By admin of MillarLaw A Professional Corporation On Monday, January 7, 2019

The beginning of the year is usually a time for thinking about the challenges ahead. This year is no different. The “shutdown” of parts of the federal government, including the IRS, will cause a variety of personal and business hardships for all affected. But among the challenges some taxpayers will face is how to deal with is the challenge to their relationship with their accountant posed by a troublesome court decision.

The decision in Kimbell v. United States,(Court of Federal Claims) dealt with what constitutes “willfulness” for purposes of imposition of penalties for failure to report a foreign bank account. The case does not directly discuss the relationship between taxpayer and account, but the implications are clear.
The taxpayer signed and filed an individual tax return (Form 1040) which included a Schedule B. Part III of the schedule has questions about foreign accounts and trusts. For most taxpayers the answer to these questions is “No” and “No” is often considered the default answer in tax preparation software. This is where the relationship between taxpayers and accountants gets tricky. Remember, there is no privilege applicable to accountant-taxpayer communications in tax audits and investigations. Which brings us to Kimbell.
In Kimbell the taxpayer had offshore bank accounts and failed which she failed to report. On Schedule B the questions were answered “No”. The specific procedural history is not important, except to say that she paid a penalty assessed for her “willful” failure to file a Report of Foreign Bank Account. She then filed suit in the Court of Federal Claims for a refund.
The issue of “willfulness” has been the subject of much discussion and in particular whether the answers to questions on Schedule B if incorrect establish willful conduct (meaning an intentional act). The court concluded that the taxpayer had a duty to review the return for accuracy and could not claim ignorance or reliance on her accountant in its decision finding her conduct “willful” and denying her refund claim. The penalty was 50% of her highest account balance for the years in question.

The decision in Kimbell, while not binding on other courts, supports the view of the IRS that the determination of “willful conduct” can be based upon the answers to Schedule B. The burden now shifts to accountants and other tax return preparers to secure and report correct answers to the Schedule B questions. The opportunity to rely on a defense that the software populates the answer automatically is not going to work. Therefore, the return preparer, if a professional is used, will be the key witness against the taxpayer in either civil or criminal proceedings. The failure to ask the question may be a cause for professional discipline by the IRS. The use of a written questionnaire (organizer) which is actually answered by the taxpayer is help in avoiding the defensive claim of the taxpayer that “I relied on my accountant”. Obviously, if the taxpayer prepares their own returns they have only themselves to blame.
There is also the potential for discovery of offshore corporations, partnerships and trusts if accountant is aware that the taxpayer has offshore bank accounts. The failure to report by way of “information returns” brings further penalty exposure.
The IRS has the ability to examine the patterns and practices of return preparers where there is likely to be a pattern of violations of professional standards. The defense of a client of reliance on the accountant, if believed could result in such an investigation.
The new year promises many challenges, but based upon Kimbell the relationship between taxpayers and accountants is clearly one of them . There are options available to remedy past inaccurate filing and we are happy to discuss the options with you.