By Bryan C. Skarlatos & Michael Sardar
New York University 68th Institute On Federal Taxation
For nearly four decades, the law has required United States taxpayers to file Reports of Foreign Bank and Financial Accounts ("FBARs") disclosing the existence of foreign bank accounts holding more than a certain amount of money. 1 However, until recently, most taxpayers and many tax professionals had no idea these reporting obligation and they were rarely enforced. That has all changed with the recent investigation of UBS and the subsequent focus on offshore financial assets. The IRS has signaled that it intends to police the FBAR reporting requirements with much more vigilance.2 The evolution of the FBAR reporting requirements from a relatively obscure form that most taxpayers and tax return preparers did not know about into one of the IRS's most significant enforcement priorities in years raises questions about when it is appropriate for the IRS to penalize taxpayers who failed to file past years' FBARs.
Taxpayers with unreported foreign bank accounts are sweating bullets these days. The IRS is in the midst of an unprecedented crackdown on foreign bank accounts. The primary example is the criminal prosecution of UBS (f/k/a Union Bank of Switzerland). In February 2009, the criminal case was resolved by a deferred-prosecution agreement pursuant to which UBS agreed to pay a huge fine, cooperate with the IRS, and turn over the names of approximately 285 U.S. taxpayers with accounts at the bank. Shortly thereafter, UBS settled a civil summons proceeding with the IRS and agreed to provide the identities of another 4,450 U.S. taxpayers with accounts at the bank. These developments caused a surge of 15,000 taxpayers with foreign bank accounts to disclose voluntarily their previously unreported accounts to the IRS.
On May 25, 2007, Congress amended §6694 to raise the penalty standards for tax return preparers (the "2007 Amendment"). 2 The 2007 Amendment was met by criticism in the practitioner community, primarily because the amendment - which required preparers to have a reasonable belief that a position is more likely than not correct - created a higher standard for preparers than for taxpayers under §6662, which generally requires taxpayers to have substantial authority to avoid a penalty with respect to non-tax shelter transactions. 3 After the 2007 Amendment, Treasury issued a series of notices and proposed regulations interpreting and clarifying the operation of §6694, 4 but this guidance could not correct the inconsistency between the tax practitioner and the taxpayer penalty standards. Congress stepped in, and on October 3, 2008, a new amendment to §6694 (the "2008 Amendment") was enacted. s The 2008 Amendment reduced the general return preparer penalty standard to substantial authority, although it retained a reasonable belief/more likely than not standard for tax shelter transactions, and re-established the parity between the penalty standards for return preparers under §6694 and for taxpayers under §6662. This article discusses the facets of the new preparer penalty, including who it affects, the standards governing conduct, and the preparer's ability to rely on information and advice from others in preparing returns.
By Bryan C. Skarlatos
New York Law Journal
As April 15 rolls around again, every citizen faces the task of voluntarily disclosing his or her own income tax liability. Of course, the concept of "voluntary disclosure" is a misnomer because filing a tax return and paying taxes is not really voluntary. There are stiff monetary and even criminal penalties for those who fail to file a return or pay the correct amount of tax. A more accurate description of what happens every April 15 is that Americans "self-assess" their tax liability.