Can the IRS Seize Your Pension or 401K for Back Taxes?

To protect your retirement accounts and retirement income, you need to make payment arrangements on your tax liability before the IRS issues a levy or garnishment.

Yes, the IRS can seize your retirement accounts and/or garnish your pension payments and Social Security benefits for back taxes. Typically, the IRS tries to avoid seizing retirement accounts, but the agency will pursue this collection action as needed. 

If you're worried about the IRS taking your retirement funds, you should make arrangements on your tax liability as soon as possible or reach out to a tax professional for help. In the meantime, here is an overview of the rules and general practices, so you know what to expect.

Can the IRS Take Your 401(k) or Other Retirement Accounts?

Legally, the IRS has the right to seize funds from any of the following retirement accounts to cover unpaid tax liabilities:

• 401(k)s.
• Independent Retirement Accounts (IRA).
• Self-employed plans such as SEP-IRAs and Keogh plans.
• Pensions.
• Company profit-sharing plans.
• Stock bonus plans under ERISA.
• IRC 403(b) retirement plans.
• Eligible deferred compensation plans.

The IRS can only seize funds that you have the right to withdraw. The IRS can also place a levy against your vested rights, but it cannot accelerate payment. 

For example, say that you have a defined-benefit pension plan through your employer, but you don't have the right to withdraw any funds until retirement. The IRS generally cannot seize those funds. In contrast, imagine that you have a 401(k) and you have the right to make a withdrawal at any time. The IRS can levy those funds. 

In some cases, you may have a right to the funds in the future, but you cannot withdraw them now. In those situations, the IRS can issue the levy, but the agency cannot seize the funds until you have the right to withdraw the money. 

Can the IRS Take Your Pension for Back Taxes?

Generally, if you have the right to withdraw the funds right now, the IRS has the right to seize those funds for back taxes. Similarly, if you have a guaranteed future right to the funds, the IRS may also be able to seize those amounts. 

If you cannot make a withdrawal now or don't have a guaranteed future right to your funds based on the vesting rules of your account, the IRS cannot seize those funds. To learn about your particular retirement account, consult with your plan administrator. A tax professional can also help you figure out the rules that apply to your situation. 

How Does the IRS Decide Whether or Not to Take Your Pension?

The IRS instructs revenue officers to seize pensions as a last resort. If the revenue officer needs to seize assets to cover your back taxes, they should consider other assets before taking your retirement accounts. In most cases, they should also let you set up a payment plan before seizing your retirement accounts. 

However, if you were flagrant about the unpaid taxes, the IRS becomes more likely to seize your retirement accounts. Flagrant means conspicuously or obviously offensive. In relation to retirement accounts and unpaid tax liabilities, the IRS considers several different actions to indicate flagrant behavior. 

What Flagrant Behavior Can Lead to the IRS Garnishing Your Retirement Accounts?

If you've engaged in any of the following activities, the IRS revenue officer may decide that you've engaged in flagrant conduct:

• Contributing to your retirement account while not paying your taxes — Note that making automatic contributions based on a low percentage of your income to a 401(k) plan is not flagrant behavior. 
• Committing tax fraud or evasion.
• Helping others to commit tax fraud or evasion. 
• Owing tax based on illegal-sourced income — By law, you are supposed to report and pay tax on all income. So, if your tax bill is from selling illegal drugs or embezzling money from a company, the IRS becomes more likely to seize your retirement accounts. 
• Refusing to provide a Collection Information Statement (CIS) if requested by the IRS. 
• Repeatedly failing to take actions to reduce your tax liability — For example, if you owe tax every year and you don't adjust your withholding or make estimated payments, a retirement account levy becomes a bigger risk. 
• Having trust fund recovery penalties assessed against you in the past — These are penalties for unpaid payroll taxes withheld from employees' paychecks. If you have incurred trust fund recoveries in the past, the IRS may be more likely to levy your retirement accounts.
• Exhibiting a pattern of uncooperative behavior — The IRS has a lot of resolution options, but if you don't cooperate, the agency will become less willing to work with you. 

The IRS also takes into account extenuating factors. If you have suffered an illness, lost a loved one, become unemployed, or been the victim of identity theft, the IRS will be less likely to levy your retirement account. 

How Much Can the IRS Garnish From Your Pension or Retirement Accounts?

The IRS can garnish your entire retirement account. As explained above, however, the IRS can only garnish the amount to which you have access. The agency will also consider if you rely on the funds for your current or future income. 

How to Protect Your Retirement Account From Being Garnished?

To protect your retirement accounts from being garnished, you should be proactive about setting up a payment arrangement for your tax liability. Here are the most popular options and links to more information. 

• Installment Agreement — Make monthly payments on your tax liability for up to six years until it is paid in full. 
• Partial Payment Installment Agreement — Make monthly payments on your tax liability until the collection statute expires, and then the IRS will settle the rest of the liability. 
• Hardship status — Get the IRS to mark your account as currently not collectible and stop collection actions against you. 
• Offer in compromise — Prove to the IRS that you cannot afford to pay the tax liability in full and convince the agency to settle for less than you owe. 

Depending on your situation, you may also be able to apply for innocent spouse relief or request penalty abatement. A tax pro can help you identify the best resolution method to protect your retirement accounts and other assets from being seized. 

Retirement Benefits the IRS Cannot Levy

Again, the IRS cannot levy retirement accounts that you cannot access. Levies can only attach to fixed and determinable rights. In other words, if your rights to your retirement account are not guaranteed yet or if the amount is not determinable, the IRS cannot seize those accounts. 

Additionally, the IRS cannot take the funds you need now or in the near future. The IRS uses financial standards that outline basic living costs to assess this — these standards are not generous. Ideally, you should make arrangements to take care of your tax liability before the IRS starts holding you to these standards. 

The IRS also takes into account longevity tables. Basically, the agency considers standard life expectancies and very minimal living costs. If your retirement account can cover more than those essentials, the IRS can seize the rest. The agency will also consider extenuating factors about your budget and any other retirement money you have. 

Taxation of Levied Retirement Accounts

If the IRS levies your retirement account, you will be taxed on the distribution as usual. The plan administrator will typically withhold 20% of the distribution for federal income taxes, but your exact tax rate will vary based on your income. 

For instance, if you have $5,000 in a retirement account, the IRS can levy all of that, but once the plan withholds 20%, the IRS will only receive $4,000. Even if you ultimately owe less than this amount of tax, the IRS only has the right to levy the $4,000. 

Retirement Account Levies and the 10% Early Withdrawal Penalty

Normally, you face a 10% penalty when you take a distribution from your retirement account before reaching age 59.5 years. The 10% penalty does not apply in this case. 

When the IRS sends you a notice of levy for your retirement account, the agency will also send a letter explaining that you are not subject to this penalty. You may receive Letter 3257 (Excise Tax for Early Withdrawal Not Due if by Levy to Retirement Plan Administrator) and Letter 3258 (Excise Tax for Early Withdrawal Not Due if by Levy to Taxpayer). 

You can show these letters to your plan administrator, so they know you are not subject to the 10% penalty. You may also need these letters when you file your tax return. 

Bankruptcy and Retirement Account Levies

Taxes must meet specific rules to be discharged through bankruptcy. If you have taxes discharged in bankruptcy, the IRS may still have the ability to levy your retirement accounts to cover those taxes. 

If the IRS filed a tax lien before you filed bankruptcy, the IRS has the right to seize accounts that were exempt from the bankruptcy case. Additionally, the IRS also seize retirement accounts that were excluded from bankruptcy even if the liens were not filed on time. 

Garnishment of Social Security Benefits

The IRS also has the right to garnish your Social Security retirement income. The agency can garnish up to 15% of your Social Security benefits, but it cannot take lump-sum death benefits or benefits paid to children. Additionally, if you only receive partial benefits due to repaying a liability to Social Security, the IRS won't levy those benefits. 

Before levying your monthly Social Security benefits, the IRS will send you Notice CP 298 (Final Notice Before Levy on Social Security Benefits) or a similar notice. Once you receive the notice, you have 30 days to make arrangements. If you set up a payment plan or make other arrangements, the IRS won't start the levy. 

The IRS has the right to garnish 15% of your benefits, regardless of how much you receive. But if the garnishment causes you financial hardship, you can apply to have it removed. The IRS uses a strict set of financial criteria to assess hardship. Just because you feel strained doesn't mean the IRS will agree. 

Garnishment of Pension and Retirement Payments

The IRS can also garnish any pension plans or payments you're receiving from your retirement accounts. There is a common misbelief that the IRS will only garnish 25% of your pension payments. This is not true. 

Pension payments and other payments from retirement accounts are subject to the same rules as other IRS wage garnishments. Basically, the IRS only has to leave you with enough money for living expenses, and then the agency can garnish the rest. 

Get Help With Back Taxes

Don't let the IRS levy your retirement accounts or garnish your pension payments. The agency typically only garnishes these sources in severe situations, but if you ignore your tax liability long enough, the agency may decide that the situation is severe. Usually, you will receive a notice of intent to levy before the IRS takes your assets. To be on the safe side, you should reach out for help as soon as possible. 

Get help before the IRS seizes your assets. At TaxCure, we have curated a directory of local tax professionals. Using our search feature, you can look for a tax pro based in your area with the experience you need. Protect yourself — find a local tax pro to help you today.

What Happens If Your Spouse Owes Back Taxes?

When your spouse owes a tax debt to the IRS or a state tax authority, you may be liable for that tax’s repayment. It depends on when your spouse incurred the tax debt, your tax return filing status, and other factors. Our guide will help you understand the consequences of your spouse’s unpaid tax debt.

Marriage often brings certain tax benefits such as increased income thresholds for different tax rate brackets along with deduction and credit opportunities. However, marriage can also present risks as a taxpayer if you do not have strong knowledge of your income, finances, and tax obligations. If your spouse lies on your return, for example, you may be unaware of the inaccurate income reporting and the unpaid tax debt that will likely follow. It's important to know your rights as a married taxpayer and how you can protect yourself from the unpaid taxes of your spouse. Here's what you need to know about dealing with your spouse's back taxes.

Your Tax Filing Status Will Affect Your Liability for a Spouse’s Unpaid Tax

As a married taxpayer, you have two filing status options when you prepare your federal income tax return and submit it to the Internal Revenue Service (IRS). You and your spouse can file as either married filing jointly or married filing separately. When signing your tax returns, you and your spouse certify the accuracy of the reporting, and you both become responsible for the tax bill. At the same time, you also take responsibility for any underreporting or underpayment of tax and any resulting penalties. 

