Case of Jones Shows How Far IRS goes to Find Willful FBAR

How Far IRS goes to Find Willful FBAR (US v Jones)

Incomplete Streamlined Procedure Willful FBAR Penalty: In  the recent case of U.S. v Margaret Jones, the court affirmed an IRS Willful FBAR Penalty against an elderly widow, for a seemingly incomplete Streamlined Disclosure.  The catalyst for claiming that the Taxpayer’s submission was incomplete was because the applicant did not include a 5% streamlined penalty for her deceased husband.  Whether or not that would make the submission incomplete per se is unclear. It also appears an inexperienced IRS Agent went rogue against the elderly widow for reasons unknown. For reference, this was the Agent’s “first” streamlined case, based on having three days of classroom training. How neither the IRS nor the Court showed sympathy for a 91-year old elderly widow is incredible.

*Updated from original publishing date (mid-2020).

US v Jones: Case 2:20-cv-06173-JVS-RAO

In the case of US vs Jones there were several unfortunate missteps along the way, most having nothing to do with the Taxpayer’s submission. The catalyst for the audit stemmed from Taxpayer’s failure to include the decedent spouse as part of the Title 26 Miscellaneous Offshore Penalty.

The Agent was Inexperienced with Streamlined Disclosure

Like many IRS personnel, the Agent was a novice when it came to auditing Streamlined Disclosures.  This case proves that just because a person worked at the IRS in a non-offshore disclosure role does not mean they are qualified to handle a streamlined case. In this case, the IRS Agent assigned to Mrs. Jones’s case had Three (3) days of “classroom training” for streamlined cases under her belt. That’s right — count them….three days in a classroom setting and not a single streamlined disclosure under her belt. To be more specific, the IRS Assigned a Streamlined Submission involving several million dollars and a widow to an agent with exactly ZERO experience in streamlined submissions.

As provided by the Court:

• • • “The IRS’s income tax and FBAR examination was conducted by IRS Agent Keli Kim (formerly Keli Stelmar). Id. at ¶ 33. Ms. Kim joined the IRS in 2010 and began her career with the IRS auditing individual income tax returns, Form 1040. Id. at ¶ 34.

• • • When Ms. Kim started working on audits related to FBARs and foreign accounts, she only received three days of classroom training related to FBARs, foreign entities, foreign issues and international issues. Id. at ¶ 35.

• • • To date, Ms. Kim has only handled three streamlined submission cases—the first being the Joneses’ case. Id. at ¶ 36″

Taxpayer Jones Made a Single-Spouse Submission

When a person passes away, the IRS can still go after the estate, administrators, etc. In this case, the decedent was Mrs. Jones husband, Mr. Jones (aka Decedent) Decedent was in his early 90’s when he passed. He had a CPA who apparently did not know about the FBARs. Upon learning of the previous FBAR non-compliance, his widow, Mrs. Jones  (who knew nothing about the accounts) submitted a Streamlined Disclosure submission, but she did not include her decedent husband’s accounts as part of the submission.

Her position was reasonable: How can he sign the submission if he is deceased —

Makes sense, right?

But, by filing a single-spouse Streamlined — when as in this case, the decedent had accounts in the millions of dollars — Taxpayer was inadvertently setting herself up for an increased chance of audit.

Did the Taxpayer have an Alternative Strategy?

The problem with this strategy is that death does not mean the IRS loses all opportunity to go after FBAR Penalties.  Since Taxpayer relied on a CPA, she may have had a better shot had she’d submitted a dual-spouse Reasonable Cause submission.  While the courts can reject Reasonable Cause, oftentimes (if submitted properly) the IRS will accept it.  Even in the recent case of  U.S. v. Agrawal, where the court rejected Taxpayer’s Reasonable Cause, it was due to Taxpayer having bad facts and being self-represented.

And, in that case the IRS still limited the penalties to non-willful penalties.

No Penalty Submitted for Margaret Jones’ Deceased Husband Accounts

Just because someone passes away does not mean the estate is absolved from a prior year audit.  Here, Petitioner did not include her deceased husband’s accounts, and that seems to have been what sparked the Audit.

As provided by the Court:

• • • “The IRS began its investigation into the Joneses on the basis that Mrs. Jones’ Streamlined Submission did not list, and did not pay a 5% penalty on Mr. Jones’ foreign accounts. Id. at ¶ 37.

    • Ms. Kim disagreed with Mrs. Jones’ decision to not include Mr. Jones’ accounts on the Streamlined Submission and felt that she should have called the IRS’s 1-800 number. Id. at ¶ 38. There was, however, no clear rule as to the process for a streamlined submission for a deceased spouse.

    • An internal discussion at the IRS recognized that “[t]his is a unique SL case,” and the Frequently Asked Questions do not “really seem to address not singing [sic] the joint certification.” Id. at ¶ 39. Different IRS employees shared “[their] impressions” and agreed that not submitting a certification as to the Jeffrey Accounts is a “benign foot fault” and the IRS “will allow the surviving taxpayer spouse . . . to perfect her [non-willful] certification.” Id.

    • Other employees told Ms. Kim that Mrs. Jones could amend her Streamlined Submission to include Mr. Jones’ accounts and pay the 5% penalty. Id. at ¶ 40.”

Was Margaret Jones Allowed to Fix her Submission?

It does not appear the new Agent sufficiently followed-up with the Taxpayer to re-iterate that she should re-submit the 14654. Even other agents agreed she should have the opportunity to amend the 14654 SDOP submission. Taxpayer CLEARLY should have had a chance to fix the issue.  She is a 91-year old widow who affirmed under penalty of perjury she did not know about the accounts. It would appear the IRS Agent may have gone rogue against her for one reason or another, and was penalizing her without providing her a full chance to revise the submission.

The “1-800 Argument” Against Ms. Jones is Ridiculous

The 1-800-number was never effective in eliciting specific advice for a case. If you had a specific question, you are “recommended” to submit a PLR or similar.  This Taxpayer clearly had a unique situation and the 1-800 number would not have garnered specific, written advice she could rely upon. Mrs. Jones is 91 years old. She lost her husband of nearly 60-years, and the Streamlined program had only been around for less than 1-year. Dialing the 1-800 number for specific advice on her situation would have gotten her nowhere. 

The IRS determined Mr. Jones to be Willful

As provided by the Court:

• • • The IRS’s findings in support of its willfulness determination are set forth in the July 26, 2018 30-Day Letter sent to Mr. Jones (his Estate) and to Mrs. Jones on October 22, 2018. Id. at ¶ 76.

    • These letters attached an Explanation of Items (“Revenue Agent Report” or “RAR”). Id.

    • Each IRS Agent Determination constitutes a complete exposition of all the underlying reasons for a willfulness determination and for the amount of the penalty assessed. Id. at ¶ 77. The RAR concluded that Mr. Jones was “[a]t best . . . willfully blind regarding his FBAR filing requirements.”

As a result, the IRS assessed willful penalties.

Could the Willfulness Result have been Avoided?

Possibly.

It appears that the audit was sparked by the non-reporting of the husband’s penalty. Had Mrs. Jones submitted a penalty for the Husband’s Accounts or possibly sought a Reasonable Cause submission, an audit would have been presumably been avoided as well as the willfulness penalties that followed. It is unclear if Mr. Jones received proper legal advice from counsel to weigh the pros and cons of disputing willfulness.

The Case was dismissed by both parties involved.

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