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The Internal Revenue Service released IR-2019-63 on April 4, 2019 reminding U.S. citizens and resident aliens, including those with dual citizenship, that if they have a foreign bank or financial account, April 15, 2019, is the deadline to file their annual Report of Foreign Bank and Financial Accounts (FBAR).

Here is a rundown of key points to keep in mind:

Deadline for reporting foreign accounts
The deadline for filing the FBAR is the same as for a federal income tax return. This means that the 2018 FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 15, 2019.

Taxpayers who want to paper-file their FBAR must call the Financial Crimes Enforcement Network’s Regulatory Helpline to request an exemption from e-filing.

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2018. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.

Taxpayers with foreign financial accounts that report their accounts to the U.S Treasury Department should also visit the FBAR Fact Sheet posted on IRS.gov.

Most people abroad need to file
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

A special extended filing and payment deadline applies to U.S. citizens and resident aliens who live and work abroad. For U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, the income tax filing and payment deadline is June 17, 2019. Taxpayers have two extra days because the normal extended deadline—June 15—falls on a Saturday this year.  The same applies for those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return.

Interest, currently at the rate of 6 percent per year, compounded daily, will apply to any payment received after the regular April 15 deadline. See U.S. Citizens and Resident Aliens Abroad for details.

Nonresident aliens who received income from U.S. sources in 2018 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is April 15. See Taxation of Nonresident Aliens on IRS.gov.

Special income tax return reporting for foreign accounts and assets
In addition to the annual Report of Foreign Bank and Financial Accounts (FBAR) requirements outlined above, federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report these items for the country in which each account is located.

Also, separate from the foreign accounts reporting requirements above, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Specified Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Specified domestic entity reporting
Certain domestic corporations, partnerships and trusts that are considered formed for the purpose of holding (directly or indirectly) specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

For more information on specified domestic entity reporting, as well as the types of specified foreign financial assets that must be reported, see Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets”? and its instructions.

Report in U.S. dollars
Any income received, or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

Both FinCen Form 114 and IRS Form 8938 require the use of a December 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently. For more information on exchange rates, see Foreign Currency and Currency Exchange Rates.

 

According to DoJ, a former Indiana attorney, who also prepared tax returns for Indianapolis-area clients, pleaded guilty on April 4, 2019 to tax evasion.

Scott C. Cole, 54, of Brownsburg, Indiana, pleaded guilty to one count of tax evasion for his multi-year effort to evade the payment of taxes and penalties on income he failed to report on his 2002 tax return. According to the Superseding Indictment and court filings, Cole was an attorney and preparer of tax returns.

IRS has issued an updated version of Form 656-B, the "Form 656 Booklet, Offer in Compromise." It includes updated versions of the various forms required when a taxpayer wishes to have IRS accept his offer in compromise (OIC).

The booklet sets out the rules, for making an offer in compromise and having it accepted. For example:

• Eligibility. Submitting an application does not ensure that IRS will accept the OIC. To be eligible, the following conditions must be met: (1) file all tax returns legally required to file; (2) have received a bill for at least one tax debt included on the offer; (3) make all required estimated tax payments for the current year, and (4) make all required federal tax deposits for the current quarter, if a business owner with employees.
• Trust fund taxes. If the business owes trust fund taxes, responsible individuals may be held liable for the trust fund portion of the tax. Trust fund taxes are the money withheld from an employee's wages, such as income tax, Social Security, and Medicare taxes. A business is not eligible for consideration of an OIC unless the trust fund portion of the tax is paid or the trust fund penalty determination(s) has/have been made on all potentially responsible individual(s). However, if submitting the OIC as a victim of payroll service provider fraud or failure, the trust fund assessment is not required prior to submitting the offer.
• If individual and business tax debt is owed. If there is individual and business tax debt that a taxpayer wishes to compromise, the taxpayer needs to send in two Forms 656. Taxpayers should complete one Form 656 for their individual tax debts and one Form 656 for their business tax debts. Each Form 656 will require the $186 application fee and initial payment.

A business is defined as a corporation, partnership, or any business that is operated as other than a sole-proprietorship. An individual's share of a partnership debt will not be compromised. The partnership must submit its own offer based on the partnership's and partners' ability to pay.

The booklet contains the following updated forms and instructions for submitting an OIC:

• Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-employed Individuals.
• Form 433-B (OIC), Collection Information Statement for Businesses.
• Form 656, Offer in Compromise.

IRS has announced that using previous versions of the forms may result in delayed processing of OIC applications.