In other words, spouses who submit joint tax returns will assume responsibility for both spouses’ tax debt obligations on the return. In contrast, married filing separately taxpayers only certify their individual income and tax liability. If you file separately, you're only responsible for the tax debt shown on your individual return unless you live in a community property state.  

Are You Liable for Tax Liabilities a Spouse Accumulates During Marriage?

If you file your tax return as married filing jointly, you are liable for the tax liabilities regardless of whether they relate to you or your spouse. You are generally liable for the tax liabilities that a spouse accumulates during marriage when you submit your tax returns under a married filing joint status. When you file a joint tax return, the IRS views you and your spouse as a single taxable entity and will seek to collect owed tax amounts from either party, regardless of who earned the income resulting in tax liability.

In contrast, if you use the filing status of married filing separately, you are only liable for your own tax bill. Again, however, this rule changes if you live in a community property state. There are more details on that below. Here are some other questions you may have about taxes your spouse incurs while you are married.

Are You Liable for Your Spouse's Tax Debt From Their Business?

Your liability for your spouse's business taxes depends on the business structure and how you file taxes. If the business is a sole proprietorship or a partnership, the profits are pass-through. That means that they aren't taxed on the business level, they are taxed on the personal level. If you own the business with your spouse, you are naturally responsible for the business's taxes. However, if you don't own the business jointly, your liability for your spouse's tax debt depends on how you file your taxes. If you file jointly, you will be responsible for the business's taxes on your joint return. But if you file separately, you won't be responsible.

If your spouse owns a corporation, the corporation will pay its own income taxes, but your spouse will have to report any income or dividends that they receive from the company on their tax return. Again, you will be responsible for the taxes due to this income if you file jointly. You won't be responsible if you file separately. 

Of course, there are other business taxes such as sales taxes, payroll taxes, and excise taxes to name a few. Generally, if you don't own the business, you won't be liable for these taxes. However, you still need to be careful. You own property with your spouse, and in a lot of cases, the IRS may be able to seize jointly owned property even if just one person owes the tax. 

What Can the IRS Do to Collect Unpaid Taxes Against Married Taxpayers?

If you fail to voluntarily pay owed back taxes, the IRS may take certain actions against you or your spouse to collect the owed tax:

• Withhold or offset your tax refunds in future years.
• File a federal tax lien notice on your property.
• Serve a notice of levy to seize your property.

The IRS can attempt to collect unpaid tax from any of your personal or real property. This includes property such as bank accounts, investment accounts, wage garnishment, and other personal belongings of value.

When Can Innocent Spouse Relief Be Used If I Am Liable?

In some situations, the IRS will provide innocent spouse relief to those who unknowingly submit tax returns when their spouse underreported taxable income, claimed excessive credits, or misrepresented other necessary tax information. To qualify for innocent spouse relief, you must meet certain eligibility criteria:

• You filed a joint return that understated your tax obligations because of your spouse’s erroneous item (i.e., a misstated calculation of income, deductions, credits, or property basis).
• You can prove that when you signed the joint return, you either didn’t know and didn’t have a reason to know that your spouse understated their taxes.
• Holding you accountable for your spouse’s understated tax would be unfair under the circumstances.

For the element of fairness, the IRS will consider whether you received any financial or other benefits more than typical support. To maintain eligibility for innocent spouse relief, you must initiate the request within two years from when the IRS started its collection actions against you. However, if you apply for equitable relief, you have three years from the date you paid the tax to request a refund and up to 10 years from the tax filing deadline to request relief from the tax liability.

Separation of Relief If Your Former Spouse or Late Spouse Has Unpaid Taxes

In addition to innocent spouse relief, you may have the opportunity to avoid your spouse’s unpaid taxes through separation of liability relief. Separation of liability relief is when you distinguish your tax liability from your spouse on the joint return as though you had filed separately. To qualify for separation of liability relief, you must meet one of the following requirements:

• Be divorced or separated from your spouse.
• Be widowed.
• Not have been a member of the household as the spouse you filed the joint return within the 12 months ending on the date you file for relief.

Separation of liability relief also requires that you did not have actual knowledge of understatement of tax. However, you can have knowledge of the situation if you were coerced to sign the return or if you were under duress at the time when you filed.

Equitable Relief When It's Unfair to Hold You Responsible for a Spouse or Former Spouse's Back Taxes

Equitable relief is a final method of innocent spouse relief the IRS offers to spouses or ex-spouses in situations where it would be unfair to hold them liable for their partner’s understatement of tax. You can also apply for equitable relief if your spouse underpaid the taxes. For instance, this might apply if you thought your spouse paid the tax bill, but they stole the funds for personal use. In cases of equitable relief, the IRS will consider factors such as abuse or a lack of financial control when deciding.

How Do Community Property States Deal With Spouse Back Taxes?

In community property states, you are generally responsible for your spouse's tax bill even if you file separately. To give you an example, imagine that you live in a community property state, you report $5,000 in income on your return, and your spouse separately reports $95,000 in income. In a common law state, you're only responsible for the tax bill on the $5,000 of your income. But in a community property state, you are responsible for half of the total income — in this case, that's $50,000. 

However, community property states have different rules concerning both IRS and state tax debts. You may have different options for avoiding your spouse’s tax liability if you live in a community property state such as:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

To benefit from your state’s community property laws, you will usually have to file your tax returns as married filing separately. However, the rules vary. That's why it's critical to work with a tax pro who has experience in your particular state. They can help you deal with both the IRS and your state tax agency.

Married Filing Separately and Spouse Owes Back Taxes

When you submit tax returns as married filing separately, you are usually only liable for the taxes owed on your income. That means the IRS will have difficulty going after your assets to collect the unpaid taxes of your spouse. Again, the rules are different in community property states. In all cases, even though you won’t technically be liable for your spouse’s unpaid tax, you may find your joint assets (e.g., joint bank accounts) with your spouse in jeopardy because of the IRS’s efforts to collect the owed tax. Additionally, gifted property from your spouse could also find itself the target of tax liens or levy if the transfer was made to avoid payment of unpaid tax.

Can You Be Liable for a Spouse’s Premarital Taxes?

You won’t generally be liable for a spouse’s underpayment of taxes for years before the marriage. As mentioned above, your liability for a spouse’s unpaid tax is most concrete in situations where you filed jointly. Although, you may have to deal with the consequences of your spouse’s unpaid tax during the marriage and it may impact any joint assets you have – similar to situations where you submit as married filing separately. The IRS has 10 years from the date of assessment to collect unpaid tax, which means spouses could have fallout from their partner’s tax liability well before they ever married.

Can the IRS Take Money From My Spouse?

It depends on the situation. If you owe taxes from a joint return that you filed with your spouse, the IRS can go after your spouse for the tax debt incurred from that return. However, if you have tax debt incurred from a separately filed return, from a business that your spouse doesn't own, or from a return jointly filed with another person, your spouse isn't liable. The IRS can't take money from your spouse for these taxes.

If you have unpaid taxes and you want to protect your spouse, the best thing to do is make arrangements to take care of the tax debt. If you set up a payment plan, get an offer in compromise, or make other arrangements, the IRS won't have to enforce involuntary collection actions against you or your spouse. 

Can the IRS Take My Tax Refund for My Spouse's Debts?

Generally, the IRS cannot take your tax refund for your spouse's tax debts. If the IRS seizes your joint tax refund to cover a debt related solely to your spouse, you can request to get your portion of the refund back. This is called Injured Spouse Relief.

To give you an example of how injured spouse relief works, imagine that your spouse owes $2,000 in back taxes from 2018 and $3,000 in child support from 2020. You get married in 2021 after they gave incurred these debts. Then, you file a 2021 return jointly and earn a $5,000 tax refund. However, the IRS keeps the entire tax refund to cover your spouse's debts. You think this isn't fair so you apply for Injured Spouse Relief. The IRS agrees that you should not be responsible for your spouse's old debts so the agency looks at your return and it figures out which portion of the refund is due to you. Let's say that you and your spouse made the same amount of money, and half of the refund was yours. In that case, the IRS will send you your half of the refund ($2500).

When Can the IRS Garnish My Wages for My Spouse's Tax Liability?

If you filed married filing jointly, the IRS can garnish your wages from your spouse's tax debt on that return. The IRS can actually garnish both of your wages in this situation. With wage garnishments, the IRS only leaves you a very small amount to live on — the exact number depends on your filing status, number of dependents, and costs of living in your area. If the IRS says it's going to garnish your wages, you should make arrangements on the tax bill before that happens. Garnishments can be harsh. However, the IRS won't garnish your wages if your spouse has a tax debt from a married filing separately return or from a tax debt incurred before the marriage.

Can the IRS Hold Me Responsible for my Spouse's Ex-Spouse's Tax Debts?

The IRS cannot hold you responsible for unpaid taxes due to your spouse's ex-spouse. However, in some cases, your spouse may still be liable for their ex's tax debts, and that can affect you. To give you an example, imagine that your spouse filed a joint return with their spouse for tax year 2018. They didn't pay the tax bill, and the majority of the bill was due to the ex. In 2020, you and your spouse got married. In 2021, the IRS contacted your spouse about the unpaid debt.

Because a joint return was involved, your spouse is responsible for that old debt. If your spouse or their ex doesn't pay, the IRS may take involuntary collection actions against your spouse. This can include wage garnishments, bank account levies, and asset seizures. Remember the IRS has 10 years to collect on unpaid taxes so this cloud can hang over you for a while. If your spouse believes that they are truly not responsible for their ex's tax debt, they may want to look into innocent spouse relief.

Do I Owe My Spouse's Taxes If We Get Divorced?

If you file jointly, you will continue to be responsible for the taxes owed on your joint return even after your divorce. If possible, you should ensure that the divorce decree stipulates who should pay the taxes. However, it's important to note that a divorce decree doesn't necessarily override the IRS's rules. The IRS may still have the right to hold you responsible for your spouse's tax liability from a joint return, regardless of what the decree says. That said, if you get a divorce or are separated, you may be able to seek relief on your spouse's part of the liability through the IRS's separation of liability program. If you qualify, this program breaks down the return and figures out who owes what. Then, you're only responsible for your portion of the bill. 

