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Taxpayers Putting Pressure On Courts to Establish The IRS’s Burden Of Proof In Offshore Disclosure Cases

Recently, the U.S. Fifth Circuit Court of Appeals, in Bernard Gubser v. IRS, et al., was asked to overturn a recent U.S. District Court’s decision. The case involved the appropriate burden of proof the Internal Revenue Service (IRS) must meet when the IRS asserts a willful failure to file penalty for the Report of Foreign Bank and Financial Accounts (FBAR). At issue is whether the IRS must meet a clear and convincing evidence standard to establish willfulness or whether the appropriate measure is the lower preponderance of the evidence level of proof.

The District Court’s dismissed the initial suit for lack of standing. A group of taxpayers filed an amici curiae brief with the Fifth Circuit urging the Court to reverse the District Court’s decision due to the perceived harm that the uncertainty of the burden of proof could cause taxpayers who made an error in failing to file the FBAR, but who believe their oversight was not willful. This comes at a time when an unprecedented number of District Court cases will be filed for FBAR violations due to the inability of many taxpayers to achieve relief through the IRS Appeals process.

The Streamline Program Turns Two

The Streamlined Filing Compliance Procedure (SFCP) is now two years old. The SFCP was designed for taxpayers whose failure to disclose their offshore accounts was “non-willful,” due to a lack of understanding or knowledge of reporting requirements for U.S. persons. Unlike the full blown Offshore Voluntary Disclosure Program (“OVDP”), the SFCP places the burden of proving that the taxpayer’s noncompliance was willful on the IRS once the taxpayer has asserted that their non-compliance was not willful. Taxpayers who’s tax returns and informational filing requirements satisfy the SFCP are only required to file tax returns for the previous 3 years and FBAR’s for the previous 6 years while taxpayers in the OVDP must file tax and information returns and FBAR’s for the previous eight years.

One point of contention for taxpayers who entered into the OVDP before the SFCP was introduced in 2014, and whose noncompliance would have qualified them for the SFCP, is that they should be able to switch to the SFCP and take advantage of the reduced penalties on the income tax liability and file only 3 years of income tax returns. While the reduced miscellaneous penalty is available under the OVDP by requesting transitional relief, such relief is not guaranteed and often denied.

Recently, a group of taxpayers brought suit in the Washington D.C. District Court to challenge the IRS’s position that taxpayers who were enlisted in the OVDP prior to the implementation of the SFCP, cannot have their matter transferred to the SFCP. The taxpayers in this case contend they were being treated unfairly under this system as they were no different than those who came forward later in time and entered the SFCP.

Unfortunately, the court did not decide the merits of the case. Rather, the court held that the suit hinders the IRS’s ability to make decisions regarding the enforcement of tax liabilities and dismissed the suit as being barred under the Tax Anti-Injunction Act (26 U.S.C. § 7421), which prohibits suits that restrain the assessment and collection of taxes.   This case highlights the difficulties that can arise when the Service creates settlement programs independent from regulatory oversight and commentary.