The Tax Times: IRS Wins Another 50% Willful FBAR Penalty Case!

A district court has found in Agrawal, (DC WI 12/9/2019) 124 AFTR 2d ¶2019-5522 that a taxpayer was liable for nonwillful FBAR penalties and that the reasonable cause exception did not apply because the taxpayer did not act with ordinary business care and prudence when he prepared some of his own returns and when he had an accountant prepare others.

The penalty for violating the FBAR requirement depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC § 5321(a)(5)(B)(i)) The maximum penalty amount for a willful violation "shall be increased to the greater of" $100,000 or 50% of the balance in the account at the time of the violation. (31 USC § 5321(a)(5)(C), 31 USC § 5321(a)(5)(D))

The IRS may not impose a penalty if the taxpayer meets several requirements, one of which is that the violation was due to reasonable cause. (31 USC § 5321(a)(5)(B)(ii))

The district court points out that neither 31 USC § 5321 nor its corresponding regs define "reasonable cause" in the FBAR reporting context, but the regs implementing Code Sec. 6651 equate the reasonable cause standard with a standard of "ordinary business care and prudence." (Reg. § 301.6651-1(c)(1)) The regs interpreting Code Sec. 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." (Reg. § 1.6664-4(b)(1))

Mr. Agrawal self-prepared his 2006 and 2007 tax returns. He hired an accountant to prepare his 2008 and 2009 tax returns. In all years, he indicated, in the Foreign Accounts and Trusts part of Schedule B to Form 1040, that he did not have a foreign bank account. In all years he failed to file FBARs. But Mr. Agrawal did have a foreign bank account during those years with more than $10,000 in it.

Mr. Agrawal testified that he told his accountant that he did not have a foreign bank account. He said he did this because a tax professional at the foreign bank told him that the income in the account was not subject to US income tax.

Mr. Agrawal was in immigrant from India, completed graduate school education in the US, and taught geophysics and math at a US technical college.

The IRS sought to impose a penalty for nonwillful failure to file FBARs. While he conceded that he should have filed FBARs, Agrawal argued the reasonable cause exception should apply and that his conduct was excused because he relied on the advice of tax professionals, and because he was elderly, unsophisticated about tax law, and spoke English as a second language.

The district court found that the reasonable cause exception did not apply to Agrawal and that he was liable for the penalty.

The court held that no reasonable juror could find that Agrawal 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 for the years 2006-2009.

By his own admission, 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. And according to his deposition testimony, in 2008 and 2009, he did not tell the CPA preparing his tax return of the existence of the foreign account or question the CPA's decision to leave blank the Schedule B question about foreign bank accounts.

The court said that 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.

The court said that Agrawal's arguments that he was elderly, spoke English as a second language, and had an inexpert understanding of tax reporting requirements did not alter its reasonable cause analysis. By his own admission, Agrawal had sufficient mental acuity technical facility with the English language to work as a math teacher and as a geophysicist, and, for that matter, to represent himself in this litigation.

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