Source: https://taxlitigator.me/2015/07/29/determining-reasonable-cause-for-non-willful-fbar-violations/
Timestamp: 2019-04-22 00:14:55+00:00

Document:
For violations involving the non-willful failure to report the existence of a reportable interest in a foreign financial account, the maximum amount of the FBAR penalty that may be assessed under Title 31, Section 5321(a)(5)(B) shall not exceed $10,000, per year, for up to six calendar years. However, no penalty shall be imposed if such non-willful violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported [see 31 U.S.C. § 5321(a)(5)(B)(ii)]. The reasonable cause exception does not apply to willful FBAR violations. [see 31 U.S.C. § 5321(a)(5)(C)(ii)].
MOORE v. UNITED STATES. Recently, in Moore v. United States, a federal District Court determined that “a person has ‘reasonable cause’ for an FBAR violation when he committed that violation despite an exercise of ordinary business care and prudence.”[iv] In 1989, Mr. Moore moved to the Bahamas and subsequently opened an account at Bank of Bahamas in Nassau with $300,000 of after tax funds. In early 1990s these funds were transferred from Bank of the Bahamas to the Bahamas branch of United Bank of Switzerland (UBS) purportedly as a result of advice from the money manager of Bank of Bahamas.
Through 2005, Mr. Moore prepared his own returns and did not report income from the foreign account (apparently believing it was held in an entity that was separate from Mr. Moore for reporting purposes). In some years, Mr. Moore did not respond on his return to the question on Line 7 of Schedule B to the effect “At any time during (tax year), did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” In some years, a Schedule B was not attached to the return.
A return preparer provided a tax organizer and prepared the returns for tax years 2006-2008. Apparently, Mr. Moore responded “No” on the organizer with respect to the question “Did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” which response was also reflected in the returns. The return preparer was not otherwise advised of the existence of a possible reportable foreign account.
Mr. Moore had apparently failed to timely file FBARs regarding a foreign financial account having a high balance in 2005 of $440,070; in 2006 of $471,098; in 2007 of $517,893 and in 2008 of $408,990. Within a month of learning about FBAR filing requirements, Mr. Moore took action to come into compliance with his filing and reporting obligations for 2003 to 2008. In 2009, Mr. Moore entered the then applicable IRS OVDP and submitted amended returns setting forth additional tax liabilities for 2005 were $2,878; for 2006 were $3,205; for 2007 were $3,443 and for 2008 were $2,728. In 2010, as part of disclosing the UBS account to the IRS, Mr. Moore filed FBARs for the years 2003 through 2008.
Reasons for Assertion of Penalty – Mr. Moore never reported earnings in the UBS account since it was first established back in 1980s and earnings have accumulated over the years; the amount of the unreported income on the foreign account was “significant, and generated substantial tax liabilities and accuracy-related penalties” (the aggregate unpaid tax for the years at issue was $12,254); there was a “pattern” of non-compliance (schedule B response to the foreign account question was either left blank or “No”); and Mr. Moore responded “No” on the tax organizer provided by the preparer.
1. The person has no history of past FBAR penalty assessments; the person has no history of criminal tax or BSA convictions for the preceding ten years.
3. The person cooperated during the examination. (Mr. Moore responded to reasonable requests for documents; meetings and interviews, etc.).
There are three penalty levels depending on the highest amount in the account during the period for which the FBAR should have been filed. For violations regarding an account exceeding $250,000, the penalty per violation is the statutory maximum of $10,000.
Another attachment to the pleadings in Moore includes a declaration from the IRS Appeals Officer who was assigned to review the administrative appeal of the FBAR penalties stating “One of the issues discussed was reasonable cause, and whether it was applicable in this case considering Mr. Moore did not inquire or seek professional advice regarding his reporting requirements in connection with his foreign bank account.” The foregoing seems to reflect an IRS feeling that a reasonable cause determination requires a taxpayer to “inquire or seek professional advice regarding his reporting requirements in connection with his foreign bank account” or possibly at least inform their return preparer of the existence of an interest in a foreign financial account.
The IRS assessed the non-willful FBAR penalties against Mr. Moore on January 24, 2013. Pursuant to 31 U.S.C. § 3717, interest technically begins to accrue on such an assessment from the date of notice of the assessment and demand for payment which, in Moore, occurred on January 24, 2013. Additionally, pursuant to 31 U.S.C. § 3717(e)(2), if the FBAR penalty assessments are not paid within 90 days of notice and demand, a penalty accrues at the rate of 6% per year from the date of notice and demand on the unpaid assessments.
In its Order of July 24, 2015, the federal District Court upheld the $40,000 FBAR penalty assessment. However, to prevent “the IRS from profiting by imposing penalties without explaining them. The court voids the IRS’s assessment of interest and other charges on top of its previously unexplained penalties.” Instead, interest and penalties were to begin accruing on top of the $40,000 FBAR penalty assessment on the date of the courts Order (July 24, 2015).
IRS STREAMLINED PROCEDURES FOR NON-WILLFUL VIOLATIONS. In addition to the OVDP, the IRS maintains other more streamlined procedures designed to encourage non-willful taxpayers to come into compliance. Taxpayers using either the Streamlined Foreign Offshore Procedures (for those who satisfy the applicable non-residency requirement) or the Streamlined Domestic Offshore Procedures are required to certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to “non-willful” conduct.
For these Streamlined Procedures, “non-willful conduct” has been specifically defined as “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”. For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the Streamlined Foreign Offshore Procedures. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue under the Streamlined Domestic Offshore Procedures.
[i] For example, 26 U.S.C. § 6664(c)(1) prohibits penalties for any portion of an underpayment of tax “if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” Another statute, applicable to foreign trusts, prohibits penalties for “any failure which is shown to be due to reasonable cause and not due to willful neglect.” 26 U.S.C. § 6677(d). And, in the statute that the Government identifies as an analogue, Congress prohibited monthly penalties for failing to file tax returns where “such failure is due to reasonable cause and not due to willful neglect . . . .” 26 U.S.C. § 6651(a)(1).
[ii] United States v. Boyle, 469 U.S. 241, 245 (1985).
[iii] Id. See also Internal Revenue Manual (IRM) 20.1.1.3.1 (August 20, 1998).
[iv] Moore v. United States, Case No. C13-2063RAJ (April 6, 2015, USDC Western District of Washington).
[v] Note that the aggregate $40,000 in penalties was far less than what would have been determined under the 2009 OVDP – $103,578, likely representing 20% of the $517,893 account value that existed in 2007.
[vi] IRM 4.26.16. Many have wondered whether these mitigation guidelines had any continuing effect following the OVDP and Streamlined Procedures but, in Moore the IRS was applying the FBAR mitigation guidelines in determining the appropriate penalty in November 2011.
[viii] Under the concept of “willful blindness”, willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.

References: § 5321
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 § 3717
 § 3717
 § 6664
 § 6677
 § 6651
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