What Can You Do to Protect Yourself When Your Spouse Owes Taxes?

When you become aware of your spouse’s unpaid tax or receive a notice from the IRS, you should consider a few different actions. The first step may be to consult with a tax attorney to get a better sense of the validity of the unpaid tax claims and your options for possible innocent spouse relief or other pardons. You may need to take actions to separate your finances such as opening your own bank account and diverting any W-2 wages or other income to this account instead of to your joint accounts. You will also likely need to cease filing joint returns with your spouse. 

Find a Local Tax Professional Near You with TaxCure

At TaxCure, we have a large network of tax attorneys and other tax professionals who provide representation and advice to spouses dealing with the aftermath of their partner’s unpaid taxes from underreporting. If you need help obtaining spousal relief or received notice from the IRS, find professionals nearest you to get the assistance you deserve. You can start your search here by viewing local professionals with experience with spousal tax problems.

IRS Summons: Why the IRS Sends Summons & What to Do If You Receive

An IRS summons is an official order to provide information or testimony. The IRS issues summonses to people who are being investigated or who may have important information related to an investigation of another entity. 

A summons is serious, and you should not ignore it. But you may want to consult with a tax attorney before responding. 

Types of IRS Summonses

The most common IRS summons is Form 2039 (Summons). This form explains what the IRS wants. It may demand documents from you about yourself or a third party. Or, it may explain that the IRS has requested information about you from a third party. Form 2039 also outlines the relevant section of the Internal Revenue Code and your right to contest the summons. 

IRS agents may alternatively decide to issue the following specialized summonses:

• Form 6637 (Summons Collection Information Statement) — to collect an assessed tax.
• Form 6638 (Summons Income Tax Return) — served on taxpayers who need to file an unfiled return. 
• Form 6639 (Financial Records Summons) — may be served on third parties.

A direct summons is a summons sent directly to the person under investigation. For instance, if the IRS believes that you are hiding income, the agency may summon your bank account records. A third-party summons, in contrast, is sent to a third party to gather information about another person. 

IRS Notices Before Sending Summons

In most cases, you will get several notices before you receive the IRS summons. The IRS typically starts with Form 4564 (Information Document Request). If you don't respond, the IRS will send a delinquency letter saying that you haven't responded. 

A pre-summons notice follows this letter. Then, finally, the IRS sends the summons.   

What to Do If You Receive a Summons

If you receive an IRS summons, you can hand over the information or appear as requested. For many people, that is the best option. Others resist handing over information because they're worried about incriminating themselves or hurting their relationship with a third party. But, this can trigger a criminal investigation. 

You have the right to contest the summons. But unfortunately, the IRS wins over 95% of these arguments. To ensure you're making the right decision, you may want to consult with a tax attorney or tax professional who has experience with IRS summons. 

What If You Don't Respond to an IRS Summons

If you ignore a summons, the IRS will show the courts that the requested information is relevant to a legitimate investigation. IRS agents must follow strict rules when sending out a summons. They tend to follow the rules closely, and by extension, the courts hold up most summonses. 

If the district court says that the summons is enforceable, you can receive a citation for contempt if you continue to ignore it. That can lead to criminal persecution and jail time. 

Your Rights When You Receive a Summons

When you receive a summons, you have the right to an explanation of the process. You can represent yourself or find a professional to represent you. If you are summoned for a meeting, you can record it, but you must request to do so in advance. Again, you also have the right to contest the summons.

What Makes an Enforceable Summons

When you contest a summons or request to have it quashed, the IRS must prove that the summons is enforceable. Based on the outcome of the United States vs. Max Powell, the summons must meet these criteria to be legally enforceable:

• Related to an investigation conducted for a legitimate purpose.
• Based on an inquiry relevant to the investigation's purpose.
• Used to request information that the IRS doesn't already have.
• Issued in line with all relevant sections of the Internal Revenue Code.

To establish that these four criteria are in place, the IRS usually uses a sworn affidavit from the agent who issued the summons. At this point, the burden of proof shifts to the taxpayer.

How to Contest an IRS Summons

You can use the following arguments to contest an IRS summons in court: 

• The IRS already has the requested information. 
• The statute of limitations has expired for the tax years related to the summoned information.
• The summons violates your constitutional rights. 
• The summons was not issued properly. 

A tax attorney can help you decide which argument is relevant to your summons. Or they can help you decide if another approach is more advantageous. 

How Does the IRS Use Summoned Information?

The IRS summons information to get a better sense of your tax situation. The agency may summon information to back up details on your return during an audit. But the agency may also use summoned information for the following:

• To create a substitute for return (SFR).
• To locate assets for tax collection purposes. 
• To investigate civil or criminal tax offenses

Can the IRS Summon Information About Me From Other Parties?

IRC Section 7602(a) gives the IRS the authority to confirm information about a filed return through third parties. This typically occurs when a taxpayer has refused to provide requested information during an audit. The IRS can reach out to the following people:

1. A person who owes tax. 
2. An officer or employee of that person.
3. A person who has possession of or takes care of the business books of that person. 
4. Any other person as deemed necessary. 

In other words, the IRS can reach out to nearly anyone about your taxes. If the IRS believes that you haven't been paying payroll tax, for example, the agency may reach out to your employees to get information about your payroll practices. The IRS can also reach out to your bookkeeper, your accountant, or even just your Aunt Nancy who stores your bookkeeping records at her house. The category "any person deemed necessary" is obviously infinitely broad and subjective. 

Notice for Third-Party Summons

Before serving a notice to a third party about you, the IRS must give you notice. You must be notified at least three days before the third party is served and at least 23 days before the deadline (compliance date) on their notice. 

Your notification must include a copy of the summons and an explanation of your rights. If the IRS has requested a meeting with a third party to obtain information about you, you can request to have a representative at the meeting, but the third party must agree to the request. 

How to Quash a Third-Party IRS Summons

If the IRS issues a third-party summons, you will receive a copy and you have 20 days to file a petition in U.S. District Court to quash the summons. Quash refers to a legal request to have a judge annul the summons. This is the same process as contesting the summons.

You must meet a relatively narrow set of criteria to get a summons quashed. You can show that you already provided the information or that the information doesn't exist. Alternatively, you can contest the summons by saying that it disrupts attorney-client privilege, tax-advisor privilege, or work-product privilege. Or, you can argue that the examiner didn't follow the correct procedures when issuing the summons. 

If you request to quash a summons and the third party already sent in the documents, the IRS cannot look at the documents unless you give your consent or the courts grant permission. 

IRS Summons and the Statute of Limitations

There is a statute of limitations on tax collection. Typically, the statute expires 10 years after the return was filed or the taxes were assessed. The statute of limitations pauses when you request to quash a summons. It stays paused while the rest is pending and until it is resolved. 

What Is a John Doe Summons?

A John Doe summons is a blanket request for information about multiple taxpayers in a group. For example, the IRS used John Doe summonses to request information about taxpayers with offshore bank accounts at several foreign banks. In its recent focus on cryptocurrency compliance, the agency successfully used a John Doe summons to obtain information on thousands of Coinbase account holders. 

What to Do If You Receive a Third-Party Summons

If you receive an informal request for information about a third party, you may want to respond quickly to resolve the issue or wait until you receive a summons before providing the information. The optimal choice depends on the situation. 

In some cases, you may be able to respond to an information request without compromising yourself. However, if you're an accounting professional, you may want to wait until you receive a formal summons or authorization from the client to ensure that you don't violate client confidentiality rules. Additionally, financial institutions need to ensure that they don't violate the Right to Financial Privacy Act. 

This is not legal advice. Consult with a tax attorney or tax professional to decide the best way to respond to an IRS summons for information. 

Elements of an Enforceable Third-Party Summons

To be enforceable, a third-party summons must contain the following details:

• Name and address of the person whose tax returns are under examination. 
• Tax periods under examination.
• Identity of the person being summoned — in the case of a corporate summons, this should be the corporate officer, director, managing agent, or another authorized person.
• Description of the summoned items — the IRS cannot require you to create documents that don't exist.
• Date, place, and time by which the information must be received — If summoning someone to appear, the IRS must give them at least 10 days. 

Get Help With an IRS Summons

In most cases, if you receive a request for information from the IRS, you should probably respond. However, the best course of action can vary based on the type of information requested, your risk of criminal exposure, and your relationship with the taxpayer in the case of a third-party summons. 

To get help responding to a summons or deciding what to do after you receive an IRS summons, you should reach out to a tax professional. At TaxCure, we have a directory of tax professionals in your area. To get help and guidance, search for a tax pro experienced with IRS summons today.

IRS Special Agents – Who They Are and What to Do if They Contact You

IRS special agents have wide latitude to investigate tax-related and other financial crimes. Although these agents do not have the ability to prosecute taxpayers, they play a critical role in determining whether a specific case should be referred for criminal prosecution.

Given the above, if a special agent contacts you, it is an extremely serious matter. This article will answer some common questions about special agents, including who they are, what you should do if they contact you, and what can happen during an IRS criminal investigation.

What is an IRS Special Agent?

Special agents work within the Criminal Investigation (“CI”) Division. In this capacity, special agents make initial determinations of whether a taxpayer has committed a crime under the CI Division’s purview and whether your case should be referred for criminal prosecution.

To this end, special agents have various investigative tools at their disposal, including document requests and interviews with third parties, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data.

What is the CI Division?

The CI Division is the Service’s criminal enforcement arm. The Division investigates potential criminal violations under the Internal Revenue Code, including:

• Falsification of corporate and/or individual tax returns
• Abusive tax schemes
• Tax return preparer fraud
• Employment tax enforcement
• International tax investigations
• Bankruptcy fraud

The CI Division also investigates other financial crimes under the Bank Secrecy Act and certain anti-laundering laws. This includes investigations into complex money laundering schemes and fraud against financial institutions.

How Are Criminal Investigations Initiated?

Criminal investigations are commonly initiated when a revenue agent suspects possible tax fraud during an audit or collections effort. The CI Division can also initiate an investigation based on information provided by the public or an ongoing investigation conducted by another federal agency.

When special agents receive this information, they will first conduct a “preliminary investigation” of the information. The agent’s front-line supervisor and head of the office will ultimately need to approve or decline to move forward with the case. The approval from these levels of CI management signifies that there is sufficient basis for a criminal investigation.

