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Zhanna Ziering Speaks to Tax Notes on Reasonable Cause Defense in FBAR Case

July 6, 2017, Tax Notes

The boundaries of reasonable cause when applied to taxpayers who fail to file a foreign bank account report are currently being tested in a case being briefed at the Court of Federal Claims.

“The government’s argument in this case is a great example of its application of heightened scrutiny in evaluating reasonable cause defense to FBAR and other international penalties,” Zhanna A. Ziering of Caplin & Drysdale, Chtd. said. “The government yet again demonstrates its position . . . that reliance on a tax preparer is not sufficient to establish reasonable cause,” she said, noting that the taxpayers in the case had been transparent with their return preparers by providing them with foreign bank statements.

. . .

“In light of the government’s position, it becomes difficult to imagine a factual scenario that would be sufficient enough to establish reasonable cause,” Ziering said.

. . .

Ziering noted that the prior version of the Internal Revenue Manual “clearly stated that in order for a reasonable cause to be considered, delinquent FBARs had to be filed.”

“Despite that language, we had started to see the shift in the exam with the agents actually looking to see whether the income from the foreign accounts was reported on timely filed returns before considering reasonable cause,” Ziering said. When IRM provision was changed in November 2015 to model the language of the statute, it was anticipated that the reporting of the income would become the new prerequisite to the consideration of reasonable cause, Ziering said.

“The government’s brief seems to suggest that should Jarnagins file the delinquent FBARs now, they will satisfy the reporting prong,” Ziering continued. “It would be interesting to see if in cases where the delinquent FBARs are filed, the government would still argue that reasonable cause is not established because the interest income was not properly reported.”

Ziering also took note that the government was asserting non-willful penalties against both the husband and wife on the same accounts.

“This case was at the IRS’s Office of Appeals when the May 2015 guidance for FBAR penalties was released,” Ziering said in an email. That guidance states that for co-owned accounts, examiners make a separate determination of a violation for each owner and what the penalty should be based on percentage of ownership. “[That] would have resulted in each of the spouses owning 50% of the non-willful penalty. However, Appeals had been consistent in its position that the May 2015 guidance does not apply to cases where the exam was completed prior to the release of the guidance,” Ziering added.

For the full article, please visit Tax Notes’ website (subscription required).

Excerpt taken from the article “Reasonable Cause is Front and Center in FBAR Case” by Andrew Velarde for Tax Notes.


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