Is “I Didn’t Know” I Had to file FBAR a Defense to Penalties?

Is “I Didn’t Know” I Had to file FBAR a Defense to Penalties?

What if I Didn’t Know I had to File an FBAR?

Is “I Didn’t Know I Had to File FBAR” a Defense to Penalties: The answer is that sometimes, the “I Didn’t Know I Had to File FBAR” defense can work. While in general, ignorance of the law is typically not a defense for US Taxpayer mistakes in tax and legal matters — it is not a hard and fast rule — and it can vary based on each person’s facts and circumstances. In other words, if a taxpayer was unaware and did not know that they had an FBAR filing requirement or that a specific type of account was required — depending on the facts and circumstances of their situation, it may be sufficient to help avoid or abate an FBAR Penalty with the IRS. This is especially true when the taxpayer utilized a tax professional for the underlying filing, who represented themselves as having international tax knowledge.

Example of “I Didn’t Know I Had to File FBAR”

Here is an example of when the “I Didn’t Know I Had to File FBAR” defense may be sufficient:

Peter is a Lawful Permanent Resident who has foreign accounts outside of the United States. In the first year that Peter is required to file a US tax return, he retains a CPA who markets himself as someone who has experience with international tax. The CPA sends Peter a list of the different pieces of information he requires in order to prepare the tax return. Peter diligently prepares the forms and includes his foreign pension accounts.

Foreign Pension Accounts

In this example, the only foreign bank or financial accounts that Peter maintains are foreign pension accounts. Peter tells the CPA that he has the foreign pension accounts, but the CPA tells him not to worry about it because foreign pension accounts are similar to 401K and therefore does not not need to be included on the tax return until Peter starts taking distributions. Therefore, Peter does not report the foreign bank accounts, accepts the CPAs information, and does not look any further into the matter. 

Later, Peter is penalized for not filing the FBAR.

Does Peter Have Reasonable Cause to Abate FBAR Penalties?

Possibly. That is because Peter was diligent in that during his first year of becoming a US person, he retained a US-based CPA who represented to Peter that he has experience in all types of tax — including international tax. In addition, Peter provided the foreign pension account information to the CPA and the only reason the accounts were not provided was because the CPA doled out incorrect advice to Peter — in other words, Peter’s lack of knowledge was due to no fault of Peter’s and not due to a lack of due diligence.

Peter’s Lack of FBAR Knowledge May Qualify for Reasonable Cause

While the totality of the circumstances dictate if Peter ultimately meets the requirements for FBAR Reasonable Cause, in this type of situation the fact that Peter did not know about the FBAR but was diligent in providing the foreign pension account information to the CPA — who claimed to be knowledgeable about international tax, but gave Peter incorrect advice — may be sufficient to abate any penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

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