In the case of Moore v. United States, US DC WD Washington, Docket No. 2:13-cv-02063, 2015 TNT 64-13 a taxpayer was found to be subject to civil penalties for failure to file FBAR reports on his foreign bank accounts, though the Court did not yet decide whether the IRS had abused its discretion in failing to reduce or waive the penalty, finding the IRS had not produced evidence of the reasoning it had for denying relief.
In this case the IRS assessed a $10,000 penalty for each of the years from 2005-2008 when the taxpayer had failed to file the FBAR report despite having Swiss bank account in the name of a Bahamian corporation he had established in order to invest in a resort in The Bahamas. At all times during the four years the account had at least $300,000 in it, though always less than $550,000.
In 2009 he became aware that the IRS had a program to encourage those who had not been reporting such accounts to come forward. After seeking counsel, Mr. Moore filed amended returns for 2003 through 2008 reporting income in each year from the foreign account, which increased his taxes by $40,000.
However the issue was not the tax, but rather the penalties.
The taxpayer protested the penalties, arguing, among other things, that he me the “reasonable cause” exception to the imposition of the penalty. The IRS, in a very short letter, denied any relief.
The taxpayer then filed suit against the IRS to seek relief. He advanced a number of claims to explain why he should not owe the penalty.
However the Court was generally not receptive to most of his claims.
Specifically the Court found that it should apply the same “reasonable cause” test as used generally under the IRC, even though the Bank Secrecy Act itself contained no specific definition of what constitutes reasonable cause. Thus the Court considered whether Mr. Moore had exercised ordinary business care and prudence in determining his filing obligation.
The Court found that he had not.
Mr. Moore first contended that he believed that because the account was held in a corporation and not by him personally, he did not need to report the account. However the Court found Mr. Moore could give no objective basis for that belief. Although he sought some general legal advice about the tax implications of running a business in the Bahamas and remaining an American citizen, he never asked for nor received legal advice on whether he needed to disclose the account under the FBAR rules.
The Court noted that Mr. Moore had prepared his own tax returns prior to 2006. On his 2003 return he simply skipped over the foreign bank account questions. One of the questions specifically directed him to the instructions to Schedule B. Those instructions indicated that if a corporation in which the taxpayer had more than a 50% interest had such an account, the taxpayer had to report it. As the Court noted, had he followed the instructions and read this paragraph, he would have learned that his belief that putting the account in a corporation removed a filing obligation would have been dispelled.
In later years when Mr. Moore used an outside tax preparer, he checked “no” to the question in the organizer regarding whether he had an interest in a foreign bank account. And Mr. Moore did not offer evidence that he had informed the preparer of the existence of the account.
Thus, the Court found, Mr. Moore did not have reasonable cause for his failure to file the FBAR reports.
However the Court did find that the IRS had failed to produce evidence regarding how it used its discretion to refuse to reduce or eliminate the penalty when Mr. Moore asked for that relief. Thus, while granting the government’s other requests for summary judgment in its favor, the Court decided that there remained significant factual issues that remained to be addressed to see if there had been an abuse of discretion at the IRS level.