Taxpayers Should Consider Who Determines Willfulness When Deciding Whether to Opt Out of 2011 FBAR Voluntary Disclosure Initiative

The IRS recently posted guidance about whether taxpayers should opt out of the 2011 Voluntary Disclosure Initiative’s (the “2011 Initiative”) civil penalty structure (see prior discussion). Taxpayers who participate in the 2011 Initiative, but feel that their failure to file the FBAR form on an annual basis was “non-will”, may considering opting out. Who makes the determination as to willfulness? How is the determination made?

The IRS Makes the Initial Determination

If a taxpayer elects to opt out of the 2011 Initiative, the agent working the case will send a letter to the taxpayer instructing the taxpayer to provide a written statement setting forth the facts of the case and a recommendation of the penalties that should apply. The agent then prepares a summary of the case and makes a penalty recommendation to a group of managers, termed the centralized review committee. That committee makes a determination as to what penalties, if any, should apply.
If a taxpayer does not agree with the centralized review committee’s determination, then the taxpayer is entitled to file an appeal with the IRS’s Appeals Division. The appeals officer will give the taxpayer an opportunity to present his case, conduct an appeals conference, and issue a decision. As far at the IRS is concerned, the appeals decision is the end of matter. However, as discussed below, a taxpayer may continue to fight.

Although the IRS Makes the Initial Determination, Taxpayers Can Force the Government to Prove Willfulness in Court

With many of the penalties the IRS administers, the IRS can assess the penalty and the taxpayer cannot challenge the penalty without first paying the full amount of the assessed penalty. This is not the case with the FBAR penalty. Many of the collection tools available to the IRS, notably the lien and levy, are not available. In order to collect, the government must file suit. In response to the suit, the taxpayer can ask the court to determine whether the penalty should have been assessed. Thus, a taxpayer can force the government to prove that the taxpayer willfully failed to file the FBAR form.

The attorneys of Williams Coulson have successfully advised several clients on FBAR matters, including matters related to the 2011 Initiative. Please do not hesitate to contact Michael E. Lloyd, Stephen J. Pieklik or Brandon P. Smith to discuss any FBAR issues that you may have.

IRS CIRCULAR 230 TAX ADVICE DISCLAIMER: Any federal tax advice contained in this communication (including attachments or enclosures) is not intended or written to be used, and it cannot be used, for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing or recommending any transaction or matter.