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Steven Toscher Quoted in BNA Daily Tax Report on Information Reporting: IRS Won’t Presume Willful Failure to Report Foreign Accounts by Alison Bennett

BNA Daily Tax Report

The IRS, cracking down on failures to report foreign bank accounts, isn’t automatically presuming that failures are  “willful”—a finding that incurs a high penalty. Tax practitioners aren’t fully convinced.

“There’s no presumption of willfulness” for not filing a required Report of Foreign Bank and Financial Accounts (FBAR), said Carolyn A. Schenck, a senior counsel with the Internal Revenue Service Office of Chief Counsel. “That’s not how it works.”
The determination goes through several levels of review, rather than being rubber-stamped when an agent says a failure is willful, she said Nov. 3 at a conference in Carlsbad, Calif., sponsored by the State Bar of California’s Taxation Section.

However, agents might zero in on a high level of unreported income in the account, she said. “We look at the size of the account, how it was opened, who has access to it—all kinds of things.”
In emailed comments, practitioners said they welcomed Schenck’s remarks that willfulness isn’t automatically on the table going in. But many remained unpersuaded, telling Bloomberg Tax that IRS field agents are taking aggressive positions.

High Penalty

A finding that a taxpayer willfully failed to report a foreign account carries a penalty of 50 percent of the account’s size at the time an FBAR was required to have been filed.
The rules aren’t simple. FBARs are required by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The IRS has been given the authority to enforce the rules and assess the penalties, but the penalties are actually collected by either Treasury or the Department of Justice.

The first contact taxpayers generally have about FBARs is from the IRS, practitioners said, and agents are still taking initially aggressive positions that color the rest of the penalty process.
“Obviously the IRS is trying to maintain reasonable and consistent positions as regards FBAR enforcement across the country and has a review process in place, and practitioners are highly appreciative of these efforts,” said Scott Michel, a member of Caplin & Drysdale, Chartered.

However, he said, “This is often not filtering down to the field.”
In training sessions over the last seven years, Michel said, some line agents and managers have heard senior officials emphasize penalizing taxpayers. He said the FBAR is an information return “that was never intended to have a relationship to taxes.”
Some agents “are acting to pursue such penalties in a wide swath of situations where it may not be appropriate,” Michel said.

Provision of Law

Steven Toscher, a partner with Hochman Salkin Rettig Toscher & Perez P.C. who spoke on a panel with Schenck, said in a follow-up email that in saying there’s no presumption of willfulness, Schenck was only restating “what the law provides.”

Schenck’s comments may have come in response to recently voiced practitioner concerns, Toscher said. The IRS is trying to get the message out to its agents not to start the audit process assuming the worst, he said.

Speaking at the conference, Toscher said he thinks the IRS is actually pulling back a bit on the question of assessing multiple penalties for multiple FBAR failures, and said there may be signs that the agency is being a bit more lenient overall.

He said it appears that “the IRS has agreed as a matter of administration” to lighten that load. “Normally the penalty will be one 50 percent or maybe two,” Toscher said. ‘ It’s in play. The government should be given kudos for moderating this draconian penalty.”

Standard a Concern

Josh O. Ungerman, a partner with Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP, said the standards of willfulness being used are “a major concern.”

“Practitioners are concerned that the IRS analysis is more or less complete with the establishment of an offshore account and the signing of a tax return while not checking the foreign account box on the schedule B that includes any amount of interest earned from a US bank that issued a Form 1099-R,” Ungerman said in an email.
That form is used to report annuities, retirement or profit sharing plans, individual retirement plans, and the like.

“These are objective facts the IRS point to as circumstantial evidence that there is a presumption of willfulness that cannot be overcome by the statements of the taxpayers themselves regarding their own state of mind,” Ungerman said.

“Taxpayers are being placed in a difficult position in which they must accept the willful FBAR penalty or go to court and ask a Federal judge to determine if they acted willfully,” he told Bloomberg Tax.

Caution Advised

Caroline Ciraolo, a partner at Kostelanetz & Fink and a former acting assistant attorney general in the DOJ Tax Division, had a word of caution for the government.

“Where the facts and circumstances suggest non-willful conduct, the IRS must recognize that the statute expressly provides for non-willful penalties and the Internal Revenue Manual requires consideration of reasonable cause and penalty mitigation,” she said in an email.

“If these directives are ignored, and willful penalties are imposed with abandon, the courts will take steps to pull back the reins and limit the application of what has become an effective tool to bring taxpayers into compliance,” she said.

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