The special agent will open a “subject criminal investigation if the case is approved.” The special agent will use the investigative tools mentioned above to establish whether tax fraud or another financial crime has occurred during this stage. Based on this information, the agent and their supervisor will determine whether the evidence supports the recommendation for prosecution. If the answer is “yes,” the agent will compile a written report, which must also be reviewed and signed off by various levels of CI management.

In the event CI management signs off on the written report, the Division will forward the recommendation for prosecution to the U.S. Department of Justice (DOJ), if the crime is tax-related and the applicable U.S. Attorney's Office for all other crimes.

Ultimately, the takeaway is that special agents are conducting investigations in the background, often unbeknownst to the taxpayer in question (although they may get a sense based on visits to the taxpayer or document requests to third parties). Thus, by the time the DOJ or U.S. Attorney’s Office charges you (if they do in fact decide to), the special agent has obtained a good portion of evidence against you.

How Will a Special Agent Make Contact with You?

Special agents can contact you in a variety of ways. They can make an unexpected and unscheduled visit (even to your house) to interview you or make requests for certain documents from you.

Special agents can conduct searches of your home, office, or other premises with a warrant and make arrests in more extreme cases.

What if a Special Agent contacts me?

If special agents contact you, you should (i) tell them that you do not wish to talk to them without an attorney present and then (ii) immediately retain an attorney to represent you in all future communications. This is because the agent can use any information that you provide to support a criminal prosecution recommendation to the DOJ or the applicable Attorneys’ Office.

Indeed, the Service’s internal operating manual instructs special agents to refrain from interviewing you if:

1. You indicate that you do not want to be interviewed;
2. You tell the agents that you do not want to answer any more questions at any stage of the interview; or
3. You request an attorney prior to or during the interview.

Of course, these safeguards do not apply if you voluntarily provide information. Informing the agent that you do not wish to be interviewed without an attorney present can minimize the chance that something you say to the agents will be used as a basis for criminal prosecution.

Will They Read My Rights?

Based on the IRS internal operating manual, special agents are supposed to warn you in “clear and unequivocal” terms of your right to remain silent, that any statements made can be used as evidence against you, and your rights to request the presence of an attorney.

Even if special agents do not read you your rights, you should refrain from speaking with them and request the presence of an attorney who will handle all future communications and requests from them.

What if I Know I’m Innocent, What Should I Do? 

Even if you know that you are innocent, you should still retain an attorney to represent you in all dealings with special agents. Any information you provide during a criminal investigation can later be used by the agent (even if wrongly) as a basis for a criminal prosecution recommendation to the DOJ or the U.S. Attorney’s Office (as applicable).

An experienced criminal tax attorney can help you navigate the IRS criminal investigation process and reduce the chances that you will say something or provide information to the agent that wrongly incriminates you.

What Can Happen If I Did Commit a Tax Crime?

If you did commit a tax crime, the special agent could refer your case to the DOJ or U.S. Attorney’s Office for criminal prosecution if that agent, together with others at the CI division, determines that the evidence supports such a prosecution.

The special agent’s “preliminary investigation” and “subject criminal investigation” are subject to review and approval by various levels of CI Division management. Therefore, if an agent and others in the CI Division do not believe that the collected evidence warrants a criminal prosecution, they can terminate the criminal investigation against you.

What If I Am Just a Witness to a Tax Crime?

Even if you are a witness to a tax crime, you are required to comply with every legal and reasonable request by the special agent or the CI Division, including requests for testimony, documents, or other information. A witness can refuse requests on the basis that providing such information would tend to incriminate them.

Special agents have summons authority to compel witness testimony or the production of specified documents if the witness fails to comply with the agent’s request. This authority even extends to requests where a witness refuses to provide the information on the basis that it will tend to incriminate them.

In light of the above, witnesses should also retain and consult with an experienced criminal tax attorney to prevent themselves from being implicated in the tax crime later on during the criminal investigation.

Getting Help Help if You've Been Contacted by an IRS Special Agent

If you are involved with som resort of IRS criminal investigation, it is in your best interest to retain a tax professional that can assist. At TaxCure, we have a large network of tax professionals from around the country with a variety of backgrounds. The network includes licensed attorneys who specialize in criminal tax matters. You can start your search here for tax professionals with a law license that have experience with IRS special agents.

Enrolled Agents: How They Can Help & How to Find an EA Near You

If you need assistance with tax issues, you may want to contact an enrolled agent. But finding an enrolled agent can be tricky. This guide explains how to find an enrolled agent near me. It also outlines what these professionals do and how they can help. 

What is an IRS Enrolled Agent?

An Enrolled Agent (EA) is a tax professional who represents taxpayers in matters relating to the Internal Revenue Service (IRS) tax laws. An EA is licensed to represent taxpayers before the IRS on disputes, they can prepare tax returns, and they can answer questions regarding tax laws. This designation is comparable to an accountant or an attorney that specializes in IRS matters relating to tax laws.  However, unlike an attorney or CPA, they receive their authority from the federal government instead of state governments. The IRS Enrolled agent can choose to represent any taxpayer and may specialize in certain areas of tax law that they practice. The benefit of working with an enrolled agent is that they specialize in dealing with the IRS.

Typically the enrolled agent acts as a legal representative for the taxpayer in issues that relate to IRS tax matters. The enrolled agent must pass the three parts of the Special Enrollment Exam (unless they qualify from having years of experience working for the IRS) which certifies that the agent has proven competence in the areas of tax law. Moreover, enrolled agents must complete 72 hours of continuing education every three years to maintain their status.

What Do Enrolled Agents Do?

Like other tax professionals, Enrolled Agents perform a variety of tasks. Some of them focus on helping clients with unpaid taxes. Others perform the following types of services as well:

• Bookkeeping
• Financial planning
• Help with tax audits
• Business tax preparation
• Individual tax preparation
• IRS representation

Circular 230, published by the US Treasury Department outlines the rules for enrolled agents to practice in front of the IRS. Enrolled agents have unlimited practice rights in front of the IRS, except in Tax Court. 

Generally, only tax lawyers can represent people in Tax Court, but if an enrolled agent passes the Tax Court exam, they can also represent clients in court. Only a very, very small number of enrolled agents have this credential. 

Enrolled agents can handle tax prep, unfiled returns, tax audits, tax appeals, and other tax-related issues for the following types of taxpayers:

• Corporations
• Estates, gifts, and trusts
• Exempt organizations
• Farms and ranches
• Individuals
• Partnerships
• All other taxpayers

Taxpayers with unique tax concerns can turn to enrolled agents for help. Here are some of the issues they can help with:

• Taxes for people in the military
• Taxes during and after divorce
• Tax concerns about pensions, annuities, and IRAs
• Multi-state taxation
• International taxation
• Taxation for expatriates

Enrolled agents deal with individual and corporate income tax, but they also deal with employment tax, sales tax, and other local, state, and federal taxes. When looking for an enrolled agent near me, you should look for an enrolled agent with experience in your state, who specializes in your area of concern. 

At TaxCure, we have a directory of enrolled agents, and our site makes it easy to search for an enrolled agent near me. 

Should I Find an Enrolled Agent Near Me to Help File My Taxes?

It depends on your tax situation and your comfort level. If you have a very simple tax situation, you can often file your own return using tax software. As your taxes get more complicated, such as itemizing deductions, earning investment income, or starting a business, you may want to reach out for help. 

Most big tax prep companies hire tax preparers who do not have professional credentials. These people receive a small amount of training, and while they can help with some tax issues, they simply don't have the knowledge or expertise of an enrolled agent or a CPA.

If you want to work with someone who has the highest IRS credentials, you should work with an enrolled agent or a CPA. Note that you can select these professionals when you work with a big tax prep company such as H&R Block, Jackson Hewitt, or Turbotax, but they are not the default option. If you want to work with an enrolled agent near me at one of these companies, you need to request that type of professional specifically. 

When to Work With an Enrolled Agent

Here are some situations where you may want to work with an enrolled agent near you:

• You own a small business or are newly self-employed. — An enrolled agent can help optimize your business deductions and guide you through tax planning. 
• You've had major life changes. — If you've just bought or sold a house, cashed out a major investment, received an inheritance, gotten a divorce, or adopted a child, an enrolled agent can ensure you handle your taxes correctly. Even if you just work with them for a year, their efforts can make a difference. 
• Your taxes are complicated. — Whether you're trading crypto or trying to claim deductions for home upgrades to support a disabled family member, you may need extra support during complicated years. This is the perfect time to find an enrolled agent. 
• You made a mistake on a return and need resolution services. — Don't worry. This happens to a lot of people, and an enrolled agent can help you deal with the IRS or state tax agencies.
• You can't pay your taxes or are facing collection actions — If you are facing a situation where you can't pay your taxes or the IRS is taking collection actions against you, enrolled agents can represent you before the IRS and help you get back into compliance.

Essentially, if you want extra help dealing with the IRS or state tax agencies, you should contact an enrolled agent. 

Various Tax Problems an Enrolled Agent Can Help With

Tax laws and the regulations issued by the IRS can be overwhelming. An enrolled agent can assist the taxpayer with understanding the inner workings of the law and know the best strategy to deal with the unique circumstances for their tax-related issues. An enrolled agent understands Federal tax law, IRS regulations, and specific situations that relate to taxpayers and, most importantly, how to obtain the best, most cost-effective outcome for the taxpayer.

If any of the following circumstances apply to you, an enrolled agent is one type of tax professional that can provide needed relief.

• Tax Audit: Tax audits happen rarely, but when they do, an enrolled agent can help.  An enrolled agent can help you navigate the process and provide support along the way.
• IRS investigation: Being investigated by the IRS is a very critical matter. Depending on your situation, an IRS enrolled agent who knows the IRS laws inside and out can offer a level of consult to you and coach you through an investigation. Furthermore, a tax attorney can help if the investigation becomes criminal.
• Tax Fraud:  If you have committed tax fraud such as underreporting income, claiming false or deductions or claimed credits that you did not earn, this could be considered tax fraud.  A tax attorney or an IRS enrolled agent can help you to navigate through the process of the investigation.
• Failure to file and failure to pay tax penalties:  Failing to file tax returns, or not paying taxes owed eventually results in tax penalties that can become expensive depending on the amount of time that has passed.  An IRS Enrolled Agent can work in your favor to reduce significantly the tax penalties and costs associated with the consequences of failing to file taxes under IRS regulations.
• Unfiled tax returns: Having unfiled tax returns can lead to steep penalties and interest from the IRS. An enrolled agent can help you file old taxes and ensure that you get the maximum amount of deductions as well as helping you work through any penalties and interest that you may incur.
• Tax Liens: If you have had a tax lien filed against you, it is a good idea to seek the help of a tax professional. An enrolled agent is one type of tax professional that can analyze your situation and find the best course of action to get the tax lien removed and prevent the IRS from taking any further collection actions.
• Tax Levies: A tax levy is a serious matter, and the IRS will continue to seize assets until they have taken enough to cover all the taxes owed plus penalties and interest. An enrolled agent is aware of the many different ways tax levies can be stopped. It is a good idea to seek help from a tax professional when faced with this situation.

