Interesting Court Cases: Failure to File an FBAR and Interpretation of "Reasonable Cause".

When "I Didn't Know" Isn't Enough: The $40,000 Foreign Bank Account Mistake. Court Case Update originally published on "The Buzz About Taxes" during the 2020 Tax Season.

Feb 29, 2020

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When "I Didn't Know" Isn't Enough: The $40,000 Foreign Bank Account Mistake.

Picture this: It was a beautiful, sunny February 29th, 2020 in Michigan—one of those rare leap year days that felt like a gift. The cold air was crisp, the days were slowly getting longer, and spring was playing peek-a-boo with us tax professionals who were sprinting through another intense tax season.

Between client calls, I found myself thinking of the British gardening show I had become obsessed with (you know the one—where the presenter's enthusiasm could convince anyone they're destined to create horticultural magic). I was mentally mapping my post-tax-season garden: which herbs to plant, where the tomatoes will go, how I would finally tackle that ambitious flower bed project.

But here's the thing about wild dreams—they belong in gardens, not tax compliance!

Especially when it comes to foreign bank account reporting, where the penalties are real and the "reasonable cause" exceptions are surprisingly narrow.

The Case That Should Wake Everyone Up

Let me tell you about Mr. Agrawal's expensive lesson. In December 2019, a Wisconsin District Court handed down a decision that every American with overseas accounts needs to understand.1

THE SETUP Mr. Agrawal was a naturalized U.S. citizen who immigrated from India. He held advanced degrees, taught geophysics and mathematics at a U.S. technical college—by all accounts, an educated professional. For tax years 2006-2007, he prepared his own returns. For 2008-2009, he hired a CPA.

Here's where it gets interesting: In all four years, when Schedule B asked the direct question about foreign bank accounts, he checked "No." In all four years, he failed to file the required FBAR (Foreign Bank Account Report).

THE PROBLEM? He absolutely had a foreign bank account with more than $10,000 in it.

THE EXCUSE Mr. Agrawal's defense was that a tax professional at the foreign bank told him the income wasn't subject to U.S. income tax. Based on this advice, he didn't disclose the account to his U.S. tax preparers and answered "No" to the Schedule B questions.

When the IRS came knocking, he argued for the "reasonable cause" exception, claiming he:

Relied on professional advice
Was elderly and unsophisticated about tax law
Spoke English as a second language

Sounds reasonable, right?

Why the Court Wasn't Buying It

The district court rejected every argument and imposed the penalty. Here's their brutal but logical reasoning:

ON PROFESSIONAL RELIANCE: You can't claim you relied on professional advice when you never told your actual tax professionals about the account. The advice from the foreign bank employee was about income tax, not reporting requirements—and Agrawal never sought specific guidance about his FBAR obligations.

ON SOPHISTICATION: The court noted that someone with the mental capacity to teach advanced mathematics and geophysics, earn graduate degrees in the U.S., and represent themselves in federal litigation couldn't credibly claim they were too unsophisticated to understand basic reporting requirements.

ON LANGUAGE BARRIERS: If your English is good enough for a professional teaching career, it's good enough to read and understand tax forms.

The Legal Framework You Need to Know

Let's break down the rules that caught Mr. Agrawal:

THE REPORTING REQUIREMENT: Under 31 U.S.C. § 5314(a), if you have financial accounts in foreign countries with an aggregate value exceeding $10,000 at any time during the year, you must file an FBAR annually.

THE PENALTIES: Non-willful violations can cost you up to $10,000 per account per year. Willful violations? The greater of $100,000 or 50% of the account balance. Do the math—it gets expensive fast.

THE “REASONABLE CAUSE” EXCEPTION: Here's the kicker—the law doesn't actually define "reasonable cause." Courts have borrowed from other tax penalty provisions to create a standard based on "ordinary business care and prudence."2

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What "Ordinary Business Care" Actually Means

The court's analysis here is crucial for anyone with foreign accounts:

A taxpayer exercising ordinary business care would have:

Read the Schedule B questions carefully
Recognized they needed guidance about foreign account reporting
Actually INFORMED their tax advisor about their foreign accounts
Sought specific advice about FBAR requirements

Notice what doesn't qualify as ordinary business care:

Ignoring direct questions on tax forms
Failing to disclose relevant information to your tax preparer
Assuming someone else's offhand comment absolves you of all reporting duties

The Reality Check

Here's what makes cases like this particularly tough for taxpayers: Since the IRS launched its major FATCA (Foreign Account Tax Compliance Act) push in 2010, claiming ignorance of foreign account reporting requirements has become nearly impossible. 3

Every major tax software package [even DIY software] asks about foreign accounts.
The questions are prominent on Schedule B.
The IRS has conducted extensive outreach campaigns.

The writing has been on the wall for over a decade.

What This Means for You

If you have foreign accounts and haven't been filing FBARs, don't let Mr. Agrawal's story become yours. The IRS offers several voluntary disclosure programs that can significantly reduce penalties—but only if you come forward before they find you.

KEY LESSONS FROM THIS COURT CASE:

Be honest with your tax preparer about all foreign accounts
Don't confuse income tax advice with reporting requirements—they're different issues
"I didn't know" stopped being a viable defense years ago 4
Professional advice only helps if you actually seek it for the right issue

The Bottom Line

Mr. Agrawal's case reminds us that tax compliance isn't about finding creative interpretations or hoping nobody notices. It's about following clear rules that, while sometimes complex, are ultimately designed to be understandable by reasonably diligent taxpayers.

As I sat at my desk planning my spring garden, I was reminded that both gardening and tax compliance require the same fundamental approach: careful attention to requirements, honest assessment of what you're working with, and seeking proper guidance when you're unsure.

The difference is that gardening mistakes might cost you a season's worth of tomatoes. Tax compliance mistakes can cost you tens of thousands of dollars and years of legal headaches.

If you or someone you know has unreported foreign accounts, don't wait for the IRS to find them. We help taxpayers navigate voluntary disclosure programs and find the best path to compliance. The sooner you address the issue, the more options you'll have.