FBAR Non-Willful Update – When is it Reasonable to Rely on a CPA?
The short answer is when a CPA is well-versed in International Tax.
Every so often, the Internal Revenue Service pursues a non-willful individual for what appears to be intense fines and penalties for failing to properly file a form 8938 or FBAR.
Recently, there has been a case in which the IRS determined that certain individuals should be subject to relatively high non-willful FBAR penalties.
And, even though in that case, the court upheld multiple $10,000 FBAR penalties being issued across several years, that case must be taken in context of the specific facts of that case.
- 1 Be Careful of Fear-Mongering
- 2 The Jarnagin Case – What Does it Mean?
- 3 Three Main Takeaways from This Case
- 4 Jarnagin Court Holding Summary
- 5 Jarnagin – Background and Context
- 6 Schedule B, Question 7
- 7 Bookkeeper with no International Tax Experience?
- 8 Unreported Income as Well
- 9 Never Filed the FBAR, Even Belatedly
- 10 Golding & Golding, A PLC
Be Careful of Fear-Mongering
Over the last few months, we have received numerous calls about other Attorneys scaring clients about how the courts are holding that the IRS is going “full-force” against individuals who pursue Reasonable Cause; this is false.
While Reasonable Cause is always a risk, the recent holding in Jarnagin does not necessarily increase that risk.
The Jarnagin Case – What Does it Mean?
It is important to understand that in this particular situation, the court and the IRS are not saying that it is unreasonable to rely upon a CPA. Rather, with the court was saying in this particular scenario is that based on the specific facts and circumstances it was not reasonable for the the Jarnagins to rely on a CPA who was not knowledgeable about Foreign Account Reporting, and was not knowledgeable about offshore disclosure requirements.
Three Main Takeaways from This Case
From reviewing the court documents, it is safe to say the three sticking points are as follows:
– If you are an astute business person with significant wealth from offshore investments and bank accounts, you cannot hire a CPA inexperienced in international tax and reporting rules and then rely on their inexperience as a reasonable basis for not filing the proper forms or reporting the income from abroad.
– If you want to try to prove reasonable cause for not timely filing your FBAR, then at some point you have to at least belatedly file your FBAR.
– The defense that you never read the tax return before signing it is a very poor defense.
Jarnagin Court Holding Summary
In case you’re in a rush and don’t want to read our entire blog post (we’re not offended, being busy is a good thing), what the court specifically stated in Jarnagin is that it was not simply that the plaintiffs failed to report the income or file the FBAR that lead to the denial of the reasonable cause defense.
Rather, the court is very clear that: “The Jarnagins must prove both the reasonable cause element and reporting elements. Because the Jarnagins failed to report the income from the CIBC account and failed to timely or even belatedly file FBARs to report the CIBC Account their defense necessarily fails and the court need not consider whether the Jarnagins meet reasonable cause element.”
In other words, you cannot show reasonable cause for not timely filing the FBAR if you do not at least at some point after learning the about the FBAR requirement that you filed FBARs.
Jarnagin – Background and Context
The Jarnagins were very successful business entrepreneurs. They were not the typical individual who relocates to the United States from a foreign country and may have a few foreign bank accounts. Rather, these were successful business persons. The husband was also a Canadian citizen even though he primarily resided in the United States.
Here are some key facts to consider before evaluating this case:
– Taxpayers had significant wealth, which was being stored in a foreign account, and they had businesses abroad.
– They amassed upwards of $30 million of net worth.
– The foreign account(s) was earning income.
– The income was not being reported on schedule B.
– Taxpayer said they never reviewed their own returns before submitting them (which is equivalent to a form of perjury because by submitting the return you are acknowledging that you have read it and reviewed it – even if you have a CPA).
– Taxpayers were working with a former bookkeeper/CPA who acknowledged that she literally had no background in international tax issues.
– Taxpayers marked NO for Schedule B question seven, which asks whether the individual has signature authority or other ownership over a foreign account (and they had a CPA)
**Even after these individuals learn that they were required to file the FBAR for previous years, they never did so. “The IRS only later uncovered the lack of FBARs in an audit of plaintiffs.”
Schedule B, Question 7
Too many inexperienced attorneys underestimate the value of this one little question on the tax return, especially when a person hired a CPA to prepare their original returns. We speak with thousands of individuals each year, with 95% of those conversations involving offshore disclosure.
And, many of our clients have legitimate reasons for not including yes on schedule B. but, when a person has their own CPA, and speaks English (especially their foreign accounts are in the millions of dollars USD), it is often-times hard-pressed to find a legitimate excuse for not marking Yes on schedule B.
Bookkeeper with no International Tax Experience?
This is another key point to consider: it would seem that the government is saying that because taxpayers knowingly used a CPA/bookkeeper who had no experience or background in international tax, this is a type of blindness (although the Jarnagins were not held willful).
The IRS is not saying that taxpayers acted willfully per se, but they are basically saying that they should have vetted out the CPAs better and/or should have hired CPAs with International Tax experience in (taxpayers had other investments in Canada/British Columbia). By not doing so, they were almost setting themselves up for failure and the inability to properly comply with offshore disclosure requirements. This led to the high non-willful penalties being issued against Taxpayers.
Unreported Income as Well
Another sticking point to remember is that these individuals had more than just unreported accounts, they had unreported income from the foreign accounts. It would be hard-pressed for a CPA who passed the CPA exam (a test in which is very difficult in its own right) to be able to say (with a straight face) that he or she was unaware that the United States taxes individuals on their worldwide income.
Never Filed the FBAR, Even Belatedly
This is also the other most important fact in this scenario: At some point, plaintiffs had the actual knowledge that they were supposed to report the foreign accounts. And, even armed with the knowledge that they needed to file delinquent FBARs for prior years, the individuals did not file prior FBARs.
In reality, this is a type of willfulness. Why? Because taxpayers were aware at this time that they should’ve gone back and filed FBARs but did not do so. Still, the IRS did not issue Willful penalties, which is another important take-away from this case.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.