FBAR Case Rules on Unknown Issues

A recent FBAR decision weighs in on some unknown and uncertain penalty issues relating to failure to file FBARs. These issues include:

a. Definition of Reasonable Cause. The penalty for failure to file an FBAR will not apply if the taxpayer has reasonable cause for the nonfiling. Unfortunately, there is no definition of reasonable cause under the Bank Secrecy Act or its regulations for FBAR penalty purposes. The court determined that the best meaning would be to borrow from the Internal Revenue Code provisions (such as Sections 6664(c)(1) and 6677(d)), and held that a person would have reasonable cause for an FBAR violation if he exercised of ordinary business care and prudence.

b. No Reasonable Cause Facts. Applying the above definition, the court found the taxpayer did not have reasonable cause for his failure to file. The same facts will have a different impact on different courts, both as to having different judges and different overall circumstances. Nonetheless, it is useful to see what facts are relevant to deciding in courts. In this case, some of the bad facts were that the court determined that the taxpayer knew of his filing requirements (in part because in prior years he had filled out his own tax returns and knew of the question on the income tax return about foreign accounts even though he did not answer that question), that he incorrectly denied having foreign accounts in filling out tax organizers/questionnaires of the return preparer, and there was no evidence that he otherwise advised the preparer of the account.

c. Assessment Procedures Met Due Process. By interviewing the taxpayer, giving him a notice proposing to assess the penalties, affording the taxpayer an appeal process, and issuing a notice of assessment, the IRS was found by the court to have met the requirements of procedural due process.

d. No 8th Amendment Violation. The IRS imposed $10,000 per year penalties on the accounts. The court found that the imposition of such maximum penalties were not an 8th Amendment “excessive fine” violation. The court found the penalties were not disproportionate to the offence, since Congress authorized them without regard to the size of the unreported accounts, and the actual size of the account not reported here (account with balances between $300,000 and $550,000).

Moore v. U.S., (DC WA 04/01/2015) 115 AFTR 2d ¶2015-591