Mark Matthews Talks to Law360 on Recent IRS Enforcement of FBAR Penalties

Law360 Tax Authority

The Internal Revenue Service has been pursuing maximum penalties from taxpayers who fail to report their foreign accounts to the agency, and some see the move as an overreach of its enforcement responsibilities and a misprioritization of resources.

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On a broad level, the government's attempts to collect maximum penalties from those who have failed to report their foreign bank account information is an important enforcement effort, but those violations are only a minor contributor to the so-called tax gap, Mark Matthews of Caplin & Drysdale told Law360.

Only a small percentage of the tax gap, or the difference between taxes owed and what the IRS actually collects, is attributable to taxpayers who have committed civil FBAR violations, according to Matthews, a former deputy commissioner and criminal investigation division chief for the agency.

"Meanwhile, we continue to see many fewer resources devoted to the small-business community, which is a massively larger portion of the tax gap," he said.

Matthews said he has seen both criminal and civil cases in which the FBAR penalty assessed by the IRS exceeds the tax assessment "by many multiples." It remains unclear whether Congress intended for the IRS to use its FBAR penalty enforcement functions as a tool in civil tax disputes, he said.

"It has never been clear to me that Congress intended this massive enhancement of penalties to be applied frequently, and mostly, in tax cases as opposed to the use of FBAR penalties in drug, money laundering or terrorism-related matters," Matthews said. "Congress may react some day and take away the hammer."

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Courts have consistently ruled in the government's favor on its efforts to enforce maximum penalties for what the agency considers willful FBAR violations, and that in turn has lowered the threshold for what is considered an intentional nondisclosure, Matthews said.

To view the full article, please visit Law360's website (subscription required).


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