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Outrunning the IRS: FBAR Statute of Limitations Guidelines

FBAR statute of limitations can cause a criminal investigation into tax fraud by the IRS

What Happens If Someone Fails to File an FBAR?

A wrinkle in the law for those with interests in or signature authority over foreign financial accounts, including bank accounts, brokerage accounts, mutual funds, trusts, or other type of foreign financial accounts, exceeding certain threshold is the requirement that such persons file an FBAR or “Report of Foreign Bank and Financial Accounts.” This filing obligation was intended to curb the use of foreign accounts to evade U.S. income tax. As a result, FBAR reporting forms are now required by the IRS and enforced through the Bank Secrecy Act, which require that you file reports annually. So what happens if you fail to file an FBAR and how long do you have to wait before you are in the clear? 

The Statute of Limitations is Six Years or longer.

The IRS says 6 years, judged from when the FBAR was due is the tolling time for the statute of limitations. That’s June 30 following the calendar year being reported. For instance, the 2016 FBAR is due June 30, 2017, and the statute runs on June 30, 2023.

Even with the bright line six-year statute of limitations, the IRS can also use another date. According to 31 U.S.C. 5321(b) the statute of limitations is judged as six years from the time of the “transaction.” The problem with this murky language is that the Internal Revenue Manual does not define or interpret when a transaction occurs for the purposes of the FBAR due date.

There is also a question with respect to U.S. Taxpayers who reside outside of the United States and whether the statute is suspended for purposes of FBAR compliance while the Taxpayer is outside of the United States, consistent with treatment under the Internal Revenue Code with respect to income.

While the IRS requires you file an FBAR and sets out the statute of limitations on filing, FBARs are administered by the Department of Treasury and its Financial Crimes Enforcement Network. Despite this administration authority the Financial Crimes Enforcement Network delegated its FBAR authority to the IRS in 2003.

It is important to note, the United States Tax Court, in Williams v. Commissioner determined that it did not have jurisdiction to consider FBAR penalties. As such, Taxpayers do not have the benefit of pre-payment judicial review.

The IRS has tremendous discretion to determine what constitutes a transaction for the purposes of FBAR and assess FBAR penalties and also the circumstances under which the statute of limitations may be tolled.

Additionally, when it comes to the statute of limitations, closing your accounts and waiting the six year period may seem like the best option at first, but quietly closing accounts and disposing of funds could conceivably backfire.

The IRS may view this action as evidence of evasion or consciousness of guilt. Making this move could put you in a worse position than if you had kept the accounts open and started reporting them prospectively.

If you do choose to close your accounts and manage to make it six full years from your last “transaction” before the IRS notices, you may be in the clear. However, with tremendous deference and authority granted to the IRS to determine what constitutes a transaction and when the statute of limitations truly tolls, as well as determine penalties for FBAR violators, this is a high risk proposition. The IRS has, in the past, argued in income tax cases that this type of “close shop and wait” action is a blatant cover up of a continuing and ongoing criminal activity.

Choices in regards to the FBAR filings and statute of limitations can be extremely difficult. The possibility of large penalties and possible criminal implications require that you seek you legal advice based on your particular situation. There is no one-sized fits all response to FBAR filing and the statute of limitations. Consult your tax attorney before making any decisions regarding FBAR and the statute of limitations.

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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