by Appeals on a priority expedited basis. Appeals now requires these cases be completed and approved within 120 days of the date the Appeals Officer is assigned to the date the Appeals Team Manager (ATM) approves the case for closing. Previously, such cases were to be completed within 60 days. Appeals will require 180 days remaining on the applicable Title 31 assessment statute of limitations at the time the administrative file is received.
Appeals Cases with less than 180 days remaining on the assessment statute of limitations at the time the case is received by Appeals will be returned to the examining function as a premature referral so an extension of the statute of limitations may be secured. If no statute extension is secured then the FBAR penalty can be assessed and the taxpayer will be given post-assessment appeal rights. However, an Appeals Officer has the authority to execute a Title 31 FBAR statute extension. See IRM 220.127.116.11, Delegation Order 25-13 (formerly DO 4-35, Rev. 1). Also, see IRM 18.104.22.168.1 for information on the statute of limitations for FBAR cases.
(4). Limited Availability of Alternative Dispute Resolution (ADR) Rights. ADR rights are not available for post-assessment FBAR penalty cases. However, Fast Track Settlement (FTS) is available for pre-assessed FBAR penalties only if the 30-Day Letter (Letter 3709) has not been issued. In FTS, the IRS Appeals Officer uses mediation techniques to focus issues and lead examiner and the taxpayer to determine the outcome of the dispute. If resolution is not reached through mediation, the Appeals mediator will propose a resolution, but such proposal is not imposed on either party. If FTS is unsuccessful in reaching a resolution, a taxpayer is not precluded from requesting traditional Appeals consideration.
Fast Track Mediation (FTM) is also available for pre-assessed FBAR penalties. In FTM, Appeals personnel trained in mediation help the examiner and the taxpayer discuss the issues in dispute, and possible ways to resolve it. The goal is to reach a jointly agreeable solution, consistent with relevant law, although the mediator will not require either party to accept a certain outcome. Post Appeals Mediation (PAM) is not available on any FBAR penalty case.
(5). Mitigation Threshold Conditions Survive. The revised guidance for the IRS Office of Appeals references the historic FBAR penalty mitigation provisions set forth in IRM 22.214.171.124.6. Given recent IRS Offshore Voluntary Disclosure Programs (OVDP), the continued viability of the IRM FBAR mitigation guidelines has been subject to question. It should not be overlooked that the October 28, 2013 revisions to IRM 8.11.6 relating to FBAR penalty cases under consideration by the IRS Office of Appeals specifically reference these mitigation guidelines. For smaller foreign financial accounts, the mitigation guidelines might provide relief from the assessment of otherwise significant potential FBAR penalties of 31 U.S.C. § 5321 (a)(5).
(6). Joint and Several FBAR Penalty Liability. There is no joint and severable liability with FBAR penalty cases. FBAR penalties apply and are assessed individually and not jointly (there should only be one individual under examination per FBAR case file). Married couples under FBAR examination are treated as individual cases.
(7). Interest Does Not Accrue Until the FBAR Penalty is Assessed. Interest on FBAR penalties does not accrue until the penalty is actually assessed by the IRS. As such, some might consider executing an extension of the applicable FBAR statute of limitations to avoid a pre-mature assessment of a penalty with an accompanying interest accrual.
(8). Expedited Closings of Unagreed FBAR Penalty Cases. If the Appeals Officer and the taxpayer can not agree upon a resolution the assessment is to occur immediately without issuance of a Notice of Deficiency.
(9). No Chapter 11 Relief. Title 11 of the U.S. Bankruptcy Code does not provide relief from an assessed FBAR penalty.
(10). FBAR Penalties are an Appeals Coordinated Issue (ACI). Under existing procedures, Appeals resolutions involving coordinated issues must be approved by the Appeals FBAR Coordinator for that issue. The Appeals FBAR Coordinator serves as a resource person for the Office of Appeals. The purpose of the required coordination is to ensure that resolutions of FBAR penalties are consistent nationwide. A referral to IRS International Operations is required prior to holding the first Appeals conference regarding the FBAR penalty. Such coordination might make it difficult for certain taxpayers to obtain relief in Appeals from an FBAR penalty being considered by an otherwise understanding Appeals Officer.
(11). Litigation Forum. Litigation regarding FBAR penalties is within the jurisdiction of the U.S. District Court (rather than the Tax Court).
Summary. Significantly, the revised IRM added that IRS Counsel memo is needed for willful penalties over $10,000. The involvement of IRS Counsel in determining appropriate elements of willfulness could be significant. A non-willful civil penalty not to exceed $10,000, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements of 31 U.S.C. § § 5314 and 5321(a)(5)(A). A civil penalty equivalent to the greater of $100,000 or 50% of the balance in the account at the time of the violation may be imposed on any person who “willfully” violates or causes any violation of any provision of 31 U.S.C. § § 5314 and 5321(a)(5)(A).
The test for willfulness is generally whether there was a voluntary, intentional violation of a known legal duty and the burden of establishing willfulness is on the IRS. Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the person need know is that they have a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
The failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. However, IRM 126.96.36.199.5.3 provides that the mere fact that a person checked the wrong box, or no box, on a Form 1040, Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willfulness.
The involvement of IRS counsel lawyers familiar with the sometimes difficult task of demonstrating a person’s “voluntary, intentional violation of a known legal duty” could prove to be beneficial review in considering the difference between assertion of “non-willful” vs. “willful” FBAR penalties. Time will tell . . .