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FBAR Penalty


Did you know that the the FBAR penalty is calculated not on your account earnings, but rather, on your account value? For instance, if you have an account that is worth $1,000,000, the IRS, for one year, can asses a $500,000 FBAR penalty. And for two years, the FBAR penalty could be equal to the amount of the account. You see, the IRS is not limited to just two years, the IRS could potentially assess the FBAR for 6 or more years.
So you can see the FBAR penalty can be particularly devastating. So you need great advice on how to best deal with your unique situation.
But did you know there is a way out of this jam?


This is how to beat FBAR penalties:

You need to show the IRS one or more of the following:
• you relied on the advice of a professional tax adviser who was informed of the existence of the foreign financial account.
• you had a legitimate purpose for establishing the unreported account. For instance, you opened the account because you are a dual citizen, or use the money to fund operational expenses overseas, like a rental property.
• you lacked of any intentional effort to conceal income or assets related to an unreported foreign account. So despite the non-filing of the FBAR, you took no action to hide the existence of the account.
• you don’t have an outstanding tax bill. Or whatever unreported income you have, you already amended and paid the outstanding taxes before applying for FBAR penalty abatement.
What is the process for abating and avoiding penalties? You may need to submit a 2012 Offshore Voluntary Disclosure Initiative, and subsequently opt-out to obtain lower penalties. In some cases however, especially where there is no unreported income, a, OVDI is not necessary. In either case, is best to speak to a qualified offshore tax attorney in order to find the right path for you.
Now when will the IRS look to asses FBAR penalties. When the following factors are present:
• you failed to disclose a foreign financial account to his or her tax return preparer. That is, you never mention the unreported earnings on your tax return.
• your background and education indicate that you should have known of the FBAR reporting requirements. For instance, if you are employed as an international banker, it will be difficult (but not impossible) to claim you did not know about the FBAR filing requirement. The truth is that many Americans do not understand that all earning earned globally are subject to US taxes. This is known as universal tax jurisdiction. You can learn about the history of Universal Tax Jurisdiction here.
• a tax deficiency related to the unreported foreign account. If you have an unreported income, be sure to pay the taxes if you are going to dispute the assessment of the FBAR penalty.
In cases where you do not think you have reasonable cause, then it is likely best to utilize the 2012 Offshore Voluntary Disclosure Initiative. Instead of opt-outing of the standardized penalty structure like someone with reasonable cause, someone without reasonable cause would agree to accepted the pre-determined penalty rate. In this case, the FBAR penalty is 27.5% of the highest account value in the last 8 years. The good news is that it is limited to a one-time application.
No doubt it is a difficult decision to make. Debating between making a full disclosure or continue to hide or something in between. And making it more difficult is that in these economic conditions, and low rates of returns, most taxpayers realize it will take several years to rebound from these penalties.

6 comments:




  1. Offshore Money, FBAR International Tax and the IRS

    By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness


    FBAR, International Tax, IRS audits be careful. IRS Offshore Voluntary Disclosure Program Reopens Do YOU have money overseas? By Lance Wallach, CLU, CHFC - Recently the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.
    Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.

    The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.

    Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.

    He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.

    “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We

    Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.

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  2. must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

    Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

    The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.


    Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
    The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

    While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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  3. International tax, transfer pricing, FBAR

    April 24, 2012 By Lance Wallach, CLU, CHFC


    International Tax, Transfer Pricing, FBAR problems
    Transfer Pricing FBAR International Tax Problems
    By Lance Wallach

    The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
    1- Use or transfer of tangible property
    2- Services
    3- Loans
    4- Use or transfer of intangible property (especially cost sharing arrangements)

    Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.

    Determination of what is arm’s length for fair rental value transactions:
    a) Period of use
    b) Location of use
    c) Owner’s investment in property or rent paid
    d) Expenses of maintaining the property
    e) Type of property
    f) Condition of property

    Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.

    Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
    Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.

    Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:

    1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based

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  4. Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.

    Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.

    The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
    a) Two or more controlled participants agree to share the costs of developing intangibles.
    b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
    c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.

    As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.


    Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
    The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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  5. Wednesday, April 10, 2013
    IRS FBAR Voluntary Disclosure Initiative, opt out to reduce tax


    Lance Wallach

    The 2012 OVDI, which is still open, is patterned after the 2011 OVDI, but increases the maximum Report of Foreign Bank and Financial Accounts (FBAR)-related penalty from 25 percent to 27.5 percent of the highest account value at any time between 2003 and 2010. The 2012 OVDI does not have a stated expiration date. In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.
    Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the U.S. must file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by reporting the account on their income tax return and by filing Form 90–22.1, the FBAR. Willfully failing to file an FBAR can be subject to both criminal sanctions (i.e., imprisonment) and civil penalties equivalent to the greater of $100,000 or 50 percent of the balance in an unreported foreign account — for each year since 2004 for which an FBAR wasn't filed.
    The 2009 OVDP brought in at least 14,700 U.S. taxpayers (disclosing accounts in more than 60 countries) through the front door of IRS Criminal Investigation and untold thousands through a process of quietly amending returns and filing delinquent FBARs with the government. For eligible taxpayers who applied the OVDP provided the certainty of no criminal prosecution and civil penalty relief — they were required to pay back-taxes from 2003 to 2008, interest and a 20-25 percent penalty on the delinquent taxes. The IRS also imposed a 20 percent FBAR-related penalty equal to the highest aggregate value of the financial account between 2003 and 2008. In limited situations, the FBAR-related penalty could be reduced to five percent of the account value or $10,000 per tax year. If they got a great CPA with experience to help them, the fine was a lot less.
    The 2011 OVDI, brought in an additional 12,000 eligible taxpayers who filed original and amended tax returns and agreed to make payments (or good-faith arrangements to pay) for taxes, interest and accuracy-related penalties. The 2011 OVDI FBAR-related penalty framework required a 25 percent “FBAR-related” penalty equal to the highest value of the financial account between 2003 and 2010. Only one 25 percent offshore penalty is to be applied with respect to voluntary disclosures relating to the same financial account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. . Participants in the 2011 OVDI also had to pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Subject to certain limitations, financial transactions occurring before 2003 were generally irrelevant for those participating in the OVDI. With good advice many people paid a lot less.
    There are many considerations before a taxpayer should determine whether to pursue a voluntary disclosure of prior tax indiscretions. When reviewing

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