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April 27, 2015

Recent Court Decision Analyzed the Proper Standard of Review for FBAR Penalty Issues

The tax attorneys at Nardone Law Group in Columbus, Ohio are committed to keeping taxpayers updated and informed about the various programs the Internal Revenue Service offers that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations. In our prior article on the Delinquent FBAR Submission Procedures, we provided an overview of the Report of Foreign Bank and Financial Accounts (FBAR), and described how eligible taxpayers can come into compliance with U.S. tax reporting requirements by filing delinquent FBARs.

Frequently, taxpayers will address their failure to file the required FBAR form as part of the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. In certain circumstances, however, taxpayers with undisclosed foreign financial interests will not need to use the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program. In such cases, the taxpayer may simply need to file the FBAR, by following the Delinquent FBAR Submission Procedures. Regardless of which reporting method taxpayers utilize to come into compliance, it is important to know that the IRS has a broad scope to assess penalties for failure to disclose foreign financial accounts. A recent district court decision highlighted the IRS’ assessment abilities and provided helpful insight into how the court examines FBAR penalty issues.

FBAR Penalty Issues in Moore v. U.S.

Recently, a district court dismissed a taxpayer’s challenges to his penalty for failing to file FBARs with respect to his foreign account. In reaching its decision, the court was required to address a number of FBAR-related issues, including the appropriate standard of review. The court ultimately determined that the IRS-imposed penalties were not excessive, since the taxpayer had no reasonable cause for his violations of the FBAR filing requirements.

The Bank Secrecy Act (BSA) gives the IRS broad authority to collect information from U.S. citizens who have foreign financial accounts. U.S. taxpayers who have a financial interest in, or signature authority over, a foreign financial account must file the FBAR if the aggregate value of the account exceeds $10,000 at any time during the calendar year. For non-willful violations of the BSA, the IRS can impose a civil penalty of up to $10,000 on a taxpayer who fails to file FBARs (31 CFR 5321(5)(b)(i)). But, “no penalty shall be imposed” if, among other requirements, the “violation was due to reasonable cause.”

In Moore v. U.S., the taxpayer maintained a foreign account for nearly two decades. At all relevant times, the account contained a balance between $300,000 and $550,000, subjecting the account to FBAR requirements. The taxpayer, however, filed no FBARs until 2009, when he became aware of, and decided to take advantage of, the IRS’s Offshore Voluntary Disclosure Program. The taxpayer amended six years of tax returns (2003 to 2008) and filed late FBARs to report the income for each of those years from his foreign account.

In October 2011, an IRS revenue agent interviewed the taxpayer and ultimately recommended that the IRS impose a $10,000 penalty for each year from 2005 to 2008. In December 2011, the IRS sent the taxpayer a letter proposing the $40,000 fine, but the letter provided little to no information about the basis for the penalty. The letter demanded that he accept the penalty or request an appeal, otherwise the penalty would be assessed and collection procedures would be instigated.

In reviewing the case, the court determined, as a matter of law, that the taxpayer’s BSA violations were non-willful­ and therefore would subject him to civil penalties. The only remaining issue was whether the taxpayer could avoid liability by establishing that he acted with “reasonable cause.” The court examined the taxpayer’s explanation in support of reasonable cause, but it found that he had no objective basis for a belief that he was not required to report his foreign account. The court pointed to two tax questionnaires where the taxpayer had indicated to his return preparer that he had no interest in a foreign account, and there was no evidence that he otherwise disclosed the account to his preparer.

Finally, the court examined the IRS’s assessment of the FBAR penalties, to decide if the action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” The court observed that there are no codified procedures for the IRS to use in assessing FBAR penalties, which essentially allows the IRS broad discretion in how it chooses to assess those penalties. Accordingly, the court determined that the IRS’s penalty procedures “served all of the purposes of due process” and that the assessment of the maximum penalty of $40,000 did not violate the excessive fines clause.

NLG Comment: There are many critical considerations that taxpayers must weigh when deciding how to come into compliance with U.S. tax reporting obligations. If you have a previously undisclosed foreign financial account, there are multiple methods for coming into compliance, but it is crucial to choose the correct one. The IRS has a broad scope to assess penalties when the failure to disclose a foreign financial account is deemed willful. To avoid possible civil and criminal penalties, taxpayers should consult with an experienced tax attorney to determine what disclosure program or procedure is best suited to their needs.

Contact Nardone Law Group

The tax attorneys at Nardone Law Group routinely represent businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. If you have unreported foreign income, or an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorney’s today. Nardone Law Group has vast experience representing clients before the IRS. Our tax attorneys will thoroughly review your case to determine what options and alternatives are available. 

Contact us today for a consultation to discuss your case.

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April 27, 2015

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