2019 Ends With Another FBAR Victory For the IRS
While 2019 saw no major changes to the U.S. tax code, the IRS can certainly pat itself on the back for scoring a number of victories in defending its FBAR penalty regime in the court system.
In the last FBAR case of the year, Agrawal, (DC WI 12/9/2019) 124 AFTR 2d ¶2019-5522, a district court held that a U.S. taxpayer, an immigrant from India, was liable for the FBAR penalty and rejected the taxpayer’s reasonable cause claim.
The case provides an interesting insight into what courts will deem is sufficient cause to prevent the imposition of the FBAR penalty.
THE FBAR REQUIREMENT AND ITS PENALTIES
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year. The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The FBAR due date is April 15th, with a maximum extension of 6 months.
A non-willful failure to file the FBAR can result in a penalty of up to $10,000 per account per year (subject to inflation). The IRS has recently stated that these penalties represent maximum amounts and lower penalties may be appropriate depending on the circumstances. It has also reiterated that penalties will not be imposed if reasonable cause can be shown for the taxpayer’s delinquency.
THE AGRAWAL CASE
During tax years 2006-2009, Mr. Agrawal, a geophysicist, took two different approaches to preparing his returns. For the first two years he self-prepared, and for the last two years, he hired a preparer. What was common to all his filings was the fact that he indicated on Schedule B to Form 1040 that he did not have a foreign bank account. Further, he did not file FBARs despite having a foreign bank account with a more than $10,000 balance.
Mr. Agrawal explained to the Court that he told his accountant that he didn’t have a foreign account, because another tax professional at his bank told him that the income in the account was not subject to U.S. income tax and therefore it did not qualify as a reportable foreign account.
He also argued that he was an immigrant from India, he was elderly and unsophisticated about tax law, and that he only spoke English as a second language.
The district court rejected Mr. Agrawal’s reasonable cause defense, concluding that he did not make a reasonable effort to understand his FBAR reporting requirements. The Court was not sympathetic to Mr. Agrawal’s arguments that he was elderly, spoke English as a second language, and had an inexpert understanding of tax reporting requirements. The Court argued that by his own admission, Agrawal had sufficient mental ability and fluency with the English language to work as a geophysicist and to represent himself in court as part of this very litigation.
FAILING TO FILE IS A SERIOUS MATTER
For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience with FBAR fillings and helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you for good.
Joshua Ashman, CPA & Nathan Mintz, Esq.