Monday, November 7, 2011

IRM Addition for FBAR Penalties in Appeals (11/7/11)

The IRS had added IRM 8.11.6 (11/1/11), here, for Appeals Procedures regarding the FBAR penalties.

Here are a few quick observations:

1. FBAR penalties are an Appeals Coordinated Issue (Category of Case) and require a referral to International prior to holding the first conference. International issue guidelines are available from the Appeals International Specialist Coordinator(ISC).

2. Appeals requires 180 days remaining on the assessment statute of limitations at the time the administrative file is received.

3. Post assessment cases can go to Appeals.

4. The statute of limitations for failure to file is: "6 years from the due date of the FBAR report (Due date is 06/30/yyyy)."

5. The statute of limitations for failure to maintain required records is "6 years from the date the IRS first asks for the records." [Query does this permit the IRS to leverage a closed year into an open year or extend the statute for a year beyond the period otherwise allowed from the date of filing?)]

6. Here is an example of the required records statute: An examiner requested the records on March 1, 2008. The assessment statute of limitations for failing to maintain required records expires on March 1, 2014.

7. If both types of violations have occurred (failure to file the FBAR and failure to maintain the records), examiners can assert both the failure-to-file an FBAR report penalty and failure to maintain required records penalty on the same account for the same period. However, Compliance policy in IRM 4.26.16.4.7 allows examiners discretion over whether to assert multiple violations against one FBAR report.

23 comments:

  1. Jack,

    I read through the IRM and cannot figure its implications for OVDI participants. Will it help them, or otherwise.

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  2. I don't know that there are any particular implications except that there will be an appeals opportunity for those who opt out of the OVDP / OVDI penalty structure.

    I would point out paragraph 1 above. The IRS's web site for Appeals Coordinated issues (last revised 7/25/11) says that "This page is no longer active. Please go to Appeals Settlement Guidelines for the latest information." See http://www.irs.gov/individuals/article/0,,id=108652,00.html. The linked site on Appeals Settlement Guidelines, which has nothing about FBARs, is: http://www.irs.gov/individuals/article/0,,id=108655,00.html

    I think all of this means that there will be coordination within Appeals to insure consistency rather than just ad hoc responses to particular cases. Perhaps that is good, particularly when the coordination guidelines become public so that taxpayers and practitioners can better advise taxpayers on whether to opt out and, in the case of taxpayers still considering a decision of whether to do a traditional voluntary disclosure, whether to get in or stay out and take their audit risks.

    Jack Townsend

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  3. Jack,

    Thanks a lot for the reply. Momentarily the news lit a glimmer of hope that there could be an appeal for participants.

    Had joined thinking that millions will join because of "last chance" and did not want to be left out!

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  4. The IRM addition mentions many internal forms and letters, including:
    Form 13448 Penalty assessments
    Letter 3708
    Notice 1330
    Form 5402
    Form 13449
    Form 13535
    Form 13381
    Form 3210
    Apparently these are for internal use; I have been unable to find them either through Google or the IRS website. Are these available somewhere on the Web?

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  5. This document is primarily a description of procedure rather than some of the substance appeals will use. While useful, it doesn't provide any clear insight into what sort of penalties might be applied and how they could be reduced through Appeals.

    I speculate part of the reason the IRS is releasing this is that they are handling a number of cases (OVDP/OVDI opt-outs, quiet disclosures pushed into VD, and regular audits) that might lead to assessment of FBAR penalties.

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  6. Does anyone (Jack or anyone else) have an idea of cases that went to FBAR appeals and how fairly they were resolved ? Its early in the game (and I recollect that Jack said that none of his cases had even opted out), but maybe another professional or participant might have some indirect or direct experience.

    Also, what would Appeals consider as "hazards of litigation" for FBAR issues ? The possibility that a penalty might be thrown out by a judge as excessive, the possibility that the willfulness standard used by the IRS may be rejected, the possibility that the collection make take more money that can be recovered ?

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    1. Prior to the current initiative starting in 2009, the IRS did not have a significant enforcement initiative regarding FBARs that practitioners could observe. Hence, although most practitioners are well familiar with the Appeals process, most practitioners had little or no experience with Appeals consideration of FBAR penalties.

      Then, the OVDP 2009 came in followed by OVDI 2011. At least in theory, depending upon the number of opt outs, this should be resulting in a lot of cases in the pipeline to go to Appeals. As that pipeline clears, some anecdotal evidence will come out to offer guidance as to what Appeals is doing. However, because of the substantial delays and perhaps the IRS's willingness to move to an acceptable figure earlier in the process (either FAQ 35 consideration or on the opt out audit), there is not now enough anecdotal evidence of what Appeals may be doing.

