The IRS can impose penalties, even after your death.

Does the IRS like to impose penalties? You should, as IRS penalties have a way of infiltrating many tax notices, even for innocent mistakes. You might think that if you weren't trying to cheat on your taxes and just made a mistake, you'd be fine. Taxes are complex and mistakes do occur, but the burden is on you to show that you acted reasonably. Relying on professional tax advice can be one way, but if you can't convince the IRS, you'll likely end up with penalties. The size of the fines varies, but they often represent around 25% of the taxes in question. However, if the IRS believes you were trying to cheat, you could face a 75% civil penalty or, in extreme cases, even criminal prosecution. Surprisingly, most criminal tax cases start with regular civil audits.

The IRS can discover something suspicious, including how you respond in the audit and whether it is evasive, and refer it to the criminal side of the IRS. There are many special penalties, and some of them are staggering in size. A good example is the penalties for not disclosing a foreign bank account. As a U.S. citizen or green card holder, of course.

If you don't, there are taxes, interest, and penalties. In addition to these tax penalties, there are bigger and nastier penalties for failing to submit the bank account reporting forms known as FBARs. Another name is FinCEN Form 114. These annual forms are not filed with the IRS, but with the Financial Crimes Enforcement Network, which is part of the US Department of the Treasury. The penalties for failing to file an FBAR are far worse than those. tax penalties. Failure to file an FBAR can carry a civil penalty of $ 10,000 for each unintentional violation. Unintentional means that you did not mean to do any harm, you were simply ignorant. And that $ 10,000 is every year, and the statute of limitations for FBAR violations is six years. So that's $ 60,000 per account. Do you have 10 accounts? That's $ 600,000, even if not released. It can get worse.

If your violation is found to be deliberate, the fine is the greater of $ 100,000 or 50 percent of the amount in the account for each violation, and each year that you do not report a violation is a separate violation. The criminal penalties for FBAR violations are even more terrifying, including a $ 250,000 fine and five years in prison. If the FBAR violation occurs while another law is being violated (such as the tax law, which will often occur), the penalties increase to $ 500,000 in fines and / or ten years in prison. Many violent felonies are punishable less harshly. The assessment of a civil penalty does not exclude criminal penalties or prosecution.

But what about dying? Is that a way to get around these sanctions? You may think that the IRS cannot penalize you once you are deceased, but surprisingly, the IRS has won a number of tax cases doing just that with FBAR penalties. Since the taxpayer who did not report the account abroad has passed away, it is the estate that gets stuck with the bill of fines. That means heirs who hope to inherit may not inherit or may end up with less once the IRS is done with them. In US v. Gill, No. 18-cv-04020 (SD Tex. 2021), the court denied the estate's motion to dismiss the IRS penalties, finding that even the unintentional penalties survived the death of the taxpayer. These were penalties, worth about $ 800,000, but the court said the purpose of the penalties was to remedy it. Go figure.

It is not just a judge who is giving the IRS these big penalty wins against property. In fact, there are a number of cases where the Internal Revenue Service (IRS) has managed to impose deliberate penalties, even after death. The theory seems to be that, although these are purely statutory, and important, penalties, the purpose of these penalties was largely corrective. Does that logic seem forced? The feds argue in cases that by imposing these penalties, the IRS and the feds only want people to comply with the rules. These "sanctions" are not to punish, they are to help people comply. And that argument is winning in court. See U.S. v. Estate of Schoenfeld, 344 F. Supp. 3, 1354 (M.D. Fla. 2018), United States v. Wolin, 489 F. Supp. 3d 21 (E.D.N.Y.2020), U.S. v. Park, 389 F. Supp 3d 561 (N.D. Ill. 2019), and U.S. v. Green.

Is it possible to argue to get out of a tax penalty? Well, these properties have tried, and in virtually any circumstance, it's worth trying to backtrack. As a blanket proposition, taxpayers claim that penalties are unjustified for many reasons, but one of the most important is the defense that a tax position was based on reasonable cause. How the IRS assesses this depends on the penalty that has been applied. In addition to reasonable cause, certain sanction defenses involve other concepts, such as the absence of willful negligence. Isn't it proving negative? Yes, and the taxpayer also has to bear this burden. Who wins in a tax penalty stalemate? This shouldn't surprise you. The IRS does, of course.

In other words, taxpayers bear the burden of substantiating their reasonable cause. We must all exercise normal business care and prudence in declaring our proper tax liability. Remember, all tax returns are signed under penalty of perjury. The IRS applies a test of facts and circumstances on a case-by-case basis to determine whether a taxpayer meets the reasonable cause exception. But with foreign account penalties, and many others as well, it can be particularly difficult to get by.

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