It should come as no surprise that taxpayers who get hit with the $10,000.00 penalty for failure to file Report of Foreign Bank and Financial Accounts (FBAR) are trying to get relief from the penalty by blaming their tax preparers for it.
Here is an excerpt from a recently issued statement of the IRS Office or Professional Responsibility (“OPR”) titled Professional Responsibility and the Report of Foreign Bank and Financial Accounts (FBAR):
We understand that FBAR non-filers are blaming their preparers for their failure to file – stating that they have reasonable cause for failure to file because the practitioners did not ask about or explain the foreign financial account part of the return.
And here is what the OPR says about tax preparers’ legal responsibility for a taxpayer’s failure to file the FBAR:
A practitioner must comply with FBAR rules as part of his or her due diligence obligation under Section 10.22 of Circular 230:
§10.22 Diligence as to accuracy.
Each attorney, certified public accountant, enrolled agent, or enrolled actuary shall exercise due diligence:(a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
(b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and
(c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service
Due diligence does not require that the practitioner “audit” their client. However, it does require that a practitioner make reasonable inquiries when a client provides information that suggests possible participation in overseas transactions/accounts subject to FBAR requirements.
I wrote about the FBAR requirements in a blog post titled Tax Court Update – October 2008 – The Limits of Tax Court Jurisdiction.
Practice Pointer: Have your client sign a statement that says he or she did not have a foreign bank account during the tax year and keep the statement in your file.
7 responses so far ↓
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3 Anonymous // Jun 23, 2009 at 2:13 am
“Have your client sign a statement that says he or she did not have a foreign bank account . . .”
With respect, the above would not pass the due diligence test because it is “leading”. It can too easily be construed as a “wink, wink, nod, nod, ‘You don’t have any foreign holdings, DO YOU’”.
Asking the client what kind of foreign holdings they have passes the due diligence test. Then the holdings, if any, must be analyzed to determine whether a filing requirement exists.
Of course, if the client answers that they have no foreign holdings, but indicia exists that suggests the contrary, §10.22 of Circular 230 as quoted above mandates the preparer to make further inquiries.
The client must then be apprised of the filing requirement, if one exists. I would have the client sign a document that the explanation took place.
If the client refuses to file the form, then the preparer must determine whether to keep the client; i.e., can the client be “trusted” in other areas.
With criminal and civil penalties in this area, I’d be careful.
4 Peter // Jun 23, 2009 at 8:18 am
Anonymous,
Thanks for the comment.
I agree that in today’s “close the tax gap” climate, tax preparers need to do a lot of CYA-ing.
But having said that we don’t audit our clients nor do we conduct an investigation into the veracity of statements they make to us.
That’s not our job, it’s the IRS’s, and we don’t get paid enough to do it.
But more importantly, we BELIEVE our clients.
If I ask my client if he has an interest in any foreign bank account and he says no and I respond with “prove it,” I wouldn’t have a client for very long.
If I don’t think a client is telling me the truth about his foreign bank account holdings, I don’t keep him as a client.
Our client statement contains an explanation of the foreign filing requirement in addition to a signature block to be signed under penalties of perjury.
5 Anonymous // Jun 24, 2009 at 2:32 am
Peter,
Your response is different than your original post and I am glad for that. You’ll also notice in my post I am not asking the client to prove anything. If they complete the questionnaire with all “No” answers, they are done and I do not need to ask them to prove a negative.
That being said, though, when preparing their return if they give me foreign brokerage account statements (FBAR filing requirement) or happen to tell me they have signature authority over a foreign bank account of a non-public company (FBAR filing requirement), then I have to inform them of that filing requirement. No professional standard would allow me to ignore it.
If *all* you ask is if the client has “an interest in any foreign bank account”, then you are purposely asking an incomplete question. A foreign brokerage account is a foreign financial account that must be reported. There are other examples, of course, of items that are considered foreign financial accounts that are not bank accounts. If you only ask about foreign bank accounts and the client truly does not have one, he has answered the question you asked truthfully. However, he easily could still have an FBAR requirement that he would not fulfill simply because you did not ask the correct question in the fear of losing a client.
As mentioned above, what if your client is an officer of a non-public company that has a foreign bank account and he has signature authority, but no financial interest in the account? He would still have an FBAR filing requirement even though he truthfully answered your question “No” that he does not have an “interest” in a foreign bank account.
Educating clients about filing requirements does not mean you are auditing them or asking them to prove a response. You are merely advising them of situations in which a filing requirement exists. If they answer “No” to a *complete* questionnaire, then I completely, 100% agree with you that you are under no obligation to ask them to prove it.
On the other hand, if you are truly only asking them if they have an interest in a foreign bank account, then you are steering the clients who don’t have an interest in a foreign bank account, but otherwise do have a filing requirement into incorrectly not filing. And these may be clients (hopefully it would be all of your clients) who truly do want to fulfill all of their filing requirements.
Thinking that asking complete questions is “CYA-ing”, as opposed to fulfilling professional duties may be the issue that keeps us from agreeing with one another.
6 Peter // Jun 24, 2009 at 3:49 am
Anonymous,
You’re right. I stand corrected.
The question should be more broad.
I do inform my clients of their duty to disclose all foreign investments whatever form they may take.
Finally, does it really matter why I fulfill my professional obligations?
Whether it’s CYA-ing or fidelity to professional duty, it still gets done.
It’s hard enough to get some of this stuff straight, do we now have to also get it straight for the right reasons?
Thanks for your thoughtful comments.
You’re too smart to run around incognito.
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