Case Reminds Southern California Taxpayers With Overseas Bank Accounts to File a Timely FBAR or Risk Civil Penalties

The Internal Revenue Service is tasked with enforcing the portion of the Bank Secrecy Act of 1970 that requires American taxpayers to disclose their foreign financial assets and accounts.  As a result, United States taxpayers who own or hold signature authority over an offshore bank account with an aggregate balance of at least $10,000 must file the Report of Foreign Bank and Financial Accounts (“FBAR”) by June 30 of each year. If an individual fails to do so, significant civil penalties may result.

In Moore v. United States, a man maintained a Bahamian financial account subject to FBAR reporting requirements for almost 20 years.  The account was apparently held in the name of an investment corporation that was solely owned by the man.  In 2003, the Bahamian account was transferred to Switzerland as a result of the bank’s business affairs.  At all times, the foreign asset held at least $300,000.

The U.S. taxpayer apparently failed to file a completed FBAR until 2009.  During the same year, the man amended his prior tax returns for the tax years 2003 through 2008 to include the income derived from his overseas account.  He also filed late FBARs related to each amended tax return.  After that, the IRS imposed four separate $10,000 non-willful penalties against the man regarding the late FBARs for the tax years 2005 through 2008.

In response to the civil penalties, the taxpayer filed a lawsuit against the government in federal court, claiming the IRS violated his constitutional rights.  He also argued the government illegally delegated judicial power under the Bank Secrecy Act to the IRS.  After that, the U.S. filed a motion for summary judgment and asked the court to dismiss the case.  In general, a motion for summary judgment is appropriate when there are no material facts in dispute and a party to a lawsuit is entitled to judgment as a matter of law.

After examining the facts of the case, the federal court stated the man was subject to civil penalties as a result of his non-willful violations of the Bank Secrecy Act.  Although the Act does not define “reasonable cause,” the district court stated there was no reason to believe that lawmakers intended the definition to be different than that used in the tax statutes.  According to the federal court, the man did not have reasonable cause for his violation because the evidence suggested he simply chose to ignore his duty to disclose his offshore bank account.

Next, the district court acknowledged that no binding case law addressed judicial review of IRS imposed FBAR penalties.  The court then stated § 706(2) of the Administrative Procedure Act governed judicial review of the man’s lawsuit. Since the government failed to provide sufficient evidence to determine whether the IRS acted arbitrarily or capriciously when it assessed FBAR penalties, the federal court refused to grant summary judgment on this issue and ordered the parties to supplement the record.

The federal court next held that the penalties assessed by the IRS did not violate the man’s constitutional right to due process, nor were the fines imposed excessive under the Eighth Amendment.  The district court also found that the man abandoned his remaining constitutional claims.  As a result, the court granted the government’s motion for summary judgment on the taxpayer’s various constitutional claims.

If you would like to learn more about your international tax obligations, you should discuss your situation with seasoned San Diego tax attorney William Hartsock.  Mr. Hartsock has more than 30 years of experience helping clients throughout Southern California navigate the nation’s tax laws. To speak with a veteran tax advocate, give Mr. Hartsock a call at (858) 481-4844 today or contact him through his website.

Additional Resources:

Moore v. United States, Dist. Court, WD Washington 2015