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A Couple of Interesting Rulings in Undisclosed Foreign Account Penalty Cases

By Joel N. Crouch on December 5, 2017

1. United States v. Forbes (here)
    a. The taxpayer failed to timely file FBARs and had significant unreported
         income related to    the undisclosed foreign bank accounts.
    b. The taxpayer was initially accepted into the IRS Offshore Voluntary
        Disclosure Program    (OVDP)and filed the missing FBARs and amended
        tax returns reporting additional taxable    income.
    c. The taxpayer was subsequently removed from the OVDP for failure to
        make acceptable    arrangements to pay the resulting tax, interest and
        penalties.
    d. An IRS examination of the taxpayer’s amended tax returns filed in the
        OVDP revealed that the taxpayer had underreported the necessary
        corrections and omitted over $1.7 million in additional taxable income.
    e. The IRS assessed a civil penalty of more than $1.4 million against the
        taxpayer for “his willful failure or refusal to report his interest in the
        foreign financial accounts.”
    f. The IRS filed a lawsuit to collect the willful penalty, which the taxpayer
        filed to answer.
    g. The court granted the IRS’ motion for judgement.

Takeaway:  The taxpayer may have decided to forego filing an answer and accept the $1.4 million penalty due to concerns regarding a criminal investigation related to the omitted income on the amended tax returns provided to the IRS in the OVDP.

2. Jarnagin v. United States (here)
    a.  The IRS assessed non-willful civil penalties of $80,000 against a
         husband and wife for failure to file FBARs reporting a Canadian bank
         account.
    b.  The taxpayer argued the penalties should not apply because they had
         reasonable cause. The taxpayer argued the following established
         reasonable cause:
              i.  The taxpayers hired a competent CPA to file their tax returns.
             ii.  The CPA was aware of the foreign account because it was included
                  on the financial statements that the taxpayers gave the CPA.
            iii.  The taxpayers reasonable relied on the CPA.
    c.  The court found that there is very little guidance regarding reasonable
         cause in the FBAR statute, so it turned to the tax statutes for guidance.
    d.  The court ruled that to establish reasonable cause the taxpayers must
         prove that they exercised “ordinary business care and prudence.”
    e.  The court found that the taxpayers had not exercised ordinary business
         care and prudence because:
            i.   The taxpayers had significant business sophistication with multiple
                  interests and significant wealth.
            ii.   The taxpayers signed the tax returns under penalty of perjury.
            iii.  The taxpayers failed to read and review the tax returns which would
                  have alerted them to the omission of the foreign account
                  information.

Takeaway:  Using a CPA to prepare tax returns and forms is not an automatic defense to penalties.

If you have any questions related to this or any other civil tax or criminal tax-related matter, please feel free to call me at (214) 749-2456 or by email at  jcrouch@meadowscollier.com.