A district court granted summary judgment against a taxpayer, enabling enforcement of civil penalties for nonwillful failure to timely report his financial interest in certain foreign bank accounts. It ruled that the taxpayer did not establish an issue of material fact as to whether the failure to file Treasury Forms TD F 90-22.1, Report of Foreign Bank and Financial Account, commonly called FBARs, was due to reasonable cause, concluding that he did not act with ordinary business care and prudence or make a reasonable effort to understand his FBAR reporting responsibility.
Facts: Ram Agrawal, a U.S. citizen, worked as a geophysicist and then as a math teacher in the United States. He and his wife jointly opened an account at UBS, a Swiss investment bank, funding it from maturing certificates of deposit in India. He directed UBS to invest the money in nontaxable, "non—U.S. SEC" funds. In each year from 2006 to 2009, the value of the UBS account exceeded $10,000. Agrawal closed the account in 2010.
For tax years 2006—2009, Agrawal did not timely file an FBAR regarding the UBS account and did not report the certificates of deposit in India or the UBS account on his tax returns.
In 2011, his wife submitted FBARs to an IRS agent for tax years 2006 through 2009. In 2016, a civil penalty for nonwillful failure to file FBARs was assessed against Agrawal. In 2019, the government filed an action in district court to enforce the penalty and moved for summary judgment.
In a deposition, Agrawal testified that for 2006 and 2007, he prepared his own tax returns and did not disclose his foreign financial account as required on Schedule B, Interest and Ordinary Dividends. He testified that he used CPAs to prepare his 2008 and 2009 tax returns and he did not tell them about the UBS account, despite being asked during the 2008 return preparation whether he had any foreign accounts, or inquire why the Schedule B question about foreign accounts on his 2009 return had been left blank. Later, he unsuccessfully attempted to reverse some of his testimony.
Issues: Under 31 C.F.R. Section 103.24, at the time relevant to the case, persons subject to the jurisdiction of the United States with a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country was required to file an FBAR by June 30 each calendar year with respect to foreign financial accounts with a value exceeding $10,000 at any point in the previous calendar year.
Section 5321(a)(5) of Title 31 authorizes a civil penalty for violations of the requirement to file an FBAR. However, the penalty is not imposed if the "violation was due to reasonable cause and ... the amount of the transaction or the balance in the account at the time of the transaction was properly reported."
Regs. Sec. 301.6651-1(c)(1) defines reasonable cause as exercising "ordinary business care and prudence." Regs. Sec. 1.6664-4(b)(1) provides that reasonable cause is based on all the pertinent facts and circumstances but particularly the taxpayer's effort to determine his or her proper liability.
Holding: The court granted the IRS summary judgment, finding that Agrawal did not establish an issue of material fact as to whether his failure to file his FBARs was due to reasonable cause.
Relying on Agrawal's original testimony, the court ruled that he clearly violated the law when he failed to timely file the FBARs and had not told his CPA about his UBS account or questioned why the CPA did not disclose the existence of his foreign financial account on Schedule B. Thus, Agrawal did not act with ordinary business care and prudence or make a reasonable effort to understand his FBAR reporting responsibilities. The court reasoned that a taxpayer doing so would have sought informed advice regarding the reporting requirements alluded to in Schedule B, which would involve the taxpayer's telling the adviser about the foreign account.
The court rejected Agrawal's arguments that his conduct was excused because he is elderly, English is his second language, and he has an inexpert understanding of tax reporting requirements, noting that he uses English to work, represented himself in the litigation, and had the financial savvy to direct UBS to invest in nontaxable, "non-U.S. SEC funds."
- Agrawal, No. 18-C-0504 (E.D.Wis. 12/9/19)
—By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John's University, Queens, N.Y.