US Sanctions Create FBAR Problems for Irani Immigrants

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International sanctions made it hard for two Irani immigrants to transfer proceeds from the sale of their home. But the U.S. District Court in Oregon said that what they did next created FBAR problems resulting in willful FBAR penalties that no jury could reasonably overlook in all but one case.

Irani Immigrants Get Creative to Avoid US Sanctions

Ali Mahyari and Roza Malekzadeh were Irani immigrants to the US whose primary language was Farsi. The couple both received architecture degrees in Tehran before immigrating. Mr. Mahyari then received a PhD in architecture from Sydney University in Australia, while Ms. Malekzadeh moved to the United States in 2001. Mr. Mahyari joined her in 2005. They both became U.S. citizens in 2006.

In 2011, the couple decided to sell their Irani home. On May 4, 2011, they sold the property for the equivalent of $2,879,146 US dollars. They paid Iranian taxes on the sale, and then tried to move the proceeds to the United States. However, US sanctions against the Iranian government created obstacles for them. They hired an attorney in April 2011 who got them a license from the Office of Foreign Asset Control (OFAC) to avoid penalties caused by the US sanctions. That license was issued in October 2011. However, in March 2012, the Society for Worldwide International Bank Financial Telecommunications (SWIFT) cut off Iranian banks and money exchanges as part of the US sanctions against the country. At that time, the couple had only been able to move $1,350,995 of their funds to the US.

So the couple got creative. They had previously opened two Canadian bank accounts sometime between 2001 and 2005. Even before the sale of the home was complete, they began moving their Iranian funds to these Canadian banks accounts. They then purchased gold and silver bars in Canada, moved the bars to the United States, and sold them, sometimes using their son’s name. Altogether, they purchased $474,000 in gold and silver in 2010 and 2011 and sold $170,577 in 2012 and 2013. The remaining funds remained in their Iranian accounts. According to the subsequent IRS audit, the couple’s Iranian accounts held up to $1,257,020 in 2011 and $388,652 in 2013. Their two Canadian accounts had a total high balance of $81,494 in 2011 and $44,621 in 2012, before dropping below the $10,000 FBAR reporting threshold.

Limited English Proficiency Creates FBAR Problems in Tax Preparation

Both Irani immigrants struggled to learn and use English in their professional careers. Mr. Mahyari went to an English-speaking university and Ms. Malekzadeh passed licensing examinations to be an insurance agent and mortgage broker given in English. Nonetheless, both reported that their limited English proficiencies had lost them jobs in the U.S. and raised concerns with employers.

When the IRS began an audit and later investigation into the couple’s tax returns and foreign financial account disclosure reports (commonly called FBARs), they raised this limited English proficiency as a defense. They said that their tax preparer had asked them tax questions in English, without a Farsi interpreter, and never provided the questions in writing. The questions were part of a tax prep software that prompted the preparer to ask specific questions, and would not complete the return until they were answered.

The couple said they had informed their tax preparer of the home sale in 2011, but then apparently did not disclose the Iranian or Canadian bank accounts when questioned about their FBAR reporting obligations. In fact, they denied having foreign bank accounts until the IRS questioned them about it specifically as part of the FBAR investigation. The IRS determined that their failure to file FBARs in 2011, 2012, and 2013 was willful, imposed financial penalties, and then sued to collect those penalties.

Oregon Federal Court Says Recklessness Counts for Willful FBAR Penalties

The question of what counts as a willful for FBAR penalties has come up many times before, but never in the United States District Court for the Oregon District, or the Ninth Circuit Court. Considering it an issue of “first impression,” the Oregon federal judge found that most other jurisdictions that had considered the issue determined that, for civil FBAR penalties (as opposed to criminal tax cases), “willful” meant either a knowing or reckless violation of the reporting requirement. The Court said, in the civil context:

[R]ecklessness is objective standard and includes an action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.

It summarizes this standard as a “reckless disregard for the truth.” Because recklessness applied an objective standard, the Court said it could issue a summary judgment on the couple’s FBAR problems as long as there were no “questions of material fact” that were reasonably in dispute.

Court Says Irani Immigrants Willfully Created Their Own FBAR Problems

First, the Oregon Court refused to accept the Irani immigrants’ English language defense. It found that their professional experience and education made it unreasonable to assume the couple’s limited English proficiency prevented them from understanding their tax obligations.

Moreover, even if this Court were to accept that Defendants, like many other immigrants, had difficulty understanding English, that would fact would not insulate them from their reporting obligations.

Then, the Court turned to the facts of the case to determine whether the couple’s FBAR problems justified a willful FBAR penalty. It found that the defendants were highly educated and had been living in the United States for 6 and 10 years, respectively. They moved at least $1,350,295 to the US in 2011 alone, which was most of their income from that year, but reported only $500,000 from the sale of the home to avoid capital gains taxes. Despite taking significant steps to transfer the funds, even obtaining a special license to avoid US sanctions on Iran, the couple never researched their tax obligations. Instead, they moved their assets through their Canadian bank accounts, which they never disclosed to their tax preparer.

Ultimately, the Court determined that there were enough questions around the 2011 sale of the home and the disclosures of that sale to their accountant to require a trial for the FBAR penalty issued for 2011 on the couple’s Iranian bank account. However, it found that the couple had either knowingly or recklessly failed to disclose that account in 2012 and 2013, and had never disclosed the Canadian account at all, so the IRS’s willful FBAR penalties for those accounts were appropriate and a judgment could be entered against the couple for all but the one account.

Immigrants face many challenges when relocating to the U.S. Liquidating and transferring their foreign funds become even more difficult when there are sanctions against their home country. But as this case demonstrates, immigrants must still comply with U.S. tax reporting laws, even when English is not their first language. If they don’t it may create expensive FBAR problems in the future they won’t be able to avoid.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding willful FBAR penalties, contact Joe Viola to schedule a free consultation.

Categories: FBAR