Taxpayer is found to have committed fraud by willfully failing to comply with FBAR reporting requirements.
FBAR Reporting Requirement
Every year, under the law known as the Bank Secrecy Act, U.S. persons (includes citizens, residents, corporations, partnerships, etc.) must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.
Case of D.R. Ott, DC Michigan
The individual taxpayer did not report his foreign Canadian account balances that represented an overwhelming proportion of his total income.
What Is Tax Fraud?
To prove tax fraud, the burden is on the IRS to show an underpayment of tax due to an act of the taxpayer to evade the assessment of tax which the taxpayer believed to be owing, that the underpayment act was willful and not a result of inadvertence, reliance on incorrect technical advice, a sincerely held difference of opinion, negligence or carelessness.
What Makes This Case Interesting
The IRS was able to demonstrate to the court that Ott had constructive knowledge of his FBAR reporting requirements by signing his tax return, thus proving willfulness. Ott testified that no interest, dividends, or capital gains from his foreign Canadian accounts were reflected in his tax returns. However, Ott signed a return each year, under penalty of perjury, regardless of whether he actually read the return, certifying that he did not have an interest in foreign accounts.
Ott argued that his mistaken reliance on incorrect advice proved that he was at most negligent, not willful. However, the individual’s mistaken understanding was due to advice he received from a return preparer when the individual was a young adult that he could defer tax liability by reinvesting the dividends he earned on stock. The individual’s lack of experience in tax accounting suggested that he knew, or should have known, that relying solely on advice he received as a young adult, without consulting his long-term accountant, was reckless conduct in disregard of potential reporting requirements. At the very least, the individual’s failure to disclose hundreds of thousands of dollars in a foreign Canadian account to his tax preparer demonstrated that he should have known there was a risk of noncompliance, and yet he failed to take any investigative or corrective action.
Ott provided the bank with his sister’s Canadian address instead of receiving the mail associated with his foreign accounts at his own address. Using an address that matched the country of the foreign bank accounts suggested that the individual sought to avoid the detection of his account ownership. Failure to review any of the mail sent to the individual’s sister qualified as an act of concealment.
Tax Planning Tip #1
Do NOT do what Ott did – he used his tax professional solely as his tax preparer. Taxpayers need to work closely with their tax professional throughout the tax year to discuss tax compliance requirements and tax strategies to reduce the amount of taxes paid to the IRS (and any other tax authority).
Tax Planning Tip #2
Carefully complete your tax professional’s tax organizer each tax year. Due to the U.S. Treasury Department and IRS’s focus on foreign reporting requirements, it is difficult to envision a tax professional not having a question in the tax organizer inquiring about foreign bank and investment holdings. If you do not understand a question, ask for guidance. All of your responses need to be truthful and to the best of your knowledge.
Tax Planning Tip #3
Review the draft of the tax return prepared by your tax professional for completeness and accuracy before signing the return (or the e-file authorization Form 8829). Remember, you are signing your tax return under penalties of perjury that you have examined your return and its attachments, and to the best of your knowledge and belief, that the return is true, correct and complete.
Tax Planning Tip #4
If you would like to learn more about how the IRS recognizes and develops its fraud cases, we suggest you read IRS Internal Revenue Manual Section 25.1.2.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.