The carried interest debate
Case Study

Baker Tilly resolves a $2 million FBAR penalty through IRS Fast Track Mediation

The carried interest debate
Case Study

Baker Tilly resolves a $2 million FBAR penalty through IRS Fast Track Mediation

Our clients’ need

The clients, an elderly mother and her two sons, both physicians, came to Baker Tilly in the midst of an Internal Revenue Service (IRS) audit related to several undisclosed foreign bank accounts and needed help dealing with the IRS. The clients were all U.S. citizens of Iranian-Jewish descent that had barely escaped Iran and the extreme religious persecution in 1984 and eventually settled in the U.S. Prior to coming to the U.S., the family patriarch, a veterinarian in Iran, had set up several bank accounts in the late 1970s in Israel and Belgium in anticipation of the eventual need to leave their homeland. The accounts remained unknown to the two sons and their mother, until 2004, when the patriarch, suffering from terminal cancer, disclosed the existence of the accounts. The accounts, whose balances ultimately had grown to a combined $4 million remained untouched from 2004 until 2009 when the mother suffered a massive stroke and the funds were needed for her care. Over the course of the next three years, the family closed the accounts and brought the funds, without any concealment, to the U.S., into bank accounts in their own names. In 2019, the IRS came knocking and threatened to assess a $2 million willful Foreign Bank Account Report (FBAR) penalty. The clients, with the help of their attorney, asked the Baker Tilly tax advocacy and controversy services team (TACS) for their assistance in dealing with the IRS. After a careful and thoughtful analysis of the facts and circumstances surrounding these accounts, it was Baker Tilly’s assessment that this was not a willful failure to file FBARs and conceal the accounts and income from the IRS. Baker Tilly needed to advocate zealously for these clients.

Baker Tilly’s solution

Baker Tilly immediately gathered the facts and evidence, and carefully analyzed the bank and other records and presented their arguments and findings to the IRS audit team for a lesser penalty amount. Not convinced, the IRS examiners disagreed with our interpretations of the evidence and continued to push for the 50% willful penalty. Now, at an impasse, Baker Tilly and the clients’ attorney suggested presenting this matter to the IRS Independent Office of Appeals (Appeals) under the IRS Fast Track Mediation program (Fast Track) and the IRS agreed. Fast Track, which is non-binding mediation, allows both sides to present their case to Appeals and other subject matter experts with the hope of coming to a fair and equitable resolution. Moreover, agreeing to Fast Track does not relinquish any procedural rights to a formal IRS Appeals conference should an agreement not be reached.

Results

By moving to the Fast Track program, the Baker Tilly TACS team and the IRS audit team were able to present their respective cases to an independent IRS Appeals officer and subject matter expert. These presentations were followed by negotiations based on the opinions and guidance of the Appeals employees. Ultimately, after nearly eight hours, an agreement was struck for a FBAR penalty in the amount of $201,000 or 10% of penalty that the IRS was originally seeking. A victory for Baker Tilly and an even bigger victory for the clients.

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