In a recent decision, a federal district court found that a long-time CPA/tax-return preparer recklessly failed to file FBARs to disclose several foreign financial accounts. As avid readers of our Insights are aware, many federal courts have found that reckless reporting failures are sufficient to impose “willful” FBAR penalties—and those penalties can be quite signficant.
The case was United States v. Kronowitz. And it is yet another reminder that courts addressing FBAR reporting failures tend to look critically at the account holder’s background, including educational and professional. Account holders with tax-related backgrounds or professionals with substantial business experience are often held to a higher standard.
The Foreign Accounts
After hearing a rumor that a former client was considering sueing him for fraud, the CPA (Kronowitz) moved assets offshore for protection, opening two bank accounts in the Cayman Islands. His purpose in opening the Cayman accounts was to keep funds out of reach from potential creditors.
Kronowitz also signed a document titled “Management and Administration Agreement” between himself and an entity named Consista Treuunternehmen (“Consista”), a company in Liechtenstein regarding the management of an entity name Cramo Stiftung/Foundation (“Cramo”). The Agreement empowered Consista to manage Cramo (a sifting/foundation in Liechtenstein) on behalf of Kronowitz.
Cramo opened an account at United Bank of Switzerland (“UBS”). Kronowitz was listed as the beneficial owner. Kronowitz later created a trust to hold proceeds from the investments. And still later, funds held at UBS were transferred to an account at Basler Kantonalbank (“BKB”), which was also opened for Kronowitz’s benefit.
The Reporting Failures
Kronowitz prepared his own tax returns for tax years 2005 through 2010. Schedule B is an attachment to the individual federal income tax return (Form 1040) that is used for reporting interest and dividend income, as well as any financial interest in, or signature authority over, financial accounts located in foreign countries. Although he was required to file a Schedule B in conjunction with his 2005 through 2010 individual income tax returns, Kronowitz did not disclose his financial interest in foreign accounts in a Schedule B for his 2005 through 2010 individual tax returns—nor did he file an FBAR.
Instead, on the Schedule B form filed with his 2008 tax return, in response to the question asking “[a]t any time during 2008, did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” Kronowitz marked “no.” There were no Schedule B forms attached to the 2005, 2006, 2009, or 2010 individual tax returns.
Kronowitz also prepared the tax returns for the Trust for tax years 2008, 2009, and 2010. He marked “no” in response to the question asking, “[a]t any time during [the] calendar year , did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country?”
Based on these essential facts, the IRS Examiner assessed the following FBAR penalties:
Calendar Year FBAR Penalty
Total Penalties Assessed: $663,771.00
The FBAR Laws
In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, referred to as the Bank Secrecy Act (BSA), 31 U.S.C. §§ 5311, et seq.. See Pub. L. No. 91-508, 84 Stat. 1114 (1970). The primary purpose of the BSA is to require certain reports that “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Id. § 202.
The regulations require “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country” to file a FBAR. See 31 C.F.R. § 1010.350(a). The FBAR is required “with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.” See 31 C.F.R. § 1010.306(c).
The authority to assess and collect civil penalties for FBAR requirement non-compliance rests with the IRS. See Delegation of Enforcement Authority Regarding the Foreign Bank Account Report Requirements, 68 Fed. Reg. 26489 (May 16, 2003). The BSA did not originally contain a civil penalty provision for failing to comply with the FBAR requirements, see Pub. L. No. 91-508, 84 Stat. 1114 (1970), but Congress added one in 1986. See Money Laundering Control Act of 1986, Pub. L. No. 99-570, Subtitle H, 100 Stat. 3207, § 1357 (October 27, 1986). FBAR penalties may be either willful or non-willful. See 31 U.S.C. § 5321(a)(5).
In Kronowitz, the Government assessed a willful penalty, in addition to late payment penalties and accrued interest. A willful FBAR penalty requires the following elements: (1) the person must be a U.S. citizen; (2) the person must have or had an interest in, or authority over a foreign financial account; (3) the account had a balance exceeding $10,000.00 at some point during the reporting period; and (4) the person must have willfully failed to disclose the account and file a FBAR. 31 U.S.C. § 5314; 31 C.F.R. § 1010.350(a).
The statutes and regulations at issue do not define the term willful; however, the BSA identifies the applicable penalty as a “civil money penalty.” 31 U.S.C. § 5321(a)(5)(A).
Confronted with this lack of definitional guidance, the Court turned to precedent:
“[W]here willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of Am. v. Burr , 551 U.S. 47, 57 (2007). “While the term recklessness is not self-defining, the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Id. at 68 (quoting Farmer v. Brennan, 511 U.S. 825, 836, 114 S. Ct. 1970, 128 L. Ed 2d 811 (1994)) (internal quotations omitted). In the FBAR context, the United States Court of Appeals for the Eleventh Circuit recently held that “willfulness in the § 5321 includes reckless disregard of a known or obvious risk.” United States v. Rum , —F.3d—, 2021 WL 1589153, at *6 (11th Cir. Apr. 23, 2021).
Under this authority, “when imposing a civil penalty for an FBAR violation, willfulness based on recklessness is established if the defendant (1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.” Id. (citing United States v. Horowitz, 978 F.3d 80, 89 [126 AFTR 2d 2020-6551] (4th Cir. 2020) (quotations and citation omitted)).
Evidence of Recklessness
The Court then set out the basic and relatively sparse facts leading to its conclusion that the willful penalties were appropriate. Boiled down, they were:
The Court’s Conclusion
Against this background, the district court found willful penalties applied:
Based upon Kronowitz’s background and experiences as a CPA and tax preparer, and the totality of his actions in this case, the Court finds that he clearly ought to have known that there was a grave risk that he was failing to comply with the FBAR requirements with respect to his foreign accounts. Furthermore, he was in a position to find out for certain very easily, had he taken the time to either conduct independent research, or consult with another person more knowledgeable on tax law as to whether any additional reporting requirements might apply to him.
Accordingly, the Court finds that Kronowitz’s FBAR violations for tax years 2006, 2007, 2008, 2009, and 2010 were willful, and that the Government is entitled to recover willful FBAR penalties for those years