Vernoia, Enterline + Brewer, CPA LLC

An individual taxpayer has learned the hard way that the IRS does not look kindly upon the failure to read all the items on a tax return and its instructions. Even though he voluntarily chose to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP) by reporting foreign assets, the IRS nevertheless held him liable for the maximum civil penalty for his failure to file the Report of Foreign Bank and Financial Accounts (FBAR).

The IRS and district court (during the subsequent litigation) held the taxpayer liable for this penalty for each of the four year at issue. The district court found that the taxpayer had ignored the instructions for Form 1040, Schedule B, when preparing his own tax returns. When he did hire a professional tax return preparer, however, he still chose not to disclose his interest in the foreign accounts. Therefore, he lacked reasonable cause for the failure.

Ultimately, the district court found that the taxpayer’s behavior suggested a willful failure. As such, the IRS was surely entitled to impose the maximum penalty for a non-willful failure.

Background

The IRS is responsible for enforcing 31 U.S.C. §5314 of the Bank Secrecy Act of 1970, which requires a person residing in the United States who has foreign accounts totaling more than the threshold amount at any time during the year to report them to the IRS by June 30 of that year on Form TD F 90-22.1 (currently known FinCEN Form 114, Report of Foreign Bank and Financial Account, or “FBAR”). A person has reasonable cause for failing to file an FBAR when the failure is committed despite an exercise of ordinary business care and prudence. The person may be excused from the penalty if he can show he had reasonable cause.

The tax years in question in this case range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. The taxpayer voluntarily participated in the IRS’s program and amended six years of tax returns to report previously unreported income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.

Court’s analysis

The district court found that the taxpayer, a U.S. resident who had kept a bank account with a branch of a Swiss bank located in the Bahamas from 1989 until 2003, did not have reasonable cause for failing to file the FBAR for 2005 through 2008. Although the individual claimed that he had asked a Bahamian law firm about the tax implications of incorporating and running a business in the Bahamas while a U.S. citizen, he did not point to any advice he received that made him believe he was free from any obligation to report the business’s account to the IRS.

Furthermore, the district court found that the taxpayer had ignored the question on Form 1040, Schedule B, asking whether he had an interest in or signature authority over a foreign financial account. The court found that this showed a lack of exercise of ordinary business care or prudence.  Had the taxpayer read this question and the instructions for the FBAR during the years in which he prepared his own tax returns, the individual would have discovered that he should have answered “yes” to the question on Form 1040, Schedule B. Furthermore, during the years when the taxpayer hired a tax return preparer, the evidence showed that he answered “no” to the question on the preparer’s tax organizer asking whether he had an interest or signature authority over a foreign financial account.

For all these years, the taxpayer admitted that he had understood that he owned more than 50-percent of the stock of a corporation that owned a foreign bank account. The court noted that the fact that the taxpayer appeared to have ignored these questions on Schedule B and the tax organizers suggested the taxpayer had actually committed a willful failure to file—a higher violation than the one at issue.

The years in question range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. After learning about the program, the taxpayer amended six years of tax returns to report income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.

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