      However, I will say that how Appeals works is not a black box for practitioners. Practitioners know Appeals well and the FBAR penalty issues will be subject to that well not process. Practitioners will be comfortable with the process.

      Appeals' mission is the settle controversies without litigation on a fair and impartial basis. See IRM 8.1.1.1 (02-10-2012); see also IRM 8.6.4.1 (10-26-2007). A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation. IRM 8.6.4(2) (10-26-2007).

      So, the standard Appeals will apply will be to make its best judgment as to what would happen in litigation and offer a settlement accordingly.

      The only problem I have encountered with Appeals' application of the process is that Appeals officers are not litigators. So their judgment of what the results in litigation may not be well grounded and this may be true particularly in the FBAR area where there is not a significant data set of actual decided cases from which the Appeals Officer can draw conclusions about what would happen in litigation.

      But, on the other hand, the limited case data set is pretty helpful for the taxpayer, particularly the Williams case. With the Williams case in hand, a taxpayer attacking IRS Exam's assertion of the willful penalty can easily raise major hazards of litigation in all except the worst of cases.

      The more interest issue will be what to do about the nonwillful penalty which will be the one applied in most opt outs. There is virtually no case authority on that, so the job of the practitioner will be to educate the Appeals Officer as to what will happen in litigation.

      Appeals Officers take their responsibilities seriously and are, except in very rare cases, extremely fair. They want to be fair and settle in order to prevent the courts from being clogged with tax litigation.

      Best,

      Jack Townsend

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    2. Jack

      Extremely helpful, thank you very much. I agree that the Williams case should be a clear reminder to the government that they cannot assume a court will necessarily go along with them (even if the appellate court reverses the judge). I also think that one issue which can definitely be raised in the context of the non-willful violation penalty is whether the government can actually levy a per account penalty per year. As I mentioned before in another post, I don't think the language of the statute supports that.

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  7. Jack

    You say

    'With the Williams case in hand, a taxpayer attacking IRS Exam's assertion of the willful penalty can easily raise major hazards of litigation in all except the worst of cases.'

    Does this depend on the outcome of the Williams case on appeal ? If the government were to prevail (and not on the collateral estopppel issue), would that significantly strengthen the government's hand ?

    I agree that Williams represent one of the worst possible cases -- someone who already pleaded guilty to tax crimes. Certainly cases that are far more nuanced should raise significant questions of 'hazards of litigation' for the IRS.

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    1. Obviously, deploying Williams for a hazards of litigation argument will be more powerful if Williams is affirmed on appeal. But, even if it is not affirmed, I doubt that the appellate decision will give the Government a slam dunk result even in the Fourth Circuit (the geographical area involved).

      And, in other circuits, the same factors that caused this good judge to hold for Williams may cause those judges to hold for the taxpayer.

      Simply put, I have used a hazards of litigation even in face of a taxpayer defeat. Indeed, I am in Appeals on an issue right now where the only decided case was for the Government. I think I have raised substantial hazards of litigation and think that the IRS will respond to it.

      Jack Townsend

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    2. Jack

      Continuing on this thread, what sort of 'hazards of litigation' could be raised for the smaller non-willful penalty ? Things that come to mind

      -- Difficulty of collection. Whether the IRS has to file a suit or not, it seems they would have a difficult time collecting if they had to rely only on offsets of government payments.
      -- Reasonable Cause. There seems to be very little case law on this, so the hazard for the IRS would be a broad reasonable cause definition that would make it hard for them to assess the penalty. In particular, the general lack of education provided by the IRS and lack of knowledge of the FBAR until around a couple of years back, even among the CPA community might be used by a taxpayer to assert a reasonable cause defense.
      -- Excessive Penalty ? I doubt the non willful penalty would ever get into the range that a court would consider constitutionally excessive (although anything over 50% might raise issues)
      -- Following the IRS's own Internal Revenue Manual, section 4.26.16 on FBAR penalties. This section essentially seems to say quite strongly that mitigation considerations should be applied and warning letters should be issued when possible. I know the IRS is not specifically required to follow its own IRM, but I wonder if this raises any Accardi issues.

      Obviously there could be other factors depending on the specific facts and circumstance of the taxpayer. Anything else ?

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    3. 1. Difficulty of collection is not a hazard of litigation. Collection is separate from liability. Liability is the issue with litigating hazards.

      2. Reasonable cause is a litigating hazard where (i) there is a defense for reasonable cause and there are at least marginal facts supporting reasoanble cause or (ii) there are good facts that might give a fact finder reason to hold for the person anyway, even if strictly reasonable cause is not present.

