The U.S. District Court for the Eastern District of Michigan has held in United States v. Dennis R. Ott
, (No.18-cv-12174) that a taxpayer was liable for penalties for willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) because he had constructive knowledge of his FBAR reporting requirements and acted recklessly and with willful blindness by failing to report his foreign accounts.
In general, taxpayer with a reportable foreign financial account must report the account annually on an FBAR. Under the Bank Secrecy Act, each U.S. person must file an FBAR when that person has a financial interest in, or signature authority over, one or more accounts in a foreign country and the aggregate value of all such accounts exceeds $10,000 at any time during the calendar year. The FBAR is generally due April 15 following the calendar year reported. However, the Financial Crimes Enforcement Network (FinCEN) will grant filers an automatic extension to the federal income tax due date of Oct. 15 each year.
The question at issue in Ott
was whether the taxpayer willfully failed to file FBARs to report his financial interests held in Canadian accounts. The taxpayer used his sister’s Canadian mailing address for correspondence with the Canadian financial institution where his accounts were held, and never disclosed his foreign accounts to his accountant. Ott did not disclose his Canadian accounts until he entered the IRS’s offshore voluntary disclosure initiative (OVDI). Ott later opted out of the OVDI and asserted a reasonable cause defense. During a subsequent examination, the IRS assessed a total civil penalty of $988,245.
The IRS contended in that Ott had constructive knowledge of his reporting requirements by signing his tax returns, which included a reference to the FBAR within the Schedule B on Form 1040. Schedule B specifically asks whether the taxpayer had a financial interest in or signature authority over a foreign financial account, and whether the account was reported on an FBAR. Ott testified that he never reviewed the instructions to IRS Form 1040, Schedule B, and did not review the substance of his tax returns beyond “"the bottom line.”
The court agreed with the IRS that the taxpayer had constructive knowledge of his reporting requirements by signing his tax returns and therefore acted recklessly and willfully by failing to report his foreign accounts. Although there were other contributing factors to the court’s determination, taxpayers should be aware that something as simple as checking “no” on Schedule B could lead to a finding by a court or the IRS of recklessness and willful blindness. It is also an important reminder that FBARs should always be timely filed.
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