FAQs About Enrolled Agents

Here are some frequently asked questions about enrolled agents. Contact us directly or in the chatbox if you have additional questions about enrolled agents. 

How Much Do Enrolled Agents Charge?

Enrolled agents often charge a fee based on the project, but if they charge an hourly rate, it tends to range from $200 to $400. Some enrolled agents charge less than this range, while others charge more. According to the Bureau of Labor Statistics, the median annual salary for an enrolled agent is $54,890. 

How Do I Find a Good Enrolled Agent?

Talk with people you know. Read reviews of local enrolled agents. Use a site such as TaxCure to search for enrolled agents in your area, read reviews, and find the best tax pro for your needs. You can follow this link here to see the enrolled agents closest to you and you can further filter by your particular tax situation to find the best suited enrolled agent to help you.

Is an Enrolled Agent Better Than a CPA?

No. CPAs and enrolled agents can both provide help with tax-related issues. The important thing is to find a CPA or enrolled agent with experience in your area of concern. 

Is an Enrolled Agent Worth the Cost?

Yes. When you're dealing with complicated tax matters, unaffordable tax bills, or a dispute with the IRS, an enrolled agent can be invaluable. They know the tax codes and how to negotiate with the IRS and state tax agencies. They save their clients time and money in the long run.

Resolution to Tax Issues

An enrolled agent can offer sound advice about many of the solutions to tax issues provided by the IRS. The complexity of the solutions provided by the IRS to deal with tax problems are something that an enrolled agent is highly trained to negotiate.

The following are examples of some of the resolutions that an IRS enrolled agent can negotiate on your behalf.

• Penalty Abatement
• Payment Plans
• Offer in Compromise
• Innocent Spouse Relief
• File Unfiled Tax Returns

The IRS enrolled agent or tax attorney may focus on resolving tax problems and be well versed in the regulations and workings of the IRS. Because the enrolled agent has passed both competency and certification to practice, taxpayers have peace of mind knowing that they are not risking getting “scammed” by the many self-proclaimed tax relief companies that advertise their services over the internet. If you are interested in the help of an enrolled agent, you can start your search below. Once you start the search, you will be given the ability to show only enrolled agents that match your search results. Our algorithm will show local professionals that have experience dealing with your unique situation.

History of the Enrolled Agent

When the IRS was formed in 1862, anyone could represent taxpayers in front of the IRS. After the Civil War ended in 1865, dubious representatives found clients and offered to represent them in exchange for a percentage of their claims. 

These representatives claimed that their clients had suffered expensive losses during the war, but in most cases, they overstated the value of the losses. In particular, they trumped up the value of lost horses. 

This debacle convinced the IRS that it needed to define parameters around representing taxpayers in front of the IRS. In 1884, The Enabling Act, also called the Horse Act, was signed into law. This act created enrolled agents, and it established a standard people needed to meet to become one of these professionals. 

Enrolled Agent Versus CPA

Enrolled agents and CPAs overlap in many ways, and both of these professionals can represent you in front of the IRS. However, there are a few differences between enrolled agents and CPAs.

CPAs are licensed in their state, while enrolled agents are licensed federally. To become an enrolled agent, you need to pass a three-part exam or work at the IRS for at least five years. CPAs typically must earn a bachelor's degree plus 30 additional credits in accounting. Then, they must log a year's work experience under another accountant and pass the CPA licensure exam for their state. 

The main difference between enrolled agents and CPAs is their area of focus. Enrolled agents are 100% focused on tax-related issues. CPAs can focus on taxes, but they can also do public accounting, corporate accounting, and accounting for government and not-for-profit organizations. CPAs also audit businesses and provide assurance that their financial statements are free from material misstatement. 

Both enrolled agents and CPAs must complete continuing education credits every year. This ensures they stay abreast of changes to the industry and the tax laws. 

What Is The National Association of Enrolled Agents?

For over 50 years, the National Association of Enrolled Agents has provided support to enrolled agents. The NAEA has over 10,000 members, and it invites organizations to become strategic partners. 

The NAEA publishes information online and in the EA Journal on how to become an enrolled agent. The organization also provides professional support to these people. When asked about the benefits of NAEA membership, enrolled agents say the organization provides invaluable help and resources to get them through tax season. 

The NAEA also works to support the industry as a whole. And the organization fights against laws that may stymy the work of these professionals.

The NAEA Education Foundation (NAEA-EF) has existed since 1972. It helps people who want to become enrolled agents and even offers scholarships to aspiring candidates as they study for their Special Enrollment Examination (SEE). Additionally, it helps existing agents maintain their status. 

How to Find an Enrolled Agent Near Me

If you're looking for an enrolled agent near me, you can simply contact the local agents who appear in a web search. Alternatively, you can ask other local taxpayers or business owners if they have worked with an enrolled agent in your area. The NAEA also offers a database of enrolled agents. 

One of the most effective options is to search for an enrolled agent near me on TaxCure. At TaxCure, we have a directory of enrolled agents and other tax professionals from around the country. You can easily search for an enrolled agent who has experience with your tax concern in your area. You can also read more about the enrolled agent and look at reviews. TaxCure allows taxpayers to find the tax professionals that have the most experience with resolving their particular tax problems.

Don't wait. Get help with your tax concerns now. Contact an enrolled agent near you today.

Enrolled Agent Search

At TaxCure, we have created a unique search to find enrolled agents that help with tax problems. Not only can you search for enrolled agents, but you can search for CPAs and tax attorneys as well. Since tax attorneys and CPAs overlap with services that enrolled agents perform, you can be sure that you can find the best professional to help in your area. You can start your search to find a local enrolled agent, or a tax resolution professional using the "find a local tax pro" button located near the top of the page. You can then filter by tax professional type or just view all the professionals that can help with your unique tax problem.

Enrolled Agents by State

• Arizona
• California
• Florida
• Georgia
• Illinois
• Indiana
• Michigan
• Mississippi
• Missouri
• Nevada
• New York
• Oklahoma
• Pennsylvania
• South Carolina
• Texas
• Virginia
• Washington

Guide to IRS Information Document Request (IDR) and Form 4564

The IRS has broad statutory authority to examine a taxpayer’s records during an audit. One primary method for the IRS to obtain this information is through Information Document Requests, or IDRs for short.

If you receive an IDR, you should answer the request within the prescribed timeline but also be careful in framing your responses. This is because the information gathered through IDRs can form a basis for a notice of proposed adjustment, as described further below.

To that end, this article will first provide an overview of what an IDR is. We will also discuss how to respond to an IDR, the potential consequences for failing to respond to an IDR, and who can help you respond to such requests.

What is an IDR Request?

The primary tool for the IRS to obtain information from a taxpayer under audit is through an IDR. The IRS will typically issue such information requests on Form 4564.

In general, the Service’s power to obtain taxpayer records is quite expensive, encompassing everything from specific questions on the taxpayer, financial records, emails to information held by relevant third parties. 

That said, the IRS faces certain restrictions on what information it can request. 

Revenue agents use IDRs to understand taxpayer positions better and develop factual record. More importantly, based on its findings from the IDRs, the IRS may issue a Form 5701, Notice of Proposed Adjustment, and Form 886-A, Explanation of Items (collectively, a so-called “NOPA”). The NOPA will outline tax return adjustments (e.g., changes to income, deductions, and/or other tax items) for the taxable year under audit and an explanation for why the adjustments were made.

How to Respond to an IDR

Since the IRS has most likely done a fair amount of preparation work before issuing an IDR, you should be honest and candid in your responses and provide answers within the prescribed time frame. You need to maintain a positive working relationship with the IRS audit team to prevent an examination from escalating into something more.

At the same time, you should also get a sense of the focus and direction of the audit. Because the findings from an IDR can form the basis for a NOPA, it would be advisable for you to draft your responses carefully and incorporate any potential defenses to the extent applicable.

Additionally, the IRS faces certain limitations on what type of information they can request in an IDR. You and your tax attorney/tax professional should vet whether the requests are protected by attorney-client privilege and/or they are not relevant to the scope of the examination.

What Happens if You Don’t Respond to an IDR?

When the IRS issues, an IDR, Form 4564 should have a date by which you need to respond. If you fail to respond to an IDR, the IRS has the statutory power to issue a summons to compel your testimony or the production of documents requested in the IDR. If you do not voluntarily comply with the summons, the Service can file a lawsuit in the applicable U.S. District Court to enforce the summons.

The Service’s summons authority is not unlimited as with other IRS powers. Generally, revenue agents need to abide by the following principles outlined by the U.S. Supreme Court in United States v. Powell, which have also been incorporated in the Service’s Internal Revenue Manuals:

• The investigation must have a legitimate purpose;
• The inquiry may be relevant to the purpose;
• The information sought is not already within the Service's possession; and
• All administrative steps required by the Code have been followed.

Still, in light of the Service’s summon’s authority, you should make every effort to respond to an IDR (unless you believe the information requested is protected by the attorney-client privilege or not relevant to the scope of the examination). If you anticipate that you will not be able to respond by the due date in Form 4564, you should request an extension or otherwise work with the revenue agents assigned to your case on a mutually agreeable due date.

Who Can Help with this Type of Request?

If you receive an IDR from the Service, you should work with a tax attorney or a tax practitioner well versed in IRS examinations and procedures to help you respond to Form 4564.

Your tax professional can help you with an IDR in a few important respects. First, IRS audits can be a very complex process. Your tax professional can explain and help guide you through an examination, including what to expect beyond the IDR requests.

