Question about late FBARs and reasonable cause relief

I talk from time to time with Mark Feldman, a U.S. tax attorney living in Israel. He sent me an interesting question and I got his permission to post it on the blog.

Anyone out there with some knowledge, hunches, secret incantations to ward off vampires, etc.?

There are many American citizens who had an accountant prepare their tax returns but the accountant never advised them to file an FBAR.  Would you say that it’s relatively safe in that circumstance to file the old FBARs with an attached note that the taxpayer has reasonable cause because the accountant never informed them?  Often in these cases, the accountant never discussed foreign bank accounts with the client, but arguably, the accountant should have been careful to inquire whether such accounts exist.  (Would you say that the attachment should include a statement by the accountant admitting that he messed up, or is that overkill?)

I note that FAQ 51.1 states: “If IRS determines that the violation was due to reasonable cause (for example, the taxpayer reasonably acted on the written advice of an independent legal advisor after having disclosed the account to the advisor).”  This, of course, is just an example, but might be read to imply that reasonable cause for FBARs requires actual written advice and actual discussion of the bank account.

Do you have the impression that the IRS is playing hardball on the issue of reasonable cause, forcing taxpayers to litigate if they want to use the reasonable cause exception?  After all, that’s the way to scare people into paying OVDI penalties, which makes lots of money for the government.  I just spoke with <well-known FBAR practitioner>, who gave me that impression.

The other question I have is how to interpret the statutory requirements for reasonable cause.  31 USCS § 5321 provides:

(ii) Reasonable cause exception. No penalty shall be imposed under subparagraph (A) with respect to any violation

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

How is clause II interpreted?  Does it refer (1) to the taxpayer properly reporting the income from the account on his personal income tax return, or (2) to properly fiing an FBAR when he finds out about his omission?

It would seem that the IRM would take the second position, as it states:

4.26.16.4.4 — Non-Willfulness Penalty

(2) The penalty should not be imposed if:

a. The violation was due to reasonable cause, and

b. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty.

Do you know whether the IRS is taking the second position?  Many of my clients have not properly reported the income on their tax return.