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New Jersey Couple Avoids FBAR Penalty and Instead Receives Warning Letter

The following is an actual FBAR case handled by the Law Office of Anthony N. Verni. My Princeton New Jersey office was successful in securing a waiver of the proposed FBAR penalties for these two taxpayers.

FBAR statute of limitations can incur FBAR penalties by the IRS, here is a prior experience with a New Jersey coupleMr.and Mrs. Beránek (a.k.a. the “taxpayers”) are Czechoslovakia nationals.* The taxpayer as well as his spouse are retired and in their early seventies. The Beránek’s came to the United States in 1997 as Permanent Legal Residents and became naturalized citizens in 2004. Since their immigration to the U.S., Mr. and Mrs. Beránek have lived in Freehold, New Jersey.

The taxpayers maintained an account with UBS in Switzerland (the “UBS Account”), which was established in 1962. The taxpayers would routinely deposit their earnings from their employment as electrical engineers into the UBS Account. In addition to the UBS Account,Mrs. Beránek opened and maintained a joint account with her non-resident alien sister, Catalina in Zvolen Slovakia at Credit Suisse (the “Credit Suisse Account”).

In 1996 the Beránek’s sold their personal residence in Prague and liquidated a number of investments totaling $1,350,000. The proceeds were used to open a Brokerage Account with Raymond James in Newark, New Jersey. The taxpayers also owned a commercial rental property located in Prague until October of 2005, when the property was sold for $700,000. The proceeds from the sale were deposited into the UBS Account and remain there to date.

The taxpayers’ federal income tax returns were prepared by a local CPA near Howell, New Jersey, by the name of Sam Patel.** Each year the taxpayers would meet with Mr. Patel’s assistance and would provide her with copies of the Composite Form 1099 they received from Raymond James.

The CPA was unfamiliar with the FBAR filing requirements, and further, did not understand the concept that U.S. Taxpayers are taxed on their worldwide income. Consequently, Mr. Patel failed to prepare and file FBAR reports, failed to report the interest income earned on those accounts and failed to report the income and expenses from the rental property on the taxpayers’ income tax returns. In addition, Mr. Patel also failed to report the sale of the property in 2005 on the taxpayers 2005 tax returns.

In 2010 the taxpayers were notified that their 2005-2007 federal income tax returns were selected by the IRS for examination. The taxpayers retained an Upper Montclair, New Jersey CPA, who was competent in the area of IRS examinations, but he too was unfamiliar with the reporting requirements for foreign financial accounts.

As part of the examination process the IRS auditor asked the taxpayers about the existence of any foreign financial accounts and whether the taxpayers had any foreign source income.

In response to the IRS agent’s questions, the taxpayers disclosed that they had two foreign financial accounts and that interest income was earned on these two accounts. In addition, the taxpayers told the IRS that they received rental income from the commercial rental property in Prague, but sold the property in 2005. As a result of the taxpayers’ disclosures, the scope of the examination was expanded to include the tax years 2008 and 2009.

At the conclusion of the examination, the IRS advised the taxpayers that an additional income tax in the amount of $2,822 for the years 2005-2009 would be proposed. The agent also told the taxpayers that he was recommending a negligence FBAR penalty in the amount of $100,000, representing a $10,000 penalty for each account for each of the five years.

The taxpayers then retained my office in Princeton NJ for purposes of bringing them into compliance with the IRS and pursuing an abatement of the proposed negligence FBAR penalties.

During my initial meeting with the Beránek’s, I was not able to discern that the taxpayers were unaware of the FBAR reporting requirements nor were they aware of their obligation to report their worldwide income for Federal income tax purposes.

The taxpayers also informed me that neither Mr. Patel nor his assistance ever asked the Beránek’s whether they had any interest in any foreign financial account or whether the taxpayers received any income from foreign sources. Based upon the foregoing, I determined that reasonable cause existed and that an abatement of the proposed FBAR penalties should be pursued.

I contacted Mr. Patel and secured the taxpayers’ complete file. I was also able to secure an affidavit from the Mr. Patel wherein he acknowledged being unfamiliar with the FBAR filing requirements and also admitted that he was not aware that U.S. Taxpayers must report their worldwide income for federal income tax purposes.

I contacted the IRS agent’s supervisor and explained the situation. We agreed that the taxpayers would submit amended income tax returns for 2005-2009 and also prepare and file delinquent FBARS for the same years. We further agreed that we would revisit the FBAR penalties proposed by the agent once the taxpayers brought their filings current.

We amended the taxpayers’2005-2009 Federal Income Tax Returns. We also prepared and filed FBAR reports for 2005-2009.

The amended returns, together with the taxpayers’ remittance in the amount of $2,822 were delivered the IRA agent. We also provided the agent with, copies of the filed FBARS, a letter brief, outlining the relevant facts supporting our abatement request and Mr. Patel’s affidavit.

Following his review of the documents submitted and supervisor review, the examining agent advised me that he would be withdrawing his recommendation for the imposition of the FBAR penalties and would instead recommend that a warning letter be issued to the taxpayers. Several weeks later the taxpayers received a warning letter (Letter 3800) from the IRS and the case was closed.

Anthony N. Verni is an attorney and certified public accountant with over 20 years of experience.His practice is focused on representing expatriates and other U.S. Taxpayers, who have failed to report their worldwide income and/or failed to meet the FBAR reporting and other U.S. financial reporting requirements. Mr. Verni services clients in the Tri-tate area, South Florida, as well as client residing outside of the United States. In addition, Mr. Verni represents clients in domestic tax matters including examinations, appeals as well as taxpayers with un-filed income tax returns.

*The clients’ names have been changed for purposes of preserving the attorney client privilege. The facts of the case, however, are the facts from the actual case.

**The CPA name and location is fictitious, based upon a confidentiality agreement.

©2017 Anthony N. Verni, Attorney at Law, CPA

About Anthony Verni

Anthony N. Verni is a Tax Attorney and Certified Public Accountant with over 20 years’ experience practicing before the Internal Revenue Service.Mr. Verni’s practice is focused on representing Expatriate and other U.S Taxpayers who have criminal and civil tax issues related to offshore tax evasion, money laundering, failure to file income tax returns, failure to report offshore income, failure to file FBAR reports and other tax related compliance and reporting concerns. Mr. Verni also represents individuals and businesses in connection with tax controversies involving income, estate and gift and employment taxes.
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