Perhaps more importantly, your tax advisor can help you get a sense of the focus and direction of the audit and appropriately frame your responses within this context, including any applicable defenses. As already mentioned above, revenue agents can use the information from IDRs as a basis for the NOPA. Your tax advisor can help you respond strategically and raise objections to any requests protected by attorney-client privilege and/or not relevant to the scope of the examination.

The Takeaway

As described above, an IDR is an essential tool for the IRS during an audit. Revenue agents primarily use IDRs to develop an audited taxpayer’s factual record and, if applicable, to build a case for issuing a NOPA. Additionally, while a taxpayer is not required to respond to an IDR initially, the Service has the authority to issue a summons to force you to comply with its request potentially.

Given these circumstances, you should work closely with a tax attorney or practitioner experienced in IRS audit matters to help you respond to an IDR within the prescribed time frame. A tax attorney or practitioner can demystify the examination process for you and help you develop strategic responses to the IDR. At TaxCure, you can find local tax professionals that can help with IDR requests and tax audits. You can start your search for a tax audit professional here.

FBAR Reporting Requirements: Everything You Need to Know for FBAR Compliance

If you're confused about FBAR reporting requirements, you are not alone. Many people are unaware of these rules, and in recent years, the IRS has started sending letters and assessing penalties to get taxpayers back into compliance. 

Before this compliance push, only around 20% of taxpayers were compliant with FBAR requirements. Now, the penalties are too high to risk non-compliance. Here's an overview of the requirements. 

Do I Need to File FBAR?

Whether you live in the United States or any other country, you need to file an FBAR if you're a U.S. tax resident with foreign bank accounts with a value above the reporting threshold. What does this mean? Let's break down these concepts.

A U.S. tax resident includes the following:

• All U.S. citizens, regardless of where they live.
• Resident aliens — This refers to foreign citizens who are residents of the United States. For instance, if you're a citizen of another country but live in the United States and have a green card, you're a resident alien.
• Domestic trusts, domestic estates, and other domestic entities. 

If you fall into one of the above categories, you should file an FBAR if you have foreign bank accounts with a total value of over $10,000 at any point during the tax year. For instance, if you have one bank account with $4,000 and another with $7,000, you're over the threshold, and you need to file. 

Types of Foreign Accounts Affected by FBAR

 For the most part, the FBAR reporting requirements apply to any foreign bank accounts you have. This includes the following:

• Foreign stock or securities in an account at a foreign institution.
• Accounts at foreign branches of U.S. banks.
• Foreign mutual funds. 
• Life insurance or annuity contracts with cash value that a foreign financial institution issued.

A few foreign accounts don't trigger an FBAR reporting requirement. You don't have to include the following on your FBAR form:

• U.S. military banking facility accounts.
• Foreign accounts owned by your retirement accounts, such as IRAs.
• Foreign accounts owned by retirement accounts that you're a beneficiary of.
• Foreign accounts that are part of a trust that you're a beneficiary of — in this case, the trust should file the FBAR, not you.
• Correspondent accounts — Also called vostro or nostro accounts, banks typically use these accounts to store money at other financial institutions. 
• Accounts owned by government entities or international financial institutions. 

If you have a lot of foreign assets and you're not sure whether or not they trigger an FBAR reporting requirement, reach out to a tax professional. They can help ensure that you're in compliance. 

Account Balances and the FBAR Reporting Requirement

Now that you know which types of foreign accounts trigger an FBAR reporting requirement, you may be wondering how much money you need to have. FBAR applies to the cumulative balance in your foreign accounts. You have to file an FBAR if the total balance was over $10,000 at any point in the year. 

In a lot of cases, your account balances will be obviously over or under this threshold, and you can easily identify if you have a reporting requirement. But if your account balances are close to the threshold, you'll have to crunch some numbers to see if you need to file. 

How to Determine the Value of Foreign Bank Accounts

To determine how much your foreign bank accounts are worth in U.S. dollars, use the Treasury Reporting Rates of Exchange. The U.S. government generates this exchange rate. The Treasury website has exchange rates for nearly every foreign currency, and you can look at the rate for every single day over the last 20 years. 

Don't just consider the balance in your accounts on the last day of the year because your account balances are likely to fluctuate during the year. If you have a single foreign bank account, figure out the date it had the highest balance. Then, convert the balance to U.S. dollars based on the exchange rate applicable for the last tax of the year. 

If you have multiple accounts, you'll need to add them together. To ensure you were never over the reporting threshold, look at each account's highest balance day and then add in the balances of your other accounts from that same day. Even if your accounts were only over the reporting threshold for a single day, you're still supposed to file. 

How to Take Care of FBAR Filing Requirements

If you're required to report your foreign bank accounts, you will need to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). Do not submit this form with your tax return. You must e-file through the BSA E-Filing System. 

You can take care of the process entirely online, or you can download a pdf FBAR form, fill it out, and upload it. You can paper file only if you request permission by calling the Financial Crimes Enforcement Network. 

You can authorize your accountant to file for you. To have anyone submit the FBAR on your behalf, you need to fill out FinCEN 114a (Record of Authorization to Electronically File FBARs). Don't send this form to FinCEN. Keep it for your records. 

Information Required on the FBAR Return

When filling out your FBAR return, you need the following details. If you're filing FBAR online, you should gather this information before getting started.

• Your name, date of birth, and address.
• Social security number (SSN) or taxpayer identification number (TIN).
• Foreign identification details if you don't have a TIN.
• Total number of foreign bank accounts. 
• Name and address of the financial institutions.
• Account number.
• The maximum value of your accounts during the calendar year, based on your account balances and the Treasury Exchange Rate.
• The number of owners for jointly held accounts.
• Names, TINs, and addresses of joint account holders.
• Whether you have signature authority or financial interest.
• Account owner details for accounts you only have signatory control over. 
• An explanation of why you have signatory control — for example, your position if your employer owns the account.

If you're going to have an accountant or tax preparer file your FBAR, just provide them with these details along with Form 114a. They will let you know if you need more information.

FBAR Reporting Requirements for Spouses

Even if you file your tax return as married filing jointly, you still may need to file your FBAR reports separately. If you individually own an account that your spouse does not own, you need to file separate FBAR forms. 

If you own all of your foreign accounts together, you can file a single FinCEN 114 as long as you meet the following conditions:

• All of the non-filing spouse's foreign accounts are jointly owned with the filing spouse.
• All of the above accounts are noted on the filing spouse's FBAR.
• The filing spouse files the FBAR on time.
• The non-filing spouse has completed Form 114a (Record of Authorization to Electronically File FBARs)

If you don't file a 114a, then you both need to file a separate FBAR, even if all of your accounts are jointly owned. 

When Do You Need to File FBAR?

The FBAR is due April 15th of the year following the year your foreign bank accounts were over the threshold. For instance, if you had over $10,000 in foreign bank accounts in 2021, you should file the FBAR by April 15, 2022. If the 15th is on a holiday or weekend, the due date moves to the next business day. 

Here's the good news — the government gives you an automatic six-month extension on the FBAR. It's probably easiest to take care of FBAR by April 15th when you deal with most other tax reporting obligations. But if needed, you can take until October 15th to file FBAR. 

What If You Missed Your FBAR Reporting Requirement?

If you didn't realize that you were supposed to file, there are many ways to take care of your delinquent FBAR reporting obligations. As long as you meet all of your other filing obligations, you may be able to just go online, file late, and not worry about a penalty. 

Suppose you forgot to file your income tax return or didn't report some of the earnings from your foreign bank accounts. In that case, you may need to use one of the IRS's special programs such as the Voluntary Disclosure Program or the Streamlined Reporting Procedures. 

A tax professional can help you select the right program and help you get back into FBAR compliance. 

Other Reporting Requirements for Foreign Bank Accounts

The FBAR is not the only reporting requirement you may face if you have foreign assets. The Foreign Account Tax Compliance Act (FACTA) requires you to file Form 8938 (Statement of Specified Foreign Financial Assets) with your tax return if you have more than $50,000 in foreign bank accounts. 

Get Help Meeting Your FBAR Reporting Requirements

Still wondering if you have to file an FBAR? Want help understanding and meeting your FBAR requirements? Then, contact a tax professional today. Using TaxCure, you can search for CPAs, enrolled agents, and tax lawyers in your area who have experience helping clients meet their FBAR requirements.

Delinquent FBAR: How to Resolve Unfiled Foreign Bank Account Reports (FBAR)

There are three different ways to take care of delinquent FBAR forms, and the right option depends on your situation. 

1. File FBAR as usual and note why you're filing late.
2. Use the IRS's streamlined procedures to file delinquent FBAR.
3. File the FBAR through the IRS Criminal Investigation Voluntary Disclosure Practice.

To minimize penalties and other repercussions as much as possible, you need to choose the optimal option. Keep reading to determine which delinquent FBAR filing strategy is right for your situation. 

FBAR Delinquent Submission Procedures

If you simply overlooked your FBAR reporting requirement but filed your tax returns correctly, you can just file FBAR online. When filing, note the reason why you didn't file on time. If you cannot file online, contact the Financial Crimes Enforcement Network at 1-800-949-2732 or 1-703-905-3975.

As long as you reported any income from these foreign accounts correctly on your income tax return, that's all you need to do. There aren't any penalties for taxpayers who qualify to submit their delinquent FBAR in this manner. 

You can only use this option if you're proactive about taking care of your delinquent FBAR. If the IRS has already contacted you about the unfiled FBAR, you cannot catch up using this option. You cannot use this option if you're currently under criminal or civil investigation from the IRS, even if the investigation isn't focused on your foreign accounts. 

FBAR Late Filing Explanation

If you're filing delinquent FBAR reports using BSA online, you need to explain why you're filing late. On the first page of the FBAR, you should see a drop-down box with a list of the most common reasons for late filing. You can choose from one of the following:

1. Forgot to file FBAR.
2. Didn't know that you had to file FBAR.
3. Didn't realize your foreign account balances were over the reporting threshold.
4. Didn't know that your account was considered a foreign account.
5. Didn't have your account statement in time to file on time.
6. Lost your account statement and just got the replacement.
7. Missing account information.
8. Couldn't get your spouse's signature on time.
9. Unable to file the FBAR online when it was due.

If you don't see your reason for filing a late FBAR on the list, choose option "Z: other" and then write in your FBAR late filing explanation. You only have 750 characters, so be precise. 750 characters is only about 135 words.

You should also choose "other" if you file late because an earlier FinCEN filing waiver applied to you. In this case, just note the waiver by number in the text box. 

FBAR Late Filing Reasonable Cause

The IRS does not audit every late FBAR submission, but if the IRS audits your FBAR and doesn't agree with your reason for filing late, the agency may require you to use a different submission process. Or the IRS may assess penalties on your account. 

So, what are the reasonable causes for filing an FBAR late? They include situations where you didn't know you needed to file, weren't aware that your account was classified as a foreign account, or didn't have the right details from your foreign bank. 

Some of these reasons are becoming less believable over time. For instance, when people paper filed or used early versions of tax prep software, they could easily file their tax returns without being aware of the FBAR requirement. Now, most tax prep software asks if you have assets in foreign bank accounts. This type of technology obliterates lack of knowledge as a reasonable cause for not filing. 

Streamlined Delinquent FBAR Reporting

The IRS's streamlined FBAR filing process is for people who overlooked their FBAR requirement and missed another filing obligation. For instance, if you didn't file your income tax return or failed to report income from your foreign accounts, you may qualify to use this program. 

If you live in the United States, you should use the Streamlined Domestic Offshore Procedures (SDOP). Use the Streamlined Foreign Offshore Procedures (SFOP) if you live in another country. Here's an overview of the steps.

How to File FBAR Under the Streamlined Procedures

The exact process can vary based on your situation. But typically, you need to work through these steps.

1. File or amend your returns.

Typically, you need to file or amend the last three years of tax returns — depending on your situation, and you may need to amend returns that go further back. For instance, if you were compliant the last three years but forgot about FBAR four, five, and six years ago, you may need to amend your annual tax returns from those years. 

2. Add additional forms related to foreign income.

You may need to file some of the following forms when amending your tax returns. The forms you need to file vary based on the type of foreign accounts and income you have.

• Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
• Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner)
• Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
• Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business )
• Form 8938 (Statement of Specified Foreign Financial Assets)
• Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation)
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund )

3. Note that you're using the streamlined procedures.

When you send in your amended returns, write "Streamlined Domestic Offshore" or "Streamlined Foreign Offshore" on the top of your amended returns. Writing this ensures they get processed correctly.

4. Pay any tax owed.

Your new tax returns will lead to a higher tax liability. This is due to the unreported foreign income. You may also face failure-to-file penalties related to the unreported income. You must pay the delinquent tax liability to participate in the streamlined program. 

5. File your delinquent FBAR returns.

You also need to file the last six years of FBAR returns using FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). You must file this form online on the BSA -Efiling System. 

Normally, you only have to file Form 114 if the aggregate balance on your foreign accounts exceeds $10,000 during the tax year. However, if you're using the streamlined process, you need to file all six years regardless of the balances in your account for each year. 

6. Fill Out Form 114a If Needed

If someone else (including your spouse) is filing the FBAR on your behalf, you need to fill out Form 114a (Record of Authorization to Electronically File FBARs ).

7. File Form 14654 or 14653

Finally, you tie everything together with Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures) or Form 14653 (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures). You can download these forms from the IRS's website.

Penalties When You Use the Streamlined Procedures

Taxpayers who use the FBAR streamlined procedures must pay a penalty of 5% of the value of their unreported accounts. Some accounts, such as certain Canadian retirement accounts, may be exempt from this fee. 

To ensure you calculate the correct fee and amend your tax returns correctly, you may want to get help from a tax professional. 

IRS Criminal Investigation Voluntary Disclosure Practice

If you willfully failed to file an FBAR, you may need to use the IRS Criminal Investigation Voluntary Disclosure Practice. This program allows people who have committed tax-related crimes to come forward voluntarily. Using this program doesn't eliminate your criminal exposure, but the IRS looks more favorably on taxpayers who came forward on their own when reviewing cases. 

To apply for this program, submit Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application). Once the IRS gives you preclearance confirmation, fill out Part II of the form within 45 days. If you're approved to participate, the IRS Criminal Investigation will send you a Preliminary Acceptance Letter.

The IRS will assign an examiner to your case, and you will work directly with them to resolve the issue. You may want to hire a tax lawyer to help with this process. 

What to Do After You File Delinquent FBAR

After you file the delinquent FBAR, keep a copy of your paperwork for your records. If you file online as usual, you may not even get a response. The IRS treats these returns the same as any other returns it gets. 

When you use the streamlined procedures, you will get a response letting you know that the case has been closed. The Voluntary Disclosure Practice includes a lot of back and forth with the IRS, and you will know when your case is resolved. 

Get Help With Delinquent FBAR

You don't have to navigate this process on your own. There are tax attorneys and other tax professionals with lots of experience with delinquent FBAR reports. With TaxCure, you can search for a pro based in your area — contact a tax pro for help today.

FBAR Penalties for Late Filing, Failure to File & More

The IRS Can Impose Severe Penalties on Taxpayers Who Fail to File FBAR

The penalties for not filing FinCEN 114 (Report of Foreign Bank and Financial Accounts FBAR) are some of the IRS's highest civil penalties. In extreme cases, these penalties can be millions of dollars. 

Don't be scared — you don't automatically face FBAR penalties if you forget to file. In a lot of cases, you can catch up on your filing requirement voluntarily without incurring penalties. 

However, the penalties can be extreme if the IRS decides that you have been willfully incompliant with this reporting obligation. To protect yourself, you need to deal with unfiled FBAR forms carefully. Here's an overview of FBAR penalties.

How Much Are FBAR Penalties?

As of 2022, the maximum penalty for a non-willful FBAR violation is $12,921. Willful FBAR violations can incur penalties of the higher of $129,210 or 50% of the balance in your foreign account. 

For example, say you have $50,000 in your foreign bank accounts, and the IRS determines that you have committed a willful FBAR violation. Your penalty can be $129,210. If you have $3 million in your foreign accounts, the FBAR willful violation penalty can be up to $1.5 million. 

FBAR Penalties for Businesses Violations of the Bank Secrecy Act

The IRS can also assess negligent violation penalties to financial institutions and non-financial trades or businesses that do not follow FBAR reporting and recordkeeping requirements. This is a civil penalty of $1,118 that applies to all violations of the Bank Secrecy Act. 

Businesses and financial institutions with a pattern of negligence may face civil penalties of up to $86,976. These FBAR penalties do not apply to individuals.

Legal Codes for FBAR Civil Penalties

As indicated above, there are four civil penalties related to FBAR violations. Here are the penalties and the U.S. Code that outlines the specific laws surrounding each of these penalties. 

• Negligent activity 31 USC 5321(a)(6)(A).
• Pattern of negligent activity 31 USC 5321(a)(6)(B).
• Penalty for non-willful violation 31 USC 5321(a)(5)(A) and (B).
• Penalty for willful violations 31 USC 5321(a)(5)(C). 

Willful Vs. Non-Willful FBAR Penalties

All FBAR penalties can be significant, but willful penalties can be ten times more than non-willful ones. Obviously, you want to avoid willful penalties whenever possible.

What's the difference between willful and non-willful? In short, non-willful penalties typically apply when you didn't know about the filing requirements. Willful penalties apply when you knowingly chose not to file your FBAR. 

But this isn't the only interpretation of the concept of willfulness. Willfulness can also include reckless disregard and willful blindness. 

FBAR Willful Reckless Disregard

Here is an example of willful recklessness with the FBAR. Say that you complete your return, and you tick a box on Schedule B saying that you do not have any foreign assets, and another box saying that you don't have to file an FBAR. 

When the IRS contacts you about the unfiled FBAR, you claim that you didn't know about the reporting requirement and didn't notice which boxes you ticked on your Schedule B. This may be considered reckless behavior. When you sign your tax return under penalty of perjury, you are declaring that the information submitted is correct. 

Ticking boxes without reading questions or reporting incorrect information is reckless. By extension, the IRS can assess willful penalties in these situations. 

FBAR Willful Blindness

Willful blindness occurs in cases where you didn't know about the FBAR filing requirement, and you went out of your way to maintain your ignorance. In other words, you should have known about the FBAR reporting requirement, but you didn't. 

Again, you don't necessarily need intent for the IRS to assess a willful FBAR penalty. The government can assess your willfulness based on recklessness and blindness. 

Civil Willfullness Vs. Criminal Willfulness

The above penalties are all civil penalties. If the IRS assesses a civil penalty, you just pay the penalty. You don't worry about criminal charges or jail time.

However, in rare cases, the government can assess willful criminal penalties on taxpayers who don't file FBAR. Generally, taxpayers only face criminal FBAR penalties when they are also being accused of other financial crimes such as money laundering and tax evasion. 

Criminal FBAR Penalties

Under U.S. Code 31 U.S.C. §5322, you can face criminal FBAR penalties of up to $500,000 and a prison term of up to 10 years. These penalties can apply if you willfully failed to file FBAR or filed a false FBAR. Again, however, criminal penalties generally only apply in cases where other crimes are involved. 

What Is the Maximum FBAR Penalty?

There is no cap on FBAR penalties, and this rule has been held up through several Federal circuit court rulings. To get a sense of how high FBAR penalties can be, look at the case of United States v. Kahn. 

In 2009, Mr. Kahn willfully failed to report the funds in his foreign bank accounts. He had just over $8.5 million in two Swiss bank accounts. Because it was a willful failure to file the FBAR, the government assessed a penalty of $4.26 million which was equal to 50% of his aggregate account balances.

The lawyers for his estate argued that a 1987 Treasury Department Regulation limited the penalty for willful FBAR reporting violations to $100,000. The government claimed that a 2004 statuary amendment superseded the regulation. The courts sided with the government in this case, just as they had in several similar Federal District Court cases. 

Are FBAR Penalties Per Form or Per Account

There is some discrepancy about whether non-willful FBAR penalties apply per form or per account. In early 2021, the U.S. Court of Appeals for the Ninth Circuit ruled that the non-willful FBAR penalties should be applied per FBAR form, not per account in the case of the United States v. Boyd. 

The defendant had 13 unreported accounts, and she came forward voluntarily. Initially, the IRS attempted to assess a non-willful FBAR violation penalty on each of the 13 accounts. Her lawyers, however, claimed that she should only have to pay a single non-willful penalty for her single unfiled FBAR. In this case, the courts agreed. 

But just a few months later, in November 2021, the U.S. Court of Appeals for the Fifth Circuit ruled the opposite way in the United States v. Bittner. In this case, the courts determined that the non-willful penalty should be applied per account rather than per form. 

