In a jury verdict this wake in the Southern District of Florida, the IRS has a sharpened Sword of Damacles to hang over the head of FBAR reporting violators. In U.S. v. Zwerner, a jury found that Carl Zwerner WILLFULLY failed to file FBARs disclosing non-U.S. accounts, thus exposing himself to 50% of the highest balance penalties for EACH of his violating years. Since there were 3 years of violations, a 150% penalty could be imposed.
Taxpayers who are weighing their options as to dealing with prior FBAR reporting failures will probably feel greater pressure to enter into the OVDI program and submit to the 27.5% penalty under this verdict. Taxpayers with a reporting failure but who do not make any corrective filings, attempt a quiet disclosure, or even enter into the OVDI program but then opt-out to seek application of penalties less egregious than the 27.5% penalty, will face the not-so-subtle pressure of this finding of wilfullness and the IRS’ assertion of a separate 50% penalty for each year of violation.
There were facts here that would suggest that a multi-year willfulness penalty is both unusual and unexpected. These include:
a. Mr. Zwerner voluntarily came forward and disclosed his noncompliance to the IRS, and filed corrective returns and paid late taxes and interest, before the IRS contacted him or any bank provided his account information to the U.S.;
b. When the official OVDI program came into being, Mr. Zwerner sought to gain entry to it (but was denied entry);
c. The account predated the FBAR filing requirement;
d. It is not clear whether Mr. Zwerner knew of the FBAR filing requirement at the time the original filings were due;
e. The IRS is seeking penalties worse than those provided to similarly situated taxpayers who entered the OVDI at a later date;
f. The imposition of multiple year penalties is highly unusual, and rarely sought even for criminal violations;
g. There are allegations of improprieties by the agent in its handling of the matter; and
h. Tax fraud was not found.
Some not so favorable facts were:
a. Mr. Zwerner did not disclose the existence of the accounts to his tax preparer, even the questionnaire asked the question about the accounts (although Mr. Zwerner contends he thought he was answering the question correctly because the accounts were in the name of a foundation and not in his individual name);
b. Mr. Zwerner did not report the income from the accounts when it was earned;
c. Mr. Zwerner took steps to affirmatively hide the existence of the account (although not necessarily for tax avoidance purposes);
d. Mr. Zwerner signed a statement that arguably admitted he intentionally did not file or disclose (although Mr. Zwerner contends that the statement does not make such an admission, and that the statement was prepared by the IRS agent and signed by Mr. Zwerner on the false promise that it was needed to obtain a reduced penalty).
The jury found willfulness. Perhaps that is not surprising, since there are enough unfavorable facts to support willfulness. What is more unexpected and unusual is the IRS’ overreaching through the imposition of a multiple year penalty when there does not appear to be egregious facts or bad acts supporting it.
The IRS now has this verdict to waive around and scare nonfilers into the OVDI program without a penalty opt-out. Indeed, it wasted now time in raising the flag per the Justice Department’s release and statement on the verdict on May 29.
It has not yet been determined what final penalties the court will allow. An appeal of a multi-year penalty may be possible based on a Constitutional challenge to such penalties as excessive under the 8th Amendment.