Reasonable Cause Defense Denied: FBAR Penalties Assessed by Court

In the recent 2019 case U.S. v. Ram Agrawal, a US District Court rejected a taxpayer’s reasonable cause defense against foreign bank account reports (FBARs) penalties. It ruled in favor of the government to collect FBAR penalties for the non-willful failure to file FBARs to timely report foreign bank accounts. Agrawal represented himself, without legal counsel in court, which is strongly not recommended in FBAR matters.

Facts of the case:

Agrawal was born in India and moved to the United States almost 50 years ago. 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, Agrawal invested in CDs at the State Bank of India (the largest bank in India). Some of these new CDs matured in 2004 and the remainder matured in 2006.

In 2004, Agrawal and his wife jointly opened an account at UBS, a Swiss investment bank (note that UBS is bank that was heavily scrutinized by the IRS). Agrawal used money from CDs in India that were maturing to fund the UBS account. Agrawal directed UBS to invest the money in non-US SEC funds, which he was advised would be non-taxable. The maximum value of the UBS account was $999,350 in 2006. In 2010, Agrawal closed the account at the request of UBS and received a check.

Agrawal 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, Agrawal replied that he did not. Agrawal’s defense was that his UBS representative informed him that his accounts were non-taxable in the U.S.

In 2011, Agrawal filed late 2006-2009 FBARs.  In 2016 the government assessed a non-willful failure to file FBAR penalty against Agrawal.  Agrawal argued, without legal counsel, 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. Agrawal argued that he is entitled to the “reasonable cause” exception to penalties.

Holding:

The court ruled that against Agrawal when he failed to file his FBARs. The court noted that Agrawal 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, Agrawal had sufficient mental acuity technical facility with the English language to work as a math teacher and as a geophysicist. In fact, the court noted “Agrawal has sufficient mental acuity technical facility with the English language to… to represent himself in this litigation.”  Agrawal’s self-representation in court was essentially used against him by the court.

Conclusion:

This case has bad facts, which often results in bad results. Conversely, good facts often result in good results. Worst of all Agrawal represented himself in court.  Agrawal was fortunate that the government did not pursue any criminal prosecution or willful penalties (a 50% of account balance penalty).

If taxpayers are non-compliant with their foreign asset and income reporting requirements, they should consider getting qualified tax legal advice and considering applying to one of IRS’ voluntary disclosure programs.

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