FBAR Appeals: When it comes to the FBAR, the IRS does not play fair. Unlike various other tax matters, in which the taxpayer can take their dispute to Tax Court — it is not an option for FBAR Penalties. The reason why, is because the FBAR is not a tax form. When a taxpayer has been penalized as a result of late filing or unfiled FBAR — there is no tax consequence. The only reason why the IRS enforces the penalty is because they took over enforcement duties back in 2003. The FBAR is actually a FinCEN form (FinCEN Form 114).
So, what happens if you have been assessed FBAR penalties?
IRS Office of Appeals & FBAR
Even though the taxpayer does not have an opportunity to go to Tax Court, The Taxpayer does have an opportunity to go to the IRS Office of Appeals — there are pre-and post-assessment appeal processes. When a taxpayer has been assessed FBAR penalties, the U.S. government has two years to enforce the penalty. Penalty enforcement generally includes filing a lawsuit in federal court to seek collection of the penalties against the taxpayer — along with accrued interest for the time the penalty has been assessed but unpaid.
Letter 3709 Notice of Penalty
The 3709 Letter is the proposed IRS penalty for the FBAR penalty.
Generally, the taxpayer or other U.S. Person foreign account holder has 30-days to respond and request an appeal of the FBAR penalties.
If the person does not seek the appeal, then the examiner will eventually close the case and assess the penalties.
IRM 22.214.171.124.3.3 & Letter 3709
When the FBAR penalty is proposed but not agreed, the examiner waits 30 days from issuance of Letter 3709, FBAR 30 Day Letter, to see if the person will request an appeal as provided in Letter 3709.
If less than 365 days remain on the statute and the filer will not extend the statute, the case will need to be closed for assessment of the FBAR penalty. See IRM 126.96.36.199.3.4.
To appeal a proposed penalty, the person against whom an FBAR penalty is proposed must submit a written protest to the examiner, postmarked on or before the designated response date listed in the Letter 3709. The group manager may grant reasonable extensions of time to provide a protest. This should be documented in the Examination Activity Record.
A valid protest must contain all the information required in Letter 3709. If the protest is valid, see IRM 188.8.131.52.3.4 for further procedures.
If the protest is invalid, the examiner communicates the errors and/or omissions to the person against whom the FBAR penalty is proposed or their authorized power of attorney. If there is sufficient time remaining on the assessment statute of limitations to allow the person time to correct the protest, the examiner sets a reasonable deadline for its return. If insufficient time remains on the assessment statute of limitations, inform the person or authorized POA. Solicit a consent to extend the FBAR statute of limitations in accordance with IRM 184.108.40.206.1.3. If the statute is not extended, proceed with closing the case for assessment, as outlined in paragraph (6).
If there is no response to the Letter 3709 the case is closed unagreed to CTR Operations, the penalty is assessed, and, if not already fully paid, the collection process begins.
What does this Mean?
This part of the IRM summarizes the process from the IRS Examiner/Agents perspective. Essentially, once a Taxpayer receives a Form 3709 the Taxpayer has 30-days to request the appeal. In order to pursue the appeal of a proposed penalty, “the person against whom an FBAR penalty is proposed must submit a written protest to the examiner, postmarked on or before the designated response date listed in the Letter 3709.” In addition, a request for extension is generally granted.
Letter 3708 Notice and Demand for Payment
The IRS Letter 3708 is technically the Notice and Demand for Payment of FBAR Penalty. The letter 3708 comes after a person receives the Letter 3709, and confirms that the taxpayer already received the notice with form 3709, and now it is time to pay the penalty. The taxpayer has 30 days to pay the amount due or seek and installment agreement. The letter goes onto say that the IRS will seek penalties if the payment is not received – in addition to the late charge.
The letter also gives the recipient the opportunity to contest the penalty with an appeal, which is done by requesting an appeal hearing through the Appeals Office. The IRS also explains the recipient can file in Federal Court – Tax Court is not an option for contesting the penalty, since it is not a “tax” and handled under title 31 and not title 26 of the U.S.C.
FBAR Appeals & the Penalty Abatement Process
In conclusion, the Taxpayer will receive notice of the FBAR penalty from the IRS by way of IRS Letter 3709. The Taxpayer will then receive notice of enforcement in the form of letter 3708. The Taxpayer has an opportunity to contest the penalty at the office of appeals, and/or file a lawsuit for refund (or defend a U.S. Government action) in Federal Court.
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