The Tax Times: A Taxpayer's Limited Education Not Sufficient to Prove Reasonable Cause for Failure to File FBAR

A district court has held in Ott, DC MI 8/7/2019, that the failure-to-file FBAR penalty applied to a taxpayer because she failed to establish reasonable cause for her failure to file.

Pursuant to 31 USC § 5314(a), every U.S. person that has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the account to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (commonly referred to as an FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5), which provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation, of 31 USC § 5314(a).

The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC § 5321(a)(5)(B)(i)) and
The maximum penalty amount for a willful violation "shall be increased to the greater of" $100,000 or 50% of the balance in the account at the time of the violation. (31 USC § 5321(a)(5)(C), 31 USC § 5321(a)(5)(D))

The IRS may not impose a penalty if the taxpayer meets several requirements, one of which is that the violation was due to reasonable cause. (31 USC § 5321(a)(5)(B)(ii))

Circumstances that may indicate reasonable cause include an honest misunderstanding of fact or law that is reasonable in light of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.

In addition, reliance on an information return or on the advice of a professional tax advisor or an appraiser does not necessarily demonstrate reasonable cause. Rather, the taxpayer must show that, under all the circumstances, such reliance was reasonable and that the taxpayer acted in good faith, e.g., where the taxpayer engages a professional tax advisor, provides him or her with "full details," and then relies upon his or her advice. (Jarnagin, (Ct Fed Cl 2017) 120 AFTR 2d 2017-6683).

Ms. Ott, a US citizen, had foreign bank accounts for which she was required to file FBARs for three tax years. She failed to file the FBARs and the IRS assessed non-willful failure-to-file FBAR penalties for those years. She had hired an advisor to prepare her tax returns.

Ms. Ott did not dispute that she violated 31 USC § 5314's reporting requirements but maintained that assessing penalties under 31 USC § 5321 would be inappropriate because she had reasonable cause for her omission. She argued that she had reasonable cause because her education was limited, she had no tax experience, and she had hired an advisor to prepare her tax returns.

The district court found that Ms. Ott did not meet her burden of showing she had reasonable cause for failing to timely file the FBARs. The District Court went on to state:

"Between 2005 and 2010, Otts withdrew $392,000 from the Canadian accounts. Otts use some of the money they withdrew from the Canadian accounts to invest in
real estate and other business opportunities."

"Despite having Canadian accounts since 1993, the Otts did not report their interest in, or authority over, these farm financial counsel Schedule B on the personal income tax returns (Forms 1040), at any time before 2010."

"It is not clear from the complaint if the tax preparer ever asked the about the foreign accounts or if the tax preparer utilized a "tax organizer" … (however) the Otts signed federal income tax returns under penalty of perjury, that included a schedule B, which they reported that they did not have an interesting, or authority over, a financial account in the foreign country."

Citing Jarnagin, the court said that she did not show that she took any steps to learn whether she was required to file FBARs. While she hired an advisor to complete her tax returns, she did not act in good faith since she did not provide any evidence that she informed the advisor of her foreign accounts. In addition, the court found that Ms. Ott's limited education and experience did not excuse her failure to file the FBARs.

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