Seattle International Tax Attorney Blog
Law firm of Harlowe & Falk LLP
Willful FBAR Penalty Sustained
In a recent case, United States v. Horowitz, the district court sustained willful violation of FBAR penalties against the taxpayer for signing returns that omit overseas accounts.
In a recent case, Haynes v. United States, the court denied summary judgment in favor the government in a case looking at the application of the reasonable cause exception.
The IRS assessed penalties against Christopher and Pricilla Haynes (the “taxpayers”) for late filing. This lawsuit was brought by the taxpayer to recoup the penalties.
As the court announced, the taxpayers are entitled to a refund on IRS penalties only if they can show reasonable cause and a lack of willful neglect for the late filing. See 26 U.S.C. 6651(a)(1). Citing the Supreme Court in United States v. Boyle, 469, U.S. 241 the district court had originally found in favor of the IRS. Under the precedent of Boyle, the court found that reliance on an attorney or an accountant to file a tax return cannot constitute reasonable cause under Sec. 6651. However, on appeal the court in this case found that material issues of fact remain, and found that summary judgment was not appropriate.
In this case, the taxpayer’s CPA filed their tax return electronically. By virtue of a mistake by the preparer, the electronic filing was rejected. Once notice of the rejection was received, the taxpayers submitted paper filings. The IRS issued penalties upon receipt of the paper filings, which is the issue of the case.
To escape penalty for late filing, the court in Boyle provided that: “the taxpayer bears the heavy burden of proving both (1) that the failure did not result from ‘willful neglect” and (2) that the failure was ‘due to reasonable cause’”. Reasonable cause exists where the taxpayer “demonstrates that he exercised ‘ordinary business care and prudence’ but nevertheless was ‘unable to file the return within the prescribed time’”.
In this case, the court found that issues of material fact existed as to the reasonable cause claim by the taxpayers. The court remanded the case back for further review.
The case provides helpful guidance on requirements for filing under the reasonable cause standard. Taxpayers should consult with an attorney to determine whether the reasonable cause standard may be applicable to them.
IRS CIRCULAR 230 NOTICE: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY ATTORNEYS AT HARLOWE & FALK LLP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
Mehrdad is a partner at the law firm of Harlowe & Falk LLP. Based in the greater Seattle area, but with clients internationally, Mehrdad's practice includes international tax consulting. This includes consulting with clients on inbound transactions, outbound transactions, mergers & acquisitions, and IC-DISC....