DOJ Secures Verdict in Excess of $2 Million for Failure to File FBARs

by Pillsbury Winthrop Shaw Pittman LLP
Contact

On Wednesday, May 28, 2014, a jury in Miami issued a verdict against a taxpayer for $2.2 million in fees, interest, and civil penalties for willfully failing to file foreign bank account reports (FBARs) for his Swiss bank accounts. The penalties amounted to a 150 percent of the maximum value of the account during the years at issue.1

Background Facts and Law

U.S. citizens and resident aliens (U.S. Persons) who have an interest in, or signature authority over, financial accounts in a foreign country, such as a bank account or a securities account, are required to disclose the existence of such accounts on Schedule B, Part III of their individual income tax returns.

Additionally, by June 30 of each tax year, U.S. persons must disclose any foreign financial accounts in excess of $10,000 by filing an FBAR with the U.S. Treasury. Taxpayers who fail to file their FBARs by June 30 can be assessed a penalty of up to $10,000. However, if the failure to file was willful, the penalty increases to the greater of $100,000 or 50 percent of the account’s balance at the time the violation occurred. This penalty is assessed each year that an FBAR was not timely filed.

Case Before the Court

In the 1960s, the defendant, Carl R. Zwerner, opened an account at a Swiss bank that was held at different times in the name of two foundations that he controlled. He regularly used the funds from the account for personal expenses, including European vacations. Nonetheless, for each of the years at issue, 2004 through 2007, he neglected to inform his CPA of the accounts and stated on his tax returns that he did not have a financial interest in, or signature authority over, any financial accounts in a foreign country. Additionally, until late 2007, Zwerner never filed an FBAR with respect to the account with the U.S. Treasury.

In 2009, tax counsel for Zwerner initiated a “traditional” voluntary disclosure2 with the IRS on an anonymous basis and received a letter from the IRS Criminal Investigation Division that there would be no criminal prosecution related to the failure to disclose the account. At that time, Zwerner amended his previously filed tax returns to declare and pay tax and interest on the account in question. In 2010, the IRS began an audit of Zwerner’s returns. Zwerner attempted to enter into the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), which was permitted even though he had previously disclosed the account pursuant to a traditional voluntary disclosure, but was ineligible because he was under audit.

In 2013, the IRS brought suit against Zwerner in federal district court for penalties under 31 U.S.C. § 5321 for failure to file FBARs for 2004 through 2007. Despite the fact that Zwerner had made a previous traditional voluntary disclosure, the IRS was not foreclosed from seeking civil penalties because the penalties imposed in connection with a traditional voluntary disclosure were not capped. Penalties are capped under the voluntary disclosure programs announced by the IRS in 2009, 2011 and 2012. The 2011 OVDI that Zwerner attempted to enter into caps penalties at 25% of the value of the offending account.

Jury Verdict

The jury found that the evidence showed Zwerner knew of his obligation to file FBARs, his failure to file FBARs for years 2004 through 2006 was willful, and that the balance of the account for each of the years at issue exceeded $1.4 million. The jury refused to find that the failure to file a timely FBAR was willful in 2007.

The court will determine the final amount of the judgment in June 2014 after hearing arguments regarding whether the penalty imposed is excessive under the 8th Amendment, likely the first time such an argument has been asserted in a tax case.

Implications of the Court’s Decision

Takeaways from this case include:

  • The Government did not have to show explicit evidence that Zwernerknew of his requirement to file a FBAR, such as previous warnings or punishment. Instead, knowledge was inferred by the jury from the facts that Zwerner:
    • Operated through controlled foundations to conceal assets, changing the name once to hide the assets from his wife;
    • Did not disclose the accounts to his CPA, even after being explicitly asked about overseas accounts;
    • Signed tax returns that contained instructions that explicitly referred to the requirement to file an FBAR; and
    • Instructed the Swiss bank never to send him records in order to keep it a "secret account."
  • The Government’s burden of proof in a civil case, even one with steep fines and penalties, is less than the "beyond a reasonable doubt" standard used in criminal cases. Instead, the Government is held to a "preponderance of the evidence" standard. This generally requires a showing that the defendant is more likely than not at fault.
  • Finally, the facts of the case may provide some insight as to criteria the Government considers when deciding which cases to prosecute. They may include:
    • Account balances each year exceeding $1 million;
    • Amendments to Schedule B’s Question 7 (asking about overseas accounts) from "No" to "Yes" outside of a voluntary disclosure program;
    • Personal use of the funds from an undisclosed foreign account; and
    • Use of a foreign foundation to conceal the identity of the US taxpayer.

For those taxpayers with undisclosed offshore accounts under comparable facts, the verdict in this case should provide adequate incentive for such taxpayers to enter into a voluntary disclosure program as soon as possible. While the 2012 Offshore Voluntary Disclosure Program is currently open and remains open indefinitely, the IRS has noted that it may close the program at any time in the future. Moreover, IRS, Treasury and Department of Justice officials have in recent public statements made clear that the government continues to focus resources on FBAR enforcement efforts.

This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters.


  1. U.S. v. Zwerner, 13-cv-22082 (S.D. Fla. 5/28/2014).
  2. A "traditional" voluntary disclosure refers to a voluntary disclosure that was entered into outside of the 2009, 2011 and 2012 Offshore Voluntary Disclosure programs.

 

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!