Thanks to all the recent commotion about offshore financial accounts and banks being forced to provide evidence against their account holders, one thing is becoming painstakingly clear to the taxpaying public – the IRS is out for blood. The IRS’s new-found focus on foreign and international taxation can make for a particularly bumpy ride for those taxpayers who don’t know the ins-and-outs of the system. One form in particular, the FBAR (officially known as FinCEN Form 114/Report of Foreign Bank and Financial Accounts), can be a real nightmare for those who a) don’t know it exists b) are pretending it doesn’t exist or c) are filling it out aimlessly without understanding what they’re meant to do.
Simply put, the FBAR is a reporting form for those who hold $10,000 or more in a foreign financial account (there’s a lot more stipulations to the form, but that’s the super boiled-down version). Failure to file your FBAR can lead to some seriously hefty penalties on your accounts. In addition to the normal penalties, there’s also FBAR record-keeping penalties that can be tacked on as well. While the Financial Crimes Enforcement Network (FinCEN) is the authority at the forefront of the FBAR charge, it is the IRS that is actually responsible for the assessment and enforcement of FBAR penalties (so who really has the power in this arrangement?).
The FBAR is an intimidating concept even though it’s just a reporting form. If you don’t file it (but are required to do so), you could be looking at some really undesirable penalties. But, here’s something that might make you feel a little better about the whole situation: if an FBAR penalty assessment does not go your way, you have a right to appeal.
As with all interactions with the IRS, knowledge is power. In this case, understanding FBAR requirements and your rights is key to coming through (relatively) unscathed! The following are key points for appealing an FBAR assessment:
How to appeal an FBAR penalty
First of all, it is not necessary to pay any sort of penalties until the end of the appeals process. In the case of the FBAR, it’s almost always a worthwhile opportunity to exhaust all possible appeals options before dealing with any penalties. This gives you the best chance at avoiding any unnecessary penalties. Also, there are different statutes of limitations for FBAR assessments and FBAR collections. Please note: your FBAR penalty may have been assessed by a local examiner, but an FBAR penalty appeal is handled through an entirely different chain of command. FBAR penalty appeals are handled by the IRS in a centralized location to ensure consistency.
A combined appeal of whatever FBAR penalties you have may be made concurrently with appeals for related income tax or other offshore penalties. It’s not a bad idea to consider knocking out multiple birds with a single stone at this point.
Two types of FBAR penalty appeals
Pre-Assessment Appeals
Many FBAR penalty appeals are done pre-assessment; that is, prior to the imposition of any FBAR penalty. If you are given notice of a proposed FBAR penalty prior to the actual assessment, it is critical that you understand THIS IS YOUR TIME TO APPEAL. The early bird… an ounce of prevention… whatever idioms you want to use to talk about getting to things early, make it happen!
The reasoning isn’t particularly complex, but it’s important. By getting to the case before it’s allowed to mature into a full-fledged problem, you can fix it before it’s unmanageable. Getting to it before the IRS can take hold with their vice-grip gives you a great head-start.
Post-Assessment Appeals
Because the statute of limitation on assessing FBAR penalties can expire, the IRS is allowed to assess FBAR penalties against you before you have had the right to appeal. However, this doesn’t mean that you don’t have the right to appeal. You absolutely, 100% do. After receiving your 30-day letter (Form 3709), you (or your appointed legal representative) have 30 days to submit a written appeals request.
What happens if you don’t appeal an FBAR penalty?
The IRS has two years to file suit in federal court. In that suit, providing that you have attempted to exhaust all administrative remedies or disagreed with the record that the IRS has based its claim upon, appealing an adverse FBAR penalty decision at an administrative level tends to be a good idea. Also, you just might win your appeal, effectively removing any threat of FBAR litigation!
While all of this might sound intensely complex, keep your head up. Appealing as early as possible gives you the best possible chance at ridding yourself of any penalties. As always, knowledge is power. Knowing what you’re up against puts you in a much better position than the majority of people who find themselves thrown into the complex world of FBARs.
For more answers to FBAR questions, click the box below.
