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Although "reasonable cause" has recently been overshadowed by "willfulness" issues in FBAR cases, it remains critical to penalty defense, in both the domestic and international contexts.
A major focus in international tax in recent years has been "willfulness." This stems from the fact that the U.S. government has litigated, and mostly won, a series of cases involving willful violations of the duty to report foreign accounts by filing Form TD F 90-22.1 or FinCEN Form 114 (FBAR).1 The concept of willfulness has also drawn attention lately because it represents the key eligibility criteria for two of the IRS's voluntary disclosure programs. Indeed, taxpayers cannot get penalty relief under the Streamline Foreign Offshore Procedure or the Streamline Domestic Offshore Procedure, unless they convince the IRS that their U.S. tax noncompliance was non-willful.
The notion of willfulness has overshadowed "reasonable cause" recently, but the latter remains critical to penalty defense, in both the domestic and international contexts. This is true for several reasons, one of which is that the existence of reasonable cause allows taxpayers to escape not only willful FBAR penalties, but non-willful penalties, too. Court cases on this topic are scarce, which is logical because: (1) the IRS generally asserts non-willful FBAR penalties only in audits occurring outside the existing voluntary disclosure programs; (2) FBAR penalties are often reduced to relatively small amounts through application of the pertinent "penalty mitigation guidelines;" and (3) the professional fees and other costs associated with judicially battling an FBAR assessment can easily outweigh the benefit of full penalty abatement. However, every once in a while, a determined taxpayer takes the U.S. government to task, as was the case with Jarnagin.2
This article analyzes Jarnagin and gleans lessons about the evolution of reasonable cause and its applicability to non-willful FBAR penalties and other international information-reporting sanctions.
Overview of Foreign Account Obligations
FBAR Duties and Penalties
Congress enacted the Bank Secrecy Act in 1970.3 One purpose of this legislation was to require the filing of certain reports, like the FBAR, where doing so would help the U.S. government in carrying out criminal, tax, and regulatory investigations.4 Applicable law requires the filing of an FBAR in cases where: (1) a U.S. person (2) has a direct financial interest in, has an...