Sunday, April 24, 2016

Willfulness and FBAR Penalties -- Non-willful Actions and Reasonable Cause | Bethesda Tax Lawyer

In this blog, I’d like to examine the differences between non-willful conduct which can trigger an IRS penalty, and non-willful conduct for which reasonable cause can be given, which offers grounds for why penalties should not be assessed.  An understanding of these differences can be critical to avoiding FBAR penalties or at least serve to make the taxpayer aware of circumstances under they might be imposed.  

Non-willful conduct is defined by the IRS a “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”  It carries with it lighter penalties than willful behavior and can help taxpayers demonstrate eligibility for streamlined domestic offshore procedures but, absent a showing of reasonable cause, cannot entirely obviate these penalties.  

In the recent decision Moore v. US, a US district court examined a taxpayer’s failure to file his FBARs and offered some clarification regarding what constitutes reasonable cause in a situation where the taxpayer’s failure to comply was non-willful in nature.  In that case, James Moore maintained high-balance overseas bank accounts in the Bahamas and Switzerland for many years but filed no Report of Foreign Bank and Financial Accounts until 2009.  

Moore tried to remedy this in 2009 after having learned of the OVDP program (which I have blogged about, here) amending several years of tax returns and filing FBARs to accompany them.  After several years of negotiation with the IRS, Moore opted out of OVDP and was assessed a fine.  Following some back-and-forth negotiation, the IRS imposed a $10,000 penalty, and Moore’s attorney offered arguments for why Moore had reasonable cause to believe he was not violating the law.  

The court’s decision, in which Moore was held to have committed non-willful violations for which the IRS penalty was appropriate, offered some clarification regarding what constituted reasonable cause under these circumstances.  By examining what constituted reasonable cause in other aspects of IRS tax procedure, the court concluded that “reasonable cause” existed when a violation of the FBAR occurred despite the exercise of ordinary business care and prudence.

Moore, however, had offered no objective evidence indicating he had exercised this standard.  Rather, on previous occasions, he had indicated to tax preparers that he had no interest in foreign accounts.  The court also determined that he knew of the Foreign Accounts and Trusts requirement, as he had occasionally followed it in past years.  Based on this standard, the sort of evidence needed to trigger a finding of “reasonable cause” is unlikely to be something that most taxpayers facing FBAR penalties possess.  For example, evidence of a conversation between the tax preparer and the taxpayer in which the taxpayer clearly and unequivocally states that he has foreign accounts and trusts, but the tax preparer tells him not to worry about it, would meet this standard.  This sort of strong objective evidence can demonstrate “reasonable cause,” but in its absence, the chief issue facing the taxpayer may likely be a determination of whether his noncompliant conduct was willful or non-willful, which I have discussed in previous blogs. 

The IRS offers a reduced penalty (5%) for taxpayers (through the Streamlined Program) if they can show that their actions related to the non-disclosure of their foreign accounts were not willful. This means that a person entering the Streamlined programs does not have to show reasonable cause and only has to show that his actions were not a result of willful actions nor willful blindness.

For a free phone consultation regarding the FBAR, OVDP, or other tax matters, please contact The Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

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