IRS Can Use Return Information To Make Foreign Bank Account Report (FBAR) – An FBAR Proceeding Is “Tax Administration”

In a recent case, a taxpayer sued the IRS after the IRS used information on the taxpayer’s return to open an FBAR investigation under 31 U.S.C. §5314.  The FBAR investigation was triggered when an examination of his tax return revealed online gambling activity and the taxpayer’s use of foreign bank accounts (most likely by virtue of the necessary disclosures as a result of filing Schedule B).  The taxpayer sued the IRS claiming that IRS had illegally disclosed his tax return information for the purpose of the FBAR investigation.  In general, I.R.C. §6103 bars the IRS from using tax return information that is discovered during an audit to conduct an FBAR investigation.  I.R.C. §6103 specifies that tax return information is to remain confidential and no officer or employee of the United States can disclose any return information in any manner.  But, there is an exception.  I.R.C. §6103(h)(1) allows tax return information to be open for inspection by or disclosure to  officers and employees of the Treasury Department when that information is needed by those officials for inspection or tax administration purposes under the Internal Revenue Laws or related statutes.   Thus, the question was whether 31 U.S.C. §5314 (authorizing an FBAR investigation) is a “related statute” under the general category of “tax administration” for purposes of I.R.C. §6103(b)(4).  The court determined that it was.  In addition, the court noted that even if the taxpayer was correct on his claim that the IRS did not follow its own procedures set forth in the Internal Revenue Manual (IRM), and therefore had not made a related statutory determination, the court noted that the IRM does not have the force of law and is of no legal significance.  As such, the taxpayer failed to state a claim for relief.  The court also rejected the taxpayer’s claim that alleged false statements in the IRS report were “actionable” under I.R.C. §6103.  Likewise, the court rejected the taxpayer’s claim that the type of information IRS sought was for “penalty assessment” rather than “tax administration.”  The court held that the distinction was meaningless because “tax administration” includes such things as assessment, collection and enforcement.”  Accordingly, the court granted the government’s motion to dismiss.  Hom, et al. v. United States of American, No. C. 13-02243 WHA, 2013 U.S. Dist. LEXIS 142818 (N.D. Cal. September 30, 2013).

Why is this case and FBAR relevant to you and your clients?  Taxpayers had to file a Report of Foreign Bank and Financial Accounts.  The first reports had to be received by the U.S Treasury Department by June 30 of 2013 (which meant the real filing deadline was June 28 because June 30 was a Sunday).  A taxpayer who is required to file FBAR Form TD F 90-22.1 and doesn’t is subject to civil penalties from $10,000 to $100,000 or 50 percent of the foreign account balance.  Criminal penalties can also apply.  Just having signatory authority over a foreign bank account triggers the requirement to file.  The Form must continue to be filed even if the foreign accounts don’t generate any income. 

In recent years, some ag producers in Iowa and elsewhere in the U.S. have invested in land in other countries and started farming business and other related ventures in these foreign countries.  That could easily trigger the FBAR requirements.  Make sure to review your clients’ activity closely and keep the FBAR requirements in mind.