Court Tightens Noose on Reasonable Cause Exception for the FBAR Penalty by Robert S. Horwitz
A U.S. person with foreign financial accounts worth over $10,000 during the calendar year is required to file a Foreign Bank Account Report (FBAR). Failing to file can result in either a “non-willful” or a “willful” penalty under 31 USC §5321(a)(5). If the failure is non-willful, the person can avoid liability under the reasonable cause exception of §5321(a)(5)(B)(ii):
Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
In Jurnagin v United States, Ct. Fed. Cl. (Nov. 30, 2017), https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2015cv1534-36-0 , the Court granted the Government’s motion for summary judgment and held that the taxpayers failed to establish reasonable cause for not filing FBARs because they did not review their income tax returns.
The Jurnagins were married in 1966. Mr. and Mrs. Jurnagin were both high school graduates who had taken a couple of college courses. Mr. Jurnagin obtained a barber license and his wife became a real estate agent. They were very successful, eventually owning a string of barbershops, ranches in Oklahoma and British Columbia and apartment complexes in the U.S. Mr. Jurnagin became a Canadian citizen and resided 9-10 months each year in Canada. His wife spent most of her time in the US watching their U.S. business interests. They had a bank account in Canada that, in 2006, had a balance of $4 million. They never filed FBARs reporting the Canadian account.
For 2006, 2007, 2008 and 2009, the Jurnigans used a U.S. accountant to prepare their U.S. tax returns and a Canadian accountant to prepare their Canadian tax returns. The U.S. accountant provided information to the Canadian accountants. The Jurnigans never asked their U.S. accountants if they knew anything about international taxation. They never told their U.S. accountant that they had a Canadian bank account and did not give him statements for the account. They gave their U.S. accountant annual financial statements that listed the Canadian account. Their U.S. accountant testified that he knew about the Canadian account from reviewing the statements.
Schedule B, Part III of Form 1040 asks whether the taxpayer had an account overseas and refers to the FBAR form. The U.S. accountant checked “no” to the box. The Jurnigans never discussed their returns with their U.S. accountant and did not review them before signing, other than to see the amount of tax they owed.
The IRS assessed four $10,000 non-willful penalties against Mr. Jurnigan (one each for 2006, 2007, 2008, and 2009) and four $10,000 penalties against Mrs. Jurnigan. The Jurnigans paid $80,000 and sued for a return of the monies plus interest. The Government and the Jurnigans filed cross-motions for summary judgment. The Jurnigans claimed that they had reasonable cause because 1) they hired a competent accountant, 2) they provided the accountant with information and 3) they relied on the accountant. The Court held that this did not cut the mustard.
The Court looked to the regulations under the Internal Revenue Code defining “reasonable cause.” To establish reasonable cause, a taxpayer must act with ordinary business care and prudence in ascertaining her tax liability. In ruling for the Government, the Court assumed that the Jurnigans’ accountants were competent and that they knew about the Jurnigans’ Canadian account. This was not enough to show ordinary business care and prudence. Despite their Canadian residence and business interests, the Jurnigans did not ask their U.S. accountant how this impacted their U.S. tax obligations and they did not discuss the Canadian account with him.
They also did not review their income tax returns. Citing Williams, 489 F. App’x 655 (4th Cir. 2012), for the proposition that a taxpayer is charged with knowing what is in her tax return, the Court stated that the Jurnigans should have read their returns before signing. If they had done so, they would have seen that the returns incorrectly checked the “no” box and would have noticed the reference to FBAR forms. This would have led them to tell the accountant about the Canadian account and ask about the FBAR Form. The Jurnigans did not do this. While reliance on the advice of a tax professional can establish reasonable cause, the Jurnigans never requested or received advice about any filing requirements due to their Canadian account. The Court noted that their U.S. accountant testified that he was unaware of the FBAR requirement and thus the Jurnigans could not have relied on him.
The [Boyle] Court acknowledged that “[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” Boyle, 469 U.S. at 251 (emphasis in original). Such “reliance” however, “cannot function as a substitute for compliance with an unambiguous statute.” Id. The Court thus held that “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause.’”
The moral of the case is that taxpayers are obligated to read their income tax returns before filing and bring any errors to their return preparer’s attention. The Court in its opinion did not mention the second part of the “reasonable cause” exception, which is that the taxpayer filed an FBAR that reported the balance in the account. Thus, even if the Jurnigans had discussed their Canadian account with their U.S. accountant and he had given erroneous advice, it would not have gotten them out of the penalty.