A ruling issued April 1, 2015, in the case of Moore v. United States by the U.S. District Court for the Western District of Washington shows that asserting reasonable cause for late filing of Financial Crimes Enforcement Network Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR), is not a simple matter.
A U.S. individual or business with a financial interest in or signature authority over a foreign financial account, including but not limited to a bank account, brokerage account, insurance policy with a cash surrender value, mutual fund, or other pooled fund, is required to file electronically an annual FBAR. An FBAR is required only if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The reports normally are required to be received by June 30 for the previous calendar year.
If an FBAR is not filed or is filed late, the filer potentially is subject to penalties and interest. Each nonwillful failure to file an FBAR in a timely manner is subject to a $10,000 penalty, whereas each willful failure to file an FBAR is subject to a penalty equal to the greater of $100,000 or 50 percent of the amount in the account for each violation. Criminal penalties can be higher still.
Taxpayers may be relieved of the nonwillful failure-to-file penalty if they demonstrate they had reasonable cause. However, in Moore, the taxpayer maintained bank accounts in the Bahamas and Switzerland from 1989 to 2010. The taxpayer did not report the income on his returns, nor did he file FBARs for the accounts. In 2010 the taxpayer participated in an IRS voluntary disclosure program and filed FBARs for 2005 through 2008. The IRS assessed the $10,000 nonwillful failure-to-file penalty for each year, and the taxpayer challenged the penalty.
The taxpayer in this case first asserted that he believed he had no legal obligation to report the accounts on an FBAR because the accounts were held by a corporation. Upon an inquiry from his personal tax return preparer, he indicated he did not have any foreign accounts to report. He then asserted that he was in his seventies at the time of opening the accounts and that his age made him less capable of properly addressing the tax forms. The court held that his actions were not significant enough to demonstrate reasonable cause, although the court requested further information to confirm the penalty was not arbitrarily or capriciously assessed.
As is demonstrated by Moore, taxpayers should take every step to ensure timely filing of their FBARs to avoid penalties.