All U.S. taxpayers who maintain foreign bank accounts, investment accounts, property, or other assets must generally report the existence of their foreign asset to the U.S. government, as well as recognize their foreign income on their U.S. income tax returns. Foreign accounts are reported on an information return known as FinCEN Form 114 Report of Foreign Bank and Financial Accounts (previously Form TD F 90-22.1) (“FBAR”). Failure to file an FBAR can result in hefty penalties, which may be subject to abatement for non-willful violations.
In a very recent case, the Court found that a taxpayer ignored his duty to report his foreign account, such that he lacked reasonable cause for abatement. Moore v. U.S., 2015 WL 1510007 (W.D. Wash. April 1, 2015). In this case, the taxpayer had owned accounts in the Bahamas and Switzerland since 1989, which had account balance between $300,000 and $550,000 during the years at issue. The taxpayer was assessed non-willful FBAR penalties totaling $40,000. The taxpayer disagreed with the assessment, and the case was eventually heard by the U.S. District Court.
Upon review, the U.S. District Court found that, while reasonable cause may provide a basis for abatement of FBAR penalties, the taxpayer here did not have reasonable cause. The Court found the taxpayer’s signature on Form 1040 to be a declaration that, under penalties of perjury, he had examined the return and schedules and the return was true, correct, and complete. However, had the taxpayer read page B-2 of the instructions, he would have discovered the requirement to check the “yes” box on the bottom of Schedule B and file FBARs. “Evidence that a taxpayer ignored relevant questions on Schedule B and in tax organizers is evidence of willful conduct. In this court’s view, it suffices as a matter of law to demonstrate a lesser FBAR violation – one made without ‘reasonable cause.’”
This recent decision follows the general trend of holding taxpayers responsible for FBAR penalties. While some taxpayers may insist they have reasonable cause for failing to file FBARs because they simply did not know about the obscure IRS requirements, abatement of FBAR penalties for reasonable cause is not likely to be available for the simple reason that the taxpayer signed their federal income tax return. Instead, taxpayers should consider available IRS programs to bring them into compliance with their tax obligations, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. With the help of a tax attorney, taxpayers can come into compliance with their federal tax obligations, minimize applicable penalties, and go to sleep each night with a clean conscience and without fear.
By: Sandra D. Merens, Esq.