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Sunday, December 30, 2018

Another Court Finds Failure to Check Off Foreign Account on Income Tax Return Is Enough to Find Willfulness For FBAR Penalty

As discussed on numerous occasions in this blog, a substantial penalty applies if a foreign account is not reported on an annual FBAR filing and the failure to report was willful. As more attention has been focused on FBAR filing failures over the last 10 years or so, more courts are addressing when a failure to file is willful.

Problematic for taxpayers who claim a lack of knowledge of the FBAR filing requirement is the question on Schedule B of their federal income tax return that asks if they have an interest in or authority over an account in a foreign country, such as a bank account, securities account, or other financial account. The question, along with the instructions as to that question, is interpreted by the government as cluing in the taxpayer to the FBAR filing requirement. Whether the taxpayer answers ‘yes’ or ‘no’ to the question, since a taxpayer is deemed to know what is in a tax return that the taxpayer signs, they are deemed to have knowledge of the filing requirement. Thus, absent other contrary facts, the lack of filing is treated as willful. This is the case even if the taxpayer did not read the return - especially with the trend to treat the term ‘willful’ in a civil penalty context as including either reckless disregard of a filing requirement or willful blindness to the filing requirement.

While not completely clear, a recent Claims Court case accepted this approach and held on summary judgment that a taxpayer who had checked ‘no’ to the foreign account question on her income tax return and who knew she had a foreign account was subject to the willfulness penalty for failing to report the account on an FBAR regardless of actual knowledge of the FBAR filing requirement. While there were other bad facts for the taxpayer, the Court appears to hold that it would have ruled the same way without those other bad facts.

This trend risks most FBAR failures to report as being automatically willful when the taxpayer otherwise filed an income tax report, absent special facts such as lack of knowledge of the account itself or perhaps contrary tax advice - a highly unfavorable trend for taxpayers.

Kimble v. U.S., U.S. Court of Federal Claims, No. 17-421 (December 27, 2018).

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