Monday, June 26, 2017

Requirements for the Reasonable Cause to Avoid the FBAR Nonwillful Penalty (6/26/17)

The statutory text for the nonwillful penalty says that the penalty does not apply if the violation "was due to reasonable cause" (reasonable cause prong) and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported" (reporting prong)  31 U.S.C. § 5321(a)(5)(B)(ii), here.  In the case of a failure to report (either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report properly is, of course, the act that causes the filer/non-filer to be at risk for the penalty in the first place.  Surely, if that means that proper FBAR reporting in the first instance, the issue of the nonwillful penalty never arises and a supposed reasonable cause escape is meaningless.  What does this mean?

Prior to November 2015, the IRM sensibly provided that meaning with respect to failure to file the FBAR as follows: "This means that the examiner must receive the delinquent FBARs from the non-filer in order to avoid application of the non-willfulness penalty.” IRM 4.26, (07-01-2008), Non-Willfulness Penalty.  Basically, as stated, this permitted a delinquent filing of the FBAR during the audit that might lead to the penalty, then permitting the reasonable cause defense if it applied.

This specific language has been eliminated from the IRM by changes made in November 2015.  The IRM currently says for the reporting component that “The person files any delinquent FBARs and properly reports the previously unreported account.”  IRM (11-06-2015), Penalty for Nonwillful FBAR Violations, here.  Like the statute, the description of the reporting prong is not as clear as it should be.  Does it mean that the person must file delinquent FBARs and, on those delinquent FBARs properly report the previously unreported account?  The use of present tense verbs might suggest that.  If that is what it means, the change to the IRM would not appear to be material and the taxpayer perfects his right to claim reasonable cause by filing delinquent FBARs.  However, the statutory text uses past tense for the reporting prong -- that the amount "was properly reported."  The Government now takes the position that the "reporting prong" requires the taxpayer to have made the U.S. aware of the account by proper reporting of the account on Form 1040 (citing legislative history to that effect).  See Jarnagin v. United States (Fed. Cl. No. 15-1534 T).  (The Government does note, in the alternative, that, even if filing a delinquent FBAR reporting the account(s) could alone solve the problem, the Jarnagans have not done so; I will not speculate as to the reason for this failure which would best situate their reasonable cause defense.)  The reply brief in the case was filed June 16, 2017, so presumably when the decision on the parties' cross-motions is rendered, we will have more learning on this issue and perhaps even more questions.

In the meantime, I offer the following:
  • U.S. Motion for Summary Judgment, here.
  • Jarnagin's Answer and Cross-Motion, here.
  • U.S. Reply and Answer to Cross-Motion, here.
  • Docket Entries as of today, here.

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