If you have ten foreign accounts and you forget to file an FBAR, the maximum non-willful penalty could be $129,210 if calculated per account. If the penalty applies per form, the penalty would only be $12,921. 

Neither penalty is ideal, but the smaller one is preferable. Because so much is at stake with FBAR penalties, you should work with a tax professional with experience with this specific tax concern. 

Why Are FBAR Penalties So Severe?

Arguably, FBAR penalties have little to nothing to do with tax. Even if you report and pay tax on the income from your foreign accounts, you may still face a penalty if you don't file your FBAR. 

The government uses FBAR penalties to scare taxpayers into compliance and reduce the risk of money laundering and other financial crimes. That is why the Financial Crimes Enforcement Network handles these returns instead of directly by the IRS. 

How Does the IRS Calculate FBAR Penalties?

Once the IRS realizes that you have unfiled FBAR, the agency will assign an examiner to your case. The examiner will attempt to get more details about your foreign accounts and learn why you didn't file the FBAR. 

You need to navigate this process carefully. The FBAR penalties quoted above are maximums — the examiner can also decide to assess no penalties or smaller penalties on your account. 

The examiner is also the person who makes the initial determination of whether your behavior was willful or non-willful. One examiner may consider the situation aggravated negligence but still non-willful. Another examiner may claim that the same set of facts constitutes reckless disregard and thus warrants a non-willful FBAR penalty. 

Luckily, this decision isn't final. The FBAR Counsel must approve all non-willful FBAR penalties. And you have the right to appeal the assessment and even take the issue to litigation if needed. 

How to Reduce Risk of FBAR Penalties?

The best way to avoid FBAR penalties is to file your FinCEN 114 accurately and on time. If you realize that you missed filing an FBAR, be proactive. It is always better to contact the IRS before the agency contacts you. 

If the IRS contacts you about unfiled FBAR, reply promptly and provide the requested information. Even in this case, you may still be able to avoid penalties if the IRS believes that you had a reasonable cause for missing the filing requirement. 

The FBAR rules can be complicated, and penalties for lack of compliance can be extremely severe. You may want to contact a tax professional to help with this issue. 

History of FBAR Penalties

In 1970, Congress passed the Bank Secrecy Act (BSA), which contained a requirement for individuals to report their foreign bank accounts. In 1972, the Secretary of the Treasury created the FBAR form so that individuals could report their foreign bank accounts when they filed their income tax returns. 

These rules were designed to reduce the risk of money laundering and other financial crimes. As these issues became a more significant problem, Congress passed the Money Laundering Control Act of 1986, and this act included the first penalty for willful failure to file FBAR. 

At that point, the FBAR penalty was the greater of $25,000 or the amount in the bank accounts. But the penalty was capped at $100,000. 

After 9/11, Congress decided to increase the willful FBAR penalty again. In 2004, the government passed a statute that increased the penalty for willful failure to file FBAR to the greater of $100,000 or 50% of the aggregate balances in the foreign bank accounts. The $100,000 is indexed for inflation, so it typically increases every year. 

FBAR Penalties Waivers

There are situations where you can file late FBAR without incurring penalties. In other cases, an examiner may look at your case's circumstances and decide to issue you a warning without any penalties. If you've been assessed FBAR penalties, you can apply to have them waived, appeal the case, or pursue the issue through litigation. 

Get Help With FBAR Penalties

If you're dealing with FBAR penalties, contact a tax professional today. Using the TaxCure directory, you can search for tax lawyers, CPAs, and enrolled agents who have experience helping taxpayers with this specific issue. 

What Happens If You Forget to File FBAR?

Worst case scenario — you can be subject to significant penalties and even criminal charges for forgetting to file FBAR. But in many cases, you can file your late FBAR forms and get back into compliance without a lot of issues. The situation depends on why you forgot to file FBAR and whether or not you missed other tax reporting obligations.

Here's a look at what to expect if you forgot to file FBAR. 

How Does the IRS Know That You Forgot to File FBAR?

In the past, FBAR compliance was extremely low. Only about 20% or fewer of the people who were supposed to file FBAR were doing so. Many of these people were never caught, and because of that, the IRS labeled not filing an FBAR as one of its dirty dozen tax scams. 

The government passed The Foreign Account Tax Compliance Act (FACTA) to increase compliance with foreign bank account reporting requirements. FACTA requires all foreign banks with U.S. persons as clients to report those accounts to the IRS. Once your bank sends a report to the IRS, the agency will know that you didn't file your FBAR. 

In some cases, the IRS also finds people with unfiled FBAR due to foreign income they have reported on their tax returns. Or, the agency may unearth overlooked FBAR forms when auditing a taxpayer. 

How the IRS Contacts People About Unfiled FBAR

Once the IRS realizes that you have forgotten to file your FBAR, the agency will send you Letter 4265 (FBAR Appointment Letter). Then, the IRS will request information about your foreign accounts and have you schedule a time to talk with an examiner on the phone. 

A lot hinges on your meeting with the examiner. During this conversation, you get to explain why you forgot to file the FBAR. 

What to Expect After Your FBAR Examination

If the examiner thinks you have reasonable cause for not filing, they may just let you take care of the delinquent FBARs without assessing a penalty. In that case, the IRS will send you Letter 3800 (Warning for Report of Foreign Bank and Financial Accounts (FBAR) Apparent Violations). 

You will only get this letter if the IRS is not assessing any FBAR penalties against you. In some cases, you may incur penalties for some years but not for others.

If the examiner decides to assess non-willful penalties on your account, the IRS may send you Letter 3708 (Notice and Demand for Payment of FBAR Penalty). You may also receive Notice 1330 (Information on Making FBAR Penalty Payment by Check). Note that the IRS sends several different letters and notices. These may not be the exact letters that you receive. 

As of 2022, the maximum penalty for non-willful violation is $12,921. This amount is indexed to inflation and increases every year, but remember, this is the maximum amount. The examiner can assess lower penalties at their discretion. 

Willful penalties are a maximum of $129,210 or 50% of the balances in your foreign accounts. If the examiner decides to assess willful penalties, the FBAR Counsel will review your case. You have the right to appeal, but you should brace yourself for a battle. Cases involving willful FBAR penalties often go through several appeals in the court system. 

What Should You Do If You Forgot to File FBAR & are Past Due?

The best thing to do if you forgot to file FBAR is to take care of the issue before the IRS contacts you. Once the IRS contacts you, your options become more limited. You also increase your risk of facing penalties. 

The exact steps you should take vary. If you forgot to file FBAR based on your situation, here is what you should do.

You're Less Than Six Months Past Due on FBAR

The FBAR is due April 15th, the same day as your federal income tax return. But the IRS gives taxpayers an automatic six-month extension for the FBAR. If you forgot to file the FBAR for last year, there might still be time to file without being late. 

You Forgot to File FBAR Due to a Natural Disaster

You may also have extra time if you've been affected by a natural disaster. The Financial Crimes Enforcement Network (FinCen) posts information about FBAR deadline extensions due to natural disasters on its website. 

You Filed Your Taxes Correctly But Forgot FBAR

The FBAR requirement is just a reporting requirement. When you file an FBAR, you just note the value of your foreign bank accounts. You don't share any information about earnings on these accounts. 

If your foreign bank accounts earned any income such as interest income, you should have reported that on your income tax return. If you correctly reported everything on your income tax return and simply forgot about your FBAR, you can usually take care of the issue by filing the FBAR online. 

Simply file the FBAR online as usual, but note the reason that you're filing late. This is the easiest way to take care of an overlooked FBAR requirement.

You cannot use this option if the IRS contacted you about the missing FBAR or if you're under criminal investigation. Generally, if you qualify to take this route, the government will not assess penalties.

You Also Forgot to Report Income From Your Foreign Bank Accounts

If you forgot to file the FBAR and also forgot to report income from your foreign accounts on your tax return, you might be able to take care of the FBAR through the streamlined filing option.
The IRS refers to these programs as Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. 

To use the streamlined program, you must meet the following requirements:

• You have a Social Security Number or a Tax Identification Number. 
• Your failure to file the FBAR was not willful. It may have been due to negligence, a mistake, or any good faith misunderstanding of the rules. 
• You are not under an IRS civil examination. Even if the IRS is investigating you for an unrelated issue to foreign accounts, you cannot use the streamlined program. 
• You are not under criminal investigation from the IRS. 

The rules for both streamlined options are about the same. You need to amend the last three years of tax returns to report income from your foreign accounts, and you also need to pay any additional tax due. Then, you need to file the FBAR for each of the years in question. 

The only difference is that people living in the United States should file Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures). People who live abroad should file Form 14653 (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures). 

These forms certify that you've completed the streamlined delinquent FBAR process steps and that your failure to file on time was not willful. You can find them on the forms and publications page of the IRS's website. 

You Willfully Forgot to File the FBAR

Typically, if someone acts willfully, they didn't forget to file their FBAR. They deliberately (willfully) choose to ignore the reporting requirement. However, willful doesn't just apply to people who purposefully and knowingly ignored the reporting requirement. 

Willfulness can also include cases where you purposefully avoided learning about a tax requirement. This is called willful blindness. Reckless behavior can also be considered willfulness. For instance, if you sign your return and answer the question on Schedule B about the foreign bank account reporting requirement but still don't file an FBAR, you may have acted recklessly. 

Suppose you believe you committed a crime or have criminal exposure due to willful failure to file the FBAR. In that case, you may need to file your FBAR through the IRS Criminal Investigation Voluntary Disclosure Practice. 

Because the penalties can be severe in these situations, you should work with a tax professional. They can advise you on the best way to get back into compliance. 

This program does not necessarily prevent you from facing criminal prosecution. But when you make a voluntary disclosure, the IRS is often less likely to recommend criminal charges. 

Get Help If You Forgot to File FBAR

If you're less than six months late or meet the criteria to file delinquent FBAR without penalties, just file online. You can handle the FBAR independently or contact a tax pro if desired.

If you believe that you need to use the streamlined procedures or are worried about criminal charges, you can also take care of the process on your own. But to be on the safe side, you should work with a tax professional. 

They can help you meet all of the requirements and choose the best option for your situation. To learn more, contact a local tax professional today. Using TaxCure, you can search for a CPA, enrolled agent, or tax lawyer experienced with FBAR and based in your area.