The booklet also instructs taxpayers to use IRS's OIC Pre-Qualifier Tool to confirm that they are eligible for an OIC and to calculate a preliminary offer amount.

We covered in Tax Returns & 5th Amendment Privilege? - Part I - The Fifth Amendment and the Filing of Tax Returns. In this post we are covering Michael J. DeBlis III's discussion of Invoking the Fifth Amendment for an IRS Document Request and Obligations of Tax Professionals: Weighing a Prompt Resolution with Protecting Taxpayer Privilege.

Invoking the Fifth Amendment for an IRS Document Request

Under code section 7602, the IRS has the broad authority to summons books, papers, files, or any other data that may be relevant to an IRS investigation. While not a formal legal proceeding, it is possible to invoke the Fifth under these circumstances, but it’s not common, and doing so requires a thorough understanding of section 7602, the act of production doctrine, and the required records doctrine.
If a taxpayer receives a summons but believes that any part of it is incorrect, unwise, or otherwise a poor idea, he can refuse to comply with any part of the summons. At this point, it’s up to the IRS to bring a court order to attempt to secure the data not willingly provided. To do this, the IRS will have to prove to a court that a court order is necessary to conduct an investigation, that the investigation will be conducted properly, and that the information is not currently in the hands of the IRS.
However, attempting to use the Fifth Amendment for this reason gets a little murky according to case law, with several applicable principles to consider. First, there is no naturally assumed privilege for pre-existing, voluntarily created documents, like personal bookkeeping records, because these weren’t created on behest of the IRS. Second, the act of procuring requested documents may incriminate a summoned person by admitting that the documents exist, that they are in the taxpayer’s possession, and that they are presumably required by the summons, making the Fifth Amendment privilege largely available on a case-by-case basis. Third, an “act of production” immunity is not an option for required records, like foreign bank account records, under the required records doctrine as these records are required to be maintained by law and the government is given the right to inspect these documents as a condition of voluntary participation in one of the covered regulated activities. Fourth and finally, it’s not possible for the IRS to use its powers to force a taxpayer to waive his Fifth Amendment rights by requiring the preparation of documents that, under the right circumstances, may be covered by privilege.
Sound confusing? It is. But that’s the nature of using the Fifth Amendment as a defense.

Obligations of Tax Professionals: Weighing a Prompt Resolution with Protecting Taxpayer Privilege

The tax system is built on the voluntary compliance of taxpayers. To facilitate this, the Treasury Department maintains numerous rules and regulations that govern the practice of tax professionals, like tax attorneys and IRS Enrolled Agents. These individuals are meant to serve as pillars of the taxation system, not as a backdoor around the IRS’ stated intentions. In layman’s terms? Cooperation is expected, even in challenging circumstances.

However, the role of the Fifth Amendment does put many tax professionals lucky enough to stumble upon an applicable case between a rock and a hard place. While it’s in their best interest to help the taxpayer, they are also obligated to help the IRS uphold its responsibilities, which means both protecting privilege while simultaneously ensuring expedited proceedings. This essentially means that representatives are expected to fully understand the potential role of the Fifth Amendment and, more importantly, whether or not it is appropriate. After all, if every taxpayer pled the Fifth whenever the IRS came knocking, the cost of performing audits would skyrocket, putting even more burden on an already-stretched agency.

In spite of the IRS’ need for adherence to guidelines and prompt cases, the current guidance provided by the IRS does address how to navigate these conflicts of interest, and the priority is often with protecting the taxpayer. For example, Circular 230 indicates that tax professionals are obligated to promptly inform their clients of non-compliance, error, or omission, and must also explain the potential consequences of any mistakes made. Circular 230 then goes on to explain that all records must be submitted in a timely manner “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” In essence, practitioners must thoughtfully and carefully weigh their obligations to their clients and their obligations to the IRS while giving proper regard to each.

This does, however, become more challenging in what is known as an eggshell audit, or an audit in which the taxpayer and his representative are aware of erroneous entries in prior tax years, but the IRS auditor is not. In this case, a tax professional must somehow balance providing the IRS with the information it needs without misstating any facts or otherwise misleading the course of the audit while still safeguarding the taxpayer’s best interest. However, this can get into murky territory regarding Misprision of Felony in the United States Code, which effectively states that concealment of a felony by anyone who knows about a felony and fails to report it to the proper authority can result in a fine or three years in prison. However, this statute implies active concealment, which means that a tax representative doesn’t necessarily have to speak up when not asked, but should be honest if the issue arises.