Two individuals who admittedly failed to file required Reports of Foreign Bank and Financial Accounts were unable to convince a U.S. Court of Federal Claims judge that there was a reasonable cause for their omission. The judge said explicitly that having tax returns prepared by tax professionals would not, by itself, be an excuse for not filing FBARs. In the absence of such a reasonable cause, the Internal Revenue Service was permitted to penalize both of the individuals for their failure (Jarnagin v. U.S.).
The married couple admitted that they maintained an account at a Canadian bank. The husband is a dual U.S. and Canadian citizen, while the wife is a U.S. citizen with Canadian residency rights, and they own businesses in several U.S. states and in Canada. Under the Bank Secrecy Act, they were required to file FBARs as part of their yearly tax returns, but they conceded that they failed to do so for 2006 through 2009. As a result, the IRS assessed penalties of $10,000 for each year against each individual, for a total of $80,000.
Reasonable cause. The BSA requires that reports of accounts maintained at foreign financial institutions must be filed by U.S. citizens and residents and by anyone in and doing business in the United States (31 U.S.C. §5314(a)). However, a person whose failure to file was due to a reasonable cause cannot be penalized (31 U.S.C. §5321(a)). The individuals wanted to take advantage of the reasonable cause protection.
The judge first noted that neither the BSA nor its implementing regulations provide any guidance on what constitutes reasonable cause for failing to file. Neither was there much judicial precedent, she added. However, sections of the Internal Revenue Code and its regulations did offer a definition that applied in the context of tax compliance.
Based on the IRC and its regulations, the judge decided that the individuals needed to show that they had acted with “ordinary business care and prudence” in order to show a reasonable cause for the failure.
Care and prudence claimed. According to the judge, the individuals relied on three claims to show they acted with ordinary business care and prudence:
- They hired a competent certified public accountant to prepare their tax returns.
- The financial information they gave the CPA revealed the existence of the Canadian bank account.
- They actually, and in good faith, relied on the CPA.
No reasonable cause. The individuals never discussed their tax returns with their U.S. accountants, the judge pointed out. They did not review their tax returns before signing and filing them, did not explicitly draw their accountants’ attention to the Canadian bank accounts, and never sought any professional advice about their resulting filing obligations.
The judge relied heavily on the tax return language in which the individuals said they had read the returns and supporting documents and asserted that everything was complete and correct. Had they actually read the returns, they would have seen that the tax returns said, explicitly and incorrectly, that they had no interest in any foreign bank accounts. Moreover, after seeing that language, they would have asked their accountants about the accounts, the judge said.
Reliance on the advice of a tax professional can show reasonable cause for failing to follow tax laws in some situations, the judge conceded. However, these individuals had never asked the accountants about their FBAR filing duties, and the accountants had never offered them any professional advice on the subject. The individuals “cannot use as a shield reliance upon advice that they neither solicited nor received,” the judge concluded.
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