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In many relationships, one spouse may handle all the financial affairs of the household. But what happens when that spouse dies? Can a widow (or widower) be assessed a willful FBAR penalty just for signing tax returns prepared by her spouse and a CPA? A new opinion from the United States District Court of Central California considers this and more.
Mr. and Mrs. Jones lived a long life together. Mr. Jones, a native of New Zealand, was born in 1919 and lived there for 30 years before moving to Canada. Mrs. Jones, a native of Canada was born in 1928. The two moved to California in 1954 and became U.S. citizens in 1969. Despite spending nearly 50 years together in the United States, Mr. and Mrs. Jones continued to hold foreign financial accounts in their native countries: three in Canada and eight in New Zealand. Of those accounts, four were in Mr. Jones’s name only (the “Jeffrey Accounts”), three were in Mrs. Jones’s name only (the “Margaret accounts”), and the couple had four joint accounts.
As often happens, particularly among older couples, Mr. Jones appears to have managed the family’s financial affairs, including preparing the couple’s tax returns. Mrs. Jones was unaware of the Jeffrey Accounts at all. She testified that she would read parts of her tax returns, but didn’t pay attention to the parts that didn’t have figures on them, including Schedule B which disclosed the existence of foreign financial accounts. Instead, she relied on the work of her tax preparer, a CPA who had worked with the couple for 25 years.
That passive involvement ended when Mr. Jones died in 2013 at age 93. Mrs. Jones was named executor of his estate and got a lawyer to help her handle the probate work. That’s when she learned about the missing tax statements and got to work.
The couple’s CPA may have been handling their domestic affairs appropriately for 25 years, but it turns out he didn’t do much to address the couple’s international tax reporting obligations. Any taxpayer who owns or controls foreign financial accounts with balances over $10,000 must report those assets on a Report of Foreign Bank and Financial Accounts (FBAR), now FinCEN Form 114. Failure to do so results in annual fines of up to $10,000 for non-willful violations, and the higher of $100,000 or 50% of the balance of the unreported account on the day of the violation.
But the Jones’s CPA didn’t know that. He was not familiar with FBAR reporting requirements, or the need to report foreign income. He never had any other clients reporting foreign bank accounts, and was not in the habit of asking clients about those accounts (or the foreign income that came from them). According to the court, even though the CPA knew that the Joneses had lived in Canada, he never asked them about foreign accounts and did not go over questions related to the disclosure of foreign accounts on Schedule B.
Based on this CPA’s guidance, the Joneses had been ignoring their obligations to file FBARs related to their accounts in Canada and New Zealand. However, Mrs. Jones’s probate law advisors saw the reporting obligations for what they were, and Mrs. Jones hurried to come into compliance using the newly created IRS Streamlined Submission program. She filed amended joint income tax returns and the outstanding FBARs, submitted a certificate of non-willfulness, and paid the 5% penalty of $156,795.26 based on the highest account balance between her own accounts and the joint accounts of the parties.
The IRS said that work wasn’t enough. The IRS Agent assigned to her case said Mrs. Jones should have included her husband’s accounts in the Streamlined Submission. She also said that Mr. Jones’s violation was “[a]t best . . . willfully blind regarding his FBAR filing requirements.” The IRS proposed a willful FBAR penalty of “the statutory maximum of $1,521,940” prorated over two years. However, the calculation was based on the value of the accounts on June 30, 2013, rather than 2012, and Mrs. Jones had filed timely FBARs in 2012. The difference between the two years’ balances resulted in a $36,660.50 higher FBAR penalty, so Mrs. Jones took the matter to court.
On cross-motions for summary disposition (asking the court to decide the case based on questions of law without a trial), Mrs. Jones and the IRS both asked the court to decide if she had been willful in her failure to file FBARs, and whether the amount of the penalty was properly calculated.
One issue in front of the court was whether Mrs. Jones could be held to have willfully violated FBAR reporting laws if she was relying on a CPA’s advice. The IRS properly noted that courts have previously held a person can recklessly disregard a risk of harm that was so obvious that it should have been known even where a CPA is involved. Hiring a CPA won’t automatically shield taxpayers from a willful FBAR penalty. However, the court also refused to say her work with the CPA was irrelevant. The court said signing a Schedule B saying she had “no” foreign financial accounts was evidence of recklessness, but that evidence could be rebutted. The evidence for that rebuttal includes relying on the work of a trusted CPA. However, if she failed to provide that CPA information about her foreign accounts that could work against her at trial. Since there were indeed genuine disputes of material fact on the willfulness issue, the court denied summary judgment to both Mrs. Jones and the government.
Both the IRS and Mrs. Jones also asked the court to look at the assessed value of the FBAR penalties. Mrs. Jones said that because the number was based on 2013 values instead of 2012, the award was “arbitrary and capricious” and the IRS should go back and run the numbers again. The court agreed.
However, the IRS said that the final result was below the statutory maximum willful FBAR penalty of $100,000 or 50% of the balance at the time of the violation, so the amount was within the maximum penalty. The court agreed with that too and granted partial summary judgment on that issue. Essentially, the court said that, if a later trial revealed Mrs. Jones willfully violated the FBAR reporting laws, the IRS would need to recalculate the figures. However, it was not in technical violation of the statute because the current numbers fell well below the statutory cap.
Jones v. United States shows that things are seldom cut and dried during an IRS audit. It often takes a trial to resolve whether a taxpayer’s FBAR violations were willful or not. With the parties’ motions for summary disposition resolved, it will be up to Mrs. Jones’s tax attorneys (who hopefully have more international tax law experience than her CPA) to demonstrate that her reliance on her accountant in failing to file FBARs before her husband’s death supports a finding that her omissions were non-willful. At age 91, it is likely to become the fight of her life.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.