FBAR Issue

Technical topics regarding tax preparation.
#1
TaxCut  
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I dropped the ball on this one.

Client sold property in foreign country in 2019 and reported sale on 2019 US Tax return.

When I originally asked client about the funds from the sale, he said funds would be transferred directly from foreign escrow account to US Bank account.

Now in 2020 I asked him about foreign bank accounts and he said he had a few hundred dollars left in the foreign bank account after transferring out the funds from the sale. Sales proceeds were deposited into his foreign bank account which he controls (not an escrow account) and immediately transferred to US Bank account.

I was stuuned when he told me this as I did not report the foreign bank account on 2019 return.

What are my options?
Consult attorney?
Report it now before IRS sends notice?

Is this an option?

Delinquent FBAR Submission Procedures
Taxpayers who do not need to use either the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
• have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),
• are not under a civil examination or a criminal investigation by the IRS, and
• have not already been contacted by the IRS about the delinquent FBARs
should file the delinquent FBARs according to the FBAR instructions.
Follow these steps to resolve delinquent FBARS
• Review the instructions
• Include a statement explaining why you are filing the FBARs late
• File all FBARs electronically at FinCEN
• On the cover page of the electronic form, select a reason for filing late
• If you are unable to file electronically, contact FinCEN's Regulatory Help line at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
 

#2
sjrcpa  
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File a late 2019 FBAR now.
 

#3
TaxCut  
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Got it.. will do that right away.
 

#4
TaxCut  
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What is best way to go about it?

Through website?

Through 2019 Tax Software?

Doesn't matter, just file it?
 

#5
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What about an 8938?
 

#6
sjrcpa  
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Doesn't matter if you use your software or the FinCen site. You need to give a reason for being late.

And heed ManVsTax 8938 suggestion.

And scare the bejesus out of your clients by pointing out the potential penalties for failing to give you accurate information resulting in not filing required forms.
 

#7
Guya  
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The SDOP will cost just 5% of the undeclared proceeds. The FBAR penalty is (probably) $10,000. The 8938 penalty is (again probably) $10,000. $20,000 will either be more or less than 5%. I'd usually still discuss the SDOP with the client because of the reasonable degree of certainty. What else might be missing? Are there home country investments & pension plans? Was the property sale converted to US $ using spot rates for the dates of purchase & sale? Was there a mortgage on the property and a US taxable foreign currency mortgage gain?
PS – Greeting from London, England. Grey and rainy ...
 

#8
TaxCut  
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Wow.. any chance of getting a first time penalty abatement?

Should I bring in someone well versed in this area?

Makes me not want to deal with anyone who has any kind of foreign asset no matter what it is.

Something like this can whipe us out of business.. I do have E&O Insurance but a claim that large may get me cancelled.
 

#9
deniz  
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If you dropped the ball and there is no unreported income/additional taxation, then I would file late or delinquent FBAR, not SDOP and handle the 8938 issue separately. CPA screwed up is your clients non willfulness explanation and they wont be subject client to the 5%. You might need to write a reasonable cause letter for the 8938. SDOP assurances are overkill for a clear CPA screw up with no unreported income.
 

#10
JAD  
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TaxCut –

I have dealt with one late foreign reporting item – not my fault – and the process was really complicated. The choices of action were complicated, with complicated ramifications. You are in a very complex, high stakes area. See Guya’s post #7.

We wound up consulting with an attorney who had a lot of experience in late foreign reporting issues. There is no way I could have wrapped my head around all of the issues as quickly as was required.

In all honesty, if this were to happen again today, I would also notify my liability insurance carrier. Having another set of eyes on the situation doesn’t hurt, and I would be protected in case something went sideways. Insurance policies carry a requirement that you report the second that you have a whiff of a problem. If you don’t, they will not cover related claims.

Re Deniz’s post above, #9, where he suggests that you use “CPA screwed up” as your reason for the late filing. Keep this in mind:

When I originally asked client about the funds from the sale, he said funds would be transferred directly from foreign escrow account to US Bank account.

Now in 2020 I asked him about foreign bank accounts and he said he had a few hundred dollars left in the foreign bank account after transferring out the funds from the sale. Sales proceeds were deposited into his foreign bank account which he controls (not an escrow account) and immediately transferred to US Bank account.


The mistake is not yours; do not fall on your sword on this. The risk is if there are penalty assessments and you are dirty because you touched it...simply as preparer of the return.
 

#11
TaxCut  
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JAD-

Any recommendations on who to call or how to go about finding someone specializing in this area.

There is no unreported income. All income from transactions was reported.

I did speak with client though and it got a little more complicated.

He said he sold similar property back in 2017 and doesn't recall prior tax professional asking him about reporting an FBAR or 8938 which is why this is new to him. (I've only done his 2019). Obviously says he didn't know there was such a thing.

I looked at his 2017 Tax Return and box in Sch B on foreign accounts is selected "no". The preparer from 2017 passed away in 2019. So we can't ask him.