      3. Excess penalty is a factor that can cause a fact finder to react negatively to a proponent for the excessive penalty. Jurors used to refuse to convict when the punishment was excessive even if the law seemed to require the punishment. That is often referred to as jury nullification.

      4. The IRM for mitigation is a strong argument to make to the IRS and to the ultimate factfinder if it goes that far.

      5. Yes, there will usually be other factors that can be deployed to build sympathy for mitigation. That is fact dependent however.

      Keep in mind that the skill you need to deploy these factors are advocacy skills where you are deploying fact and legal arguments to convince the other side to agree with you. Lawyers are trained to do that, but for reasonably intelligent taxpayers, life experiences will teach them the powers of persuasion. Good businessmen have those skills in negotiations.

      Best,

      Jack Townsend

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    4. Jack

      Different poster here. Difficulty of collection may not specifically be a 'hazard', but I've see that this is definitely something that the IRS is concerned about. There is a definite procedure for collecting taxes due, but collecting FBAR penalties is another matter. As I'm sure you've seen in closing agreements in the VD programs, the in lieu of penalty is assessed as a miscellaneous penalty under Title 26 so the IRS can use its standard tools of lien and levy to collect tax.

      When large sums are involved for FBAR penalties, the government may still bring suit, but as the Williams case shows, these are not guaranteed to succeed. For the smaller non willful FBAR penalty, its still not clear whether the IRS will actually bring suits for a set of small judgements.

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  8. Jack

    I have read that a general "presumption of correctness" applies to IRS tax penalties except the civil fraud penalty. Since the FBAR penalty is not a tax penalty, I assume the "presumption of correctness" would not apply. What implications do you think this may have for the IRS when assessing FBAR penalties (and for Appeals when considering litigation hazards) ?

    1) For the willful FBAR penalty, it seems that this would make the burden of proof for the government even higher, i.e the "clear and convincing evidence" burden you've mentioned (In the Williams case, you wrote earlier that the judge assumed a lower burden, but still found for the defendant).

    2) For the smaller non-willful penalty, does this mean that it is not up to the taxpayer to show that reasonable cause exists, but to the IRS to show that reasonable cause does NOT exist ? Or at least, that both parties have an equal burden of proof ?

    I'm not a lawyer, so pardon me if I'm talking through my hat with these legal terms.

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    1. Anonymous, you raise a good question.

      Presumptions and burdens of proof are frequently misunderstood concepts in the law generally and in the tax law specifically. Once you say, in the tax law generally, that a taxpayer has the burden of persuasion, the presumption becomes pretty much irrelevant. Generally, in the tax law, for civil adjustments, the taxpayer has the burden of persuasion, but courts do talk about the presumption of correctness although it adds little -- I think nothing -- to the analysis after the burden of persuasion is assigned to the taxpayer.

      As to penalties in the tax law, however, the IRS has an initial burden of production. I won't delve into that, but basically the IRS must have a minimum level of proof to convince the court that it just did not apply the penalty on whim.

      Now, the presumption of correctness -- whatever its meaning -- is not a concept applying only to taxes, but there is a dearth of authority as to whether it applies to FBAR assessments. And, since I think the presumption of correctness is meaningless anyway, I will just focus on the burden of proof -- in this case the burden of persuasion. I respond to your paragraphs:

      1) You correctly have picked up from my past postings that the Government has the burden of persuasion. The issue is whether it must persuade by a preponderance of the evidence (often conceptualized as more than 50%, or more likely than not) or by clear and convincing evidence (not a uniformly defined concept but clearly meaning substantially more than a preponderance but less than beyond a reasonable doubt). There is yet no answer to that question. The Williams trial court said it was preponderance, but the parties did not brief the issue. Williams is on appeal and the issue is not briefed on appeal. A decision in Williams will likely be handed down in the next two months. I would be concerned that the court of appeals might say something about it -- such as agree with the district court when the issue was not briefed.

      2) The taxpayer have to show reasonable cause, because it is in the nature of an affirmative defense. The proponent of affirmative defenses generally has some burden of proof (in a criminal case it is a production burden minimal level, but in a civil case it is a persuasion burden by a preponderance).

      I have generalize the concepts discussed above. There are nuances that cannot be developed here. If you are interested in more, you might download my Tax Procedure Book from my firm's download page on the web site.

      Jack Townsend

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  9. Thanks very much Jack. A full legal education right there.

    About the willful penalty, it would seem surprising to me that such severe penalties could be judged merely on the basis of the lower 'preponderance standard'. Even IRS civil fraud requires (as you have said before) the higher standard, and the penalties are not so severe. Unless the judge assumed that because Williams had been convinced of tax fraud already (to an even higher standard), the FBAR penalty did not need such a high standard of proof. Whereas if there was no conviction or even civil fraud penalty against the taxpayer in such a situation, the standard for FBAR violations might be higher.

