All too often when a taxpayer has penalties imposed by the IRS and the taxpayer becomes aware that there are exceptions from the penalties for reasonable cause, the taxpayer erroneously assumes that his reasonable cause explanation will satisfy the IRS and the penalty will be forgiven. Unfortunately, there are also tax preparers, including CPAs, attorneys and enrolled agents, who don’t understand that what the taxpayer or professional deems to be reasonable cause does not necessarily satisfy the IRS’s criteria for reasonable cause.
Take the case of James Moore who had a Swiss bank account in the name of his Bahamian corporation. When filing his personal tax returns, he always answered “No” to the question on Schedule B of Form 1040 that asked if he had “signature or other authority over a financial account in a foreign country.” In 2010, Mr. Moore likely got religion and amended his 2003 – 2008 tax returns and showed the additional income earned from his foreign account on his personal tax returns. He also filed the required FBAR (foreign bank account report) reports. He then filed the 2009 & 2010 tax returns showing the foreign income and filed his FBAR reports for those two years.
Naturally Mr. Moore was assessed penalties for his failure to disclose his foreign account holdings. While Mr. Moore conceded that he violated the FBAR filing requirements, he contended that the government cannot penalize him for that violation because he had “reasonable cause.” Despite the arguments that Mr. Moore made to show that he had reasonable cause, the court focused on his failure to answer the Schedule B question on his personal tax returns. 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. (These are two key tests that the taxpayer must prove to show reasonable cause). It was also noted that the tax organizer used by Mr. Moore’s tax preparer asked the question if any foreign accounts were held, and Mr. Moore had always answered the question with a “no”.
The court further stated that 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.
Accordingly, the court held Mr. Moore subject to the FBAR penalty.
When completing a tax professional’s tax organizer, it is very important that the taxpayer carefully read the organizer and complete it accurately and completely. Failure to do so can result in an adverse tax assessment.
If you want to discuss your business or personal tax planning and tax preparation concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.