Failure to Answer the Schedule B Question on Foreign Accounts Negated the “Reasonable Cause” Argument for FBAR Penalty
Moore had a Swiss bank account in the
name of his solely owned Bahamian
corporation. The balance in the account
ranged from $300,000 to $500,000. Mr.
Moore filed no timely FBARs related to
the foreign account. In 2010, he amended
six years of tax returns (from 2003
through 2008) to report income for each
of those years from his foreign account.
Those amendments increased the taxes he
owed by about $18,000. In addition to
amending his tax returns, Mr. Moore in
2010 filed late FBARs for 2003 through
2008, as well as his first timely-filed
FBAR, for 2009. IRS proposed a penalty
of $10,000 for each of the four years
from 2005 to 2008.
“Reasonable Cause” is an escape hatch for FBAR penalty liability. The Bank Secrecy Act permits the assessment of penalties for violation of the reporting requirements in 31 U.S.C. §5314, but mandates that “[n]o penalty shall be imposed” if “such violation was due to reasonable cause” and “the amount of the transaction or balance in the account at the time of the transaction was properly reported.” 31 U.S.C. §5321(a)(5)(B)(ii). The requirement regarding proper reporting of the transaction or balance is not at issue in this case. Mr. Moore conceded that he violated the reporting requirements, but contended that the government cannot penalize him for that violation because he had “reasonable cause.”
Failure to answer the Schedule B question on foreign accounts fatal on FBAR penalty. The court ruled that when Mr. Moore ignored the question on Schedule B, he showed a lack of the exercise of ordinary business care or prudence. The Schedule B question asked if he had “signature or other authority over a financial account in a foreign country …” As a matter of law, it placed Mr. Moore at least on notice that he should inquire further as to whether his corporation's foreign account was subject to disclosure. His decision to avoid further inquiry was not an exercise of ordinary business care or prudence. He admits that if he had done even the most minimal inquiry (looking on page B-2 of the instructions for Form 1040, as his tax form explicitly directed him), he would have learned unequivocally that he needed to report his foreign account. The court held Mr. Moore subject to the FBAR penalty.