Court Rejects Reasonable Cause Argument in FBAR Penalty Case

In the recent U.S. v. Ram Agrawal; No. 2:18-cv-00504 the district court rejected the taxpayer’s reasonable cause defense. It granted the government summary judgment in its suit to collect FBAR penalties for taxpayer’s nonwillful failure to file foreign bank account reports (FBARs) to report his Swiss bank account.

The Taxpayer was very fortunate that the failures were not deemed willful. Excerpts from the court order are provided below.

Case facts & background

Taxpayer was born in India and moved to the United States around 1970.

He is a United States citizen. He completed his graduate education in the U.S., then worked in the U.S. as a geophysicist and math instructor.

He received an inheritance from his parents in the form of CDs that were held in India. In or around 2002, Taxpayer renewed or purchased new CDs at the State Bank of India. Some of these new CDs matured in 2004 and the remainder matured in 2006.

In 2004, Taxpayer and his wife jointly opened an account at UBS, a Swiss investment bank. Taxpayer used money from CDs in India that were maturing to fund the UBS account.

Taxpayer directed UBS to invest the money in non-US SEC funds, which would be non-taxable. The maximum value of the UBS account was $999,350 in 2006; $967,129 in 2007; $930,531 in 2008; and $671,425 in 2009.

In 2009, UBS notified Taxpayer that it intended to close the account. In 2010, Taxpayer closed the account and received a check from UBS for $671,424.65, which was the remaining account balance.

At his deposition, Taxpayer testified that he prepared his own tax returns in 2006 and 2007, but relied on CPAs to prepare his tax returns in 2008 and 2009. He testified that he did not tell the CPAs of the existence of the UBS account.

When his CPA asked whether he had a foreign financial account, Taxpayer replied that he did not. Taxpayer’s defense was that his UBS representative informed him that his accounts were non-taxable in the U.S.

FBAR late filing

In October of 2011, Taxpayer wife completed and signed FBARs for calendar years 2006 through 2009 with respect to the UBS account and submitted those forms to an IRS agent.

On April 12, 2016, the government assessed a civil penalty against Taxpayer for nonwillful failure to file FBARs, under 31 U.S.C. § 5321(a)(5).

Reasonable cause

Taxpayer argues that his conduct is excused because he relied on the advice of tax professionals, and because he is elderly, unsophisticated about tax law, and speaks English as a second language. He therefore argues that he is entitled to the “reasonable cause” exception under § 5321(a)(5)(B)(ii).

Reasonable cause — generally

Neither § 5321 nor its corresponding regulations define “reasonable cause” in the FBAR reporting context, and there’s little development in the case law. Sections 6651(a) and 6664(c)(1) of the Internal Revenue Code, however, use and define the term in the tax compliance context, and courts have found those provisions instructive in construing the reasonable cause standard applicable in the FBAR context.

Reasonable cause — standard

The regulations implementing 26 U.S.C. § 6651 equate the reasonable cause standard with a standard of “ordinary business care and prudence.”

The regulations interpreting 26 U.S.C. § 6664(c)(1) state that the determination whether a taxpayer acted with reasonable cause “is made on a case-by-case basis, taking into account all pertinent facts and circumstances,” and further that “generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper liability.” 26 C.F.R. § 1.6664-4(b)(1).

Court’s findings

The court finds that no reasonable juror could find that Taxpayer acted with ordinary business care and prudence, or that he made a reasonable effort to understand his FBAR reporting responsibilities, when he failed to file his FBARs.

  • Taxpayer self-prepared his 2006 and 2007 tax returns; he did not disclose the existence of a foreign financial account on Schedule B despite a direct question on the issue.
  • He did not tell the CPAs preparing his tax return of the existence of the UBS account or question the CPA’s decision to leave blank the Schedule B question about foreign bank accounts.
  • A taxpayer acting with ordinary business care, or one making a reasonable effort to understand his responsibilities, would have sought informed advice about the reporting requirements alluded to in Schedule B; seeking such advice would necessarily involve the taxpayer notifying the advisor of the existence of the foreign account.
  • Despite being elderly and speaking English as a second language, Taxpayer has sufficient mental acuity technical facility with the English language to work as a math teacher and as a geophysicist.

The court finds in favor of the government and grants summary judgment.

What should non-compliant taxpayers do?

If taxpayers are non-compliant with their foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

Why hire us?

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.