    That's a pretty vague and rambling comment on my part, because it links together 2 separate matters (FBAR violations and tax violations) that really should be judged independently. But the government is itself linking the conduct of the FBAR violation and the tax violation.

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    1. Thanks, I think your comments are good even though, given the subject, they may appear vague.

      But you are right to thing that something is really twisted that a civil fraud penalty of 75% of the tax requires a clear and convincing level of proof to apply whereas the FBAR penalty which can be multiples of the real harm to society -- in these cases simply the unpaid tax -- can be many multiples -- I have a case where the penalty is 12,000 %. Something is really off track here.

      But, again, the IRS's rebuttal is that the opt out procedure -- even with its flaws -- is the safety valve for protecting all but the worst actors.

      Jack Townsend

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  10. I was reading your book on tax procedure, and on page 404, you mention
    in 'Settlement At Examination'.

    Recent initiatives to make the IRS more user friendly have somewhat relaxed this historical limitation on Examination's ability to settle cases, but not much in most cases. The future may and probably will bring more relaxation of these strictures, provided that some safeguards are instituted to assure that Examination can make the proper assessments for hazard of litigation settlements and safeguards against abuses are adopted.


    What implication does this have for settlement of FBAR penalties at examination time (on opt out or gf audit) ? Assume no willfulness. Does this mean that a taxpayer would have to go to appeals to get any settlement ? Given the wide discretion allowed to examiners in setting FBAR penalties, the fact that the IRM seems to specifically recommend penalties lower (perhaps way lower) than maximums, and the difficulty in collecting an FBAR penalty, I think the IRS has a stronger incentive to settle at exam time for FBAR penalties than it does for tax penalties.

    Thanks

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  11. I don't think there is a direct correlation from my comments and the FBAR audit. I do think, however, that the IRM invites the agent to exercise discretion rather than take extreme positions. In that sense, given the broad discretion conferred in the manual, I think the agent (and certainly the reviewing team) have discretion to reach appropriate resolutions (maybe we shouldn't call them settlements).

    Jack Townsend

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  12. Jack

    I know this is an old thread, but I wonder if you have any updates that you can share about FBAR penalties (either opt out or otherwise) being worked in Appeals. Also, one question -- suppose the IRS examiner/supervisor offers a reduced FBAR penalty of say 20K, against a potential maximum penalty (non-willful) of say 120 K (2 accounts, 6 years @10K). If the taxpayer were to reject the 20K, does this mean that the examiner would then try and assess a penalty of 120K, and that would be the base number one would start with when negotiating with Appeals? Even if one gets a 50% haircut from Appeals, that would still represent a larger sum (50% of 120K = 60K) than the original offer.

    I know that information about FBAR penalties (let alone FBAR appeals) is very sparse, but I was wondering if you had some general idea just from the way Appeals works tax penalties.

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  13. I can't speak to what the examiner will do if the taxpayer rejects the offer. What the examiner can do under those facts is to assess up to $120K. That does not mean the examiner will do that.

    It depends upon the facts. But, if the examiner (and his superior or the technical adviser) feel that $20K is the right number, offers $20K and it is not accepted, that might be their determination which can be appealed. Then, who knows. The Appeals Officer will make an independent determination, but not likely more than the examiner determined.

    I wish I could offer more guidance. Hopefully, over time, enough anecdotal evidence will be available to offer guidance, but for now that is about all we have.

    Jack Townsend

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  14. Jack

    Question about one of your statements:


    The Appeals Officer will make an independent determination, but not likely more than the examiner determined.


    You are saying that the Appeals Officer can actually increase the penalty level ? I know in tax cases they can reopen the return and sometimes (rarely) do so, but I presume that is related to a technically disputed point or position. For FBAR penalties (of the non willful variety), presumably there are less complex technically disputed items, its just a matter of whether reasonable cause exists or not, whether the penalty is disproportionate, whether there are any hazards of litigation.



    Thanks

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  15. I don't know if there is a question there, but the mind set of Appeals is to settle disputes -- narrow gaps rather than widen them in the hope that litigation can be avoided. Keep in mind that the audit level will have been worked over very well by the auditing agents, the manager and the technical advisers. There is unlikely to be material claims not made by the agent. Hence the chances of the Appeals Officer being even tempted to second-guess the examiner are remote and probably non-existent.

    I would caution readers that it should not be assumed that the Appeals Officer will always negotiate to a more favorable result than the examiner determined. It just means that it is remote that they would assert more.

    Jack Townsend

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