U.S. taxpayers seeking to resolve a foreign bank account reporting (FBAR) issue using the IRS’ streamlined procedures must certify, under penalty of perjury, that any failure to report income or accounts or pay taxes as required was “non-willful.”

There has been little litigation on the subject of FBAR penalties, and less still on penalties for non-willful, as opposed to willful, failure to file. A recent United States District Court case (James Moore v. U.S. Case 2:13-cv-02063-RAJ filed 4/1/15) sheds some light on this area of the law.

James Moore v. the United States

In Moore, the taxpayer challenged the non-willful penalty imposed by the IRS for his failure to file FBARs regarding a financial account he opened in the Bahamas that was eventually migrated to Switzerland. The court held that Moore failed to make the FBAR filings required and that furthermore, he had no reasonable cause for this failure. Moore made constitutional objections to the penalties that were also found to be without merit, and claims pursuant to the Administrative Procedures Act (APA), on which the court reserved judgment pending the supplementation of the record.

One of Moore’s constitutional objections was that his Fifth Amendment due process rights had been violated by the penalty assessment procedures. The court disagreed, noting that among other things, the IRS interviewed Moore with his counsel to determine why he had not filed FBARS, and had issued a notice of intention to assess $40,000 in non-willful FBAR penalties. In addition, Moore was given an opportunity for an internal appeal and the opportunity to pursue judicial review of all IRS decisions. In essence, the court indicated that notice of, and opportunity to contest the FBAR penalties was sufficient due process, even in the absence of a full evidentiary hearing.

Moore also argued that the assessed penalties violated the excessive fines provision of the Eighth Amendment to the U.S. Constitution. The case U.S. v. Bajakazian, 524 U.S. 321, 337 (1998) stands for the principle that a penalty should not be grossly disproportionate to the gravity of a defendant’s offense, but the court in the Moore case found that the the facts in Bajakazian case were easily distinguished. The value of one account Moore failed to report varied between $300,000 and over $550,000; the assessment of $40,000 was roughly ten percent of this amount. (In Bajakazian, by contrast, the defendant failed to fill out a customs form and paid a penalty of over $350,000 in cash.) Moore also argued that his penalty was excessive because his failure to file caused no harm to the U.S., but the court also found this argument unpersuasive.

Moore’s contention that there was reasonable cause for his failure to file also failed. Facts the court cited in rejecting this argument included previous self-preparation of Schedule B, Foreign Accounts and Trusts, which should have alerted him to a filing requirement. In addition, Moore’s tax preparer for the years at issue had him fill out two questionnaires in which he indicated that he did not have any interest in a foreign account. These questionnaires were part of the record. Absent from the record was any indication that Moore made some other disclosure of the account to his tax preparer. Based on these and other facts in the record, the court concluded there was no reasonable cause for Moore’s failure to file FBARs.

The Take-Away for Taxpayers with Interests in Foreign Accounts or Assets

The Moore case suggests that it is going to be difficult for taxpayers to establish reasonable cause for their failure to file FBARs. If a taxpayer is found ineligible for streamlined filings, the only way to avoid paying a penalty may be to establish reasonable cause, and as Moore demonstrates, this will not be easy to do.

The attorneys of Ortiz & Gosalia, PLLC have post-JD degrees in tax law and can advise you regarding foreign bank or financial account reporting requirements. With offices in Redmond, Bellevue and Kirkland, we offer services throughout the Seattle area and Washington State. If you would like to learn more about streamlined filings and statutes of limitations, we invite you to contact us.

For more on FBAR and other law relating to reporting of foreign financial assets: