The U.S. Tax Court has dealt a blow to the Internal Revenue Service in the agency's pursuit of tax evaders who fail to file Foreign Bank Account Reporting (FBAR) forms.
The Court looked at whether the six-year statute of limitations outlined in the Tax Code applied to FBARs. FBARs must be filed by individuals who hold more than $10,000 in any foreign held account at any moment throughout the tax year.
The IRS attempted to seek information, and possibly impose penalties, against an individual for tax filings from 2006 to 2008. The taxpayer in question had filed his tax returns in time, but failed to disclose holdings in a foreign bank account.
Although there is typically a three-year statute of limitations for when the IRS can investigate deficient tax filings, in this case, the agency moved to enact Code Section 6038(D) and connected it to Code Section 6501(e)(1)(A)(ii). Code Section 6038(D) requires that an individual file a statement disclosing interests in specified foreign financial assets if their total value exceeds certain thresholds, while Code Section 6501(e)(1)(A)(ii) extends the period for a possible investigation to six years.
The IRS initially filed the notice of deficiency against the individual for the tax years from 2006 to 2008 in December of 2014, believing that the six-year statute would be in effect. However, the Tax Court determined that since Section 6038(D) and 6501 were enacted on March 18, 2010, they could not retroactively be implemented to prosecute a case dating back to before the requirement was put in place.
The ruling meant that the individual did not have to pay additional taxes, and could make the IRS avoid or even rethink its strategy when attempting to find information on individuals with holdings in foreign bank accounts in attempts to recoup taxes owed.
The decision does not, however, preclude the IRS from looking further into an individual's past to detect potential fraud or evasion. Those cases, backed by evidence, allow the IRS to paint a complete picture of any potential wrongdoing for prosecution. In this specific case, no evidence of wrongdoing was found.
The IRS and Department of Justice continue to accelerate their efforts in identifying tax evaders and those who fail to file timely disclosures. They have recently had success in prosecuting individuals who willingly fail to file FBARs. A U.S. resident, originally from Korea, was sentenced in January to six months in prison as well as forced to pay a $14 million fine for failing to report approximately $28 million held in Swiss bank accounts. The settlement came after more than five years of investigation and with cooperation from the individual.