I will notify my E&O. I don't think I want to tackle this and screw it up even further.

Client was taking this lightly until I explained the potential consequences. That got his attention real quick.
 

#12
deniz  
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Thanks for the clarification of facts JAD.

Here is an attorney referral who specializes in FBARs:

Darek M. Jarski | Attorney | Jarski Law PLLC
O: 1455 NW Leary Way Ste 400 | Seattle WA 98107
M: PO Box 17009 | Seattle WA 98127-0709
P: 206-333-0750 | F: 206-333-0765 | djarski@jarskilaw.com | www.jarskilaw.com
 

#13
JAD  
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The situation that I was in was also a situation where there was simply a mistake. There were no bad intentions. There was $4000 of unreported income (error in classification of foreign entity by other CPA firm.) I identified the foreign reporting issues. Other CPA firm advised me to advise the client to report via OVDP. They said that the unreported income was immaterial and would not cause issues. I recognized this as untrue and immediately called an attorney who I knew was doing a lot of work in the area. She confirmed that there was no "reasonable approach" to OVDP. The rules are what they are, and if my client had gone that route, it would have not turned out well for him.

Now you know that there are also older issues. And again, there may be other unidentified foreign issues. I can reach out to the SF attorney for you and see if she is available. She refers to a CPA firm in SF that specializes in foreign reporting issues. That firm has helped me with various foreign reporting requirement issues. Or you could simply refer your client to the CPA firm. But first you must be certain about wanting to go this route and certain that your client will pay the substantial fees that will be incurred.

If it were me, this is what I would do:

1. Call insurance company. After that, pending their advice:
2. Tell client that he needs to speak with a specialist, and refer to the CPA firm or the attorney.
3. Let him go. Unless my kids were starving and needed the lunch money, I would explain to the client that this is above my pay grade. Who needs the headache? Replace him with someone else.
 

#14
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And if it's not obvious: put the 2020 returns on extension and have them pay in any estimated tax due.

I would not file 2020 at this juncture if I was in this situation.
 

#15
TaxCut  
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JAD wrote:But first you must be certain about wanting to go this route and certain that your client will pay the substantial fees that will be incurred.


Ok. I'll touch base with you once I communicate with client. I don't think he's looking to pay the high fees. I think he's looking at me to pay the high fees.

JAD wrote:If it were me, this is what I would do:

1. Call insurance company. After that, pending their advice:
2. Tell client that he needs to speak with a specialist, and refer to the CPA firm or the attorney.
3. Let him go. Unless my kids were starving and needed the lunch money, I would explain to the client that this is above my pay grade. Who needs the headache? Replace him with someone else.


I will do all of the above..

ManVsTax wrote:And if it's not obvious: put the 2020 returns on extension and have them pay in any estimated tax due.

I would not file 2020 at this juncture if I was in this situation.


Correct. Filing an extension for him. Initially, he was very loosey goosey about the details unitl I informed him of the seriousness..

Keep you posted

Thanks
 

#16
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Make sure the extension goes through - very important if there is an 8938 requirement. Back up the acknowledgement and submission IDs.


If there is no 8938 requirement, this situation is easy. Follow the guidelines for delinquent FBARs. No big deal.

If there is an 8938 requirement, I agree with many of the posts above. Send him to a specialist attorney. Do not handle yourself.
 

#17
sjrcpa  
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So, during the day while this discussion is ongoing, I have a client who just coughed up he's had foreign bank accounts since he came to this country 30 years ago. He's only been my client for about 3 years. Such fun.
 

#18
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sjrcpa wrote:So, during the day while this discussion is ongoing, I have a client who just coughed up he's had foreign bank accounts since he came to this country 30 years ago. He's only been my client for about 3 years. Such fun.


I think this thread highlights the importance of making sure you get this information from the client in writing each year.

I have three different foreign account/asset questions in my mandatory 1040 organizers that clients must answer and sign to.

This year one client conveyed in the organizer that he opened a foreign account during 2020, but that the balance did not approach $10k and that he only had "a few hundred USD in there".

Either way, we have to check the first 7a box at the bottom of Sch B "yes" for this client now as long as the account is open. To do otherwise would be to prepare an inaccurate return and subject the client to penalties. I wonder if he would have been forthcoming if my organizer was not mandatory and he did not have to sign to the accuracy and truthfulness of his responses. I think a lot of taxpayers think this isn't a big deal, and "how would Uncle Sam know"...but the risks for noncompliance are egregious.

I think the only solution to the foreign account and bitcoin issue for practitioners is to move all of the liability to the client by asking clear questions in writing.
 

#19
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I think this thread highlights the importance of making sure you get this information from the client in writing each year.


This.

For several years now, our firm demands this in writing every year without exception. We have each response backed up in the client's file.

These things can get really nasty when the penalty is a percentage of the account. Amounts could surpass insurance limits.
 


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