It Ain’t Over Until the FBAR Report is Filed

We all know that the deadline for filing the federal income tax return is April 15. But now since that date has passed, don’t think that the filing season is really over.  If you are “hiding” assets overseas (and, yes, Mexico and Canada are “overseas”) you may have another form to file.  It’s the Foreign Bank Account Report (FBAR) and the Form is FinCEN Form 114 (Form TD 90-22.1).  This filing is not part of the tax return that you have to file by April 15, and its due by June 30.  Also, the timely mailed (or transmitted) rule doesn’t apply to this filing (the Treasury must receive the filed form by June 30) and it’s administered completely separate from your federal income tax return. 

When do you have to make an FBAR filing?  You trigger a filing requirement whenever you have a an interest in or signatory authority over a foreign financial account with a value over $10,000 at any time during the calendar year.  The filing requirement is triggered not only by cash accounts that are over the $10,000 threshold, but it also applies to a foreign account that contains assets worth over $10,000 – such as the cash surrender value of a life insurance policy.  The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

Why worry about this?  The penalties for failing to file FBARs are severe. There is a minimum $10,000 penalty if your failure to file was inadvertent. However, if you are found guilty of willfully not filing a FBAR, the minimum fine is $100,000 or half the value of the account, whichever is greater.

But what is “willful neglect”?  What constitutes reasonable cause for not filing?  Are the amount of the fines, which can be substantial, constitutional?  We haven’t had good answers to those questions.  Now, however, at least one federal judge has weighed in.  The taxpayer had a foreign account subject to FBAR.  He opened the account in the Bahamas in 1989 upon moving there and investing in a resort. He moved back to the United States in 1990, but the account remained in the Bahamas until it migrated to Switzerland in 2003.  The account triggered the FBAR filing requirement, but the taxpayer failed to file.  The IRS imposed a $40,000 penalty – the maximum allowed for four years’ worth of non-willful violations.  The penalty was imposed even though IRS had told the taxpayer they would delay it if he requested a conference with IRS appeals – which he did in a timely manner.  He claimed he met the reasonable cause requirement of 31 U.S.C. §5321(a)(5) and shouldn’t be penalized.  The issue didn’t get resolved and the taxpayer sued.

The trial court judge, noting that neither the Bank Secrecy Act nor the corresponding regulations defined “reasonable cause,” looked to the Internal Revenue Code to hold that a taxpayer has reasonable cause for an FBAR violation upon exercising ordinary business care and prudence (I.R.C. §§6664(c)(1), 6677(d)).  Unfortunately, the taxpayer couldn’t meet that standard because he actually knew of the FBAR filing requirement – he filed his own returns and saw the question about foreign accounts but didn’t answer the question), denied having a foreign account, and later didn’t disclose the foreign account to a professional tax preparer.  The taxpayer urged the court to take into account his “age and ignorance” (he was in his 80s), but the court refused – noting that younger people were just as unable to understand tax forms and filing requirements.  The court also determined that , by interviewing him (albeit for five minutes), the IRS gave the taxpayer notice of the proposed penalties and that he was given a notice of assessment and an appeal process.  Thus, the court held, the IRS had satisfied procedural due process requirements.  The court also said that the penalties imposed did not violate the “excessive fines” restriction of the Eighth Amendment.   They weren’t disproportionate to the “evil” the taxpayer had committed.  The court noted that the Congress had authorized the penalties without any regard to the size of the foreign account.  While it was not disclosed how much was in the account, it was somewhere between $300,000 and $550,000.

In recent years, some ag producers in Iowa and elsewhere in the U.S. have invested in land in other countries and started farming business and other related ventures in these foreign countries.  That could easily trigger the FBAR requirements.  Make sure to review your clients’ activity closely and keep the FBAR requirements in mind.  At least now we have some guidance as to the “reasonable cause” requirement and what it takes to satisfy it, as well as some guidance on the constitutional issues associated with FBAR. 

The case is Moore v. United States, No. C13-2063RAJ, 2015 U.S. Dist. LEXIS 43979 (W.D. Wash. Apr. 1, 2015).