United States v. Zwerner

United States v. Zwerner

SUSTAINING THE WILLFUL FBAR PENALTY UNDER THE EXCESSIVE FINES CLAUSE OF THE ELEVENTH AMENDMENT

On June 11, 2013, the U.S. Government commenced an action against Carl R. Zwerner, in the United States District Court for the Southern District of Florida seeking to collect FBAR Civil Penalties totaling $3,488,609.33, based upon the taxpayer’s willful failure to timely file FBAR reports (Form TDF-90-22.1).

The facts contained in the allegations to the Complaint are summarized as follows:

Carl R. Zwerner (“Zwerner”) is a U.S. Citizen and resident of Coral Gables, Florida. From 2004 through 2007, Zwerner maintained a financial interest in an account at ABN AMRO Bank in Switzerland (the “Swiss Account”). Zwerner held the Swiss Account in the name of an entity known as the “Bond Foundation” from 2004-2006.  In January of 2007, Zwerner transferred the account to a new entity called the Livella Foundation.  The Government alleges that Zwerner was the beneficial owner of the Swiss Account at all times from 2004 to 2007 and that the account balances exceeded $10,000. Based upon the foregoing, the Government concluded that Zwerner had an obligation to file an FBAR before June 30, 2005, 2006, 2007 and 2008, for each of the respective years.

Zwerner failed to report his financial interest in the Swiss bank account on an FBAR and also failed to report any income earned from the Swiss bank account on his original tax returns for 2004 to 2007.  Zwerner represented on Schedule B of his original tax returns for those years that he did not have an interest in a foreign financial account by answering “no” in response to question 7(a).

Zwerner also represented to his tax preparer who prepared his original returns for 2006 and 2007 that he had no interest in or signature authority over a financial account in a foreign country.”

In an effort at making a quiet disclosure, in October of 2008, the Taxpayer filed a delinquent FBAR reporting his financial interest in the Swiss bank account during 2007, and also amended his 2007 income tax return.  Subsequently, in March of 2009, Zwerner amended his income tax returns and delinquent FBARs for 2004, 2005, and 2006.

In a “letter dated August 9, 2010, the Taxpayer admitted to the IRS that he was aware that he should have reported both the existence of the account and the income he earned from it.” Zwerner’s written admission together with his signing the original returns, wherein he asserted he did not have a financial interest in a foreign account, bolstered the IRS conclusion that Zwerner’s failure to timely report his financial interest in the Swiss bank account for 2004-2007 was willful.

The Internal Revenue Service assessed the 50% penalty for each of the years in question under 31 U.S.C. § 5321(a)(5), raising constitutional concerns under the Excessive Fines Clause of the Eighth Amendment, as well as relevant Supreme Court case law, that such penalties are unconstitutional since they are punitive and that the punishment is disproportionate to the conduct which the penalty is designed to punish. Arguably the punishment must bear some relationship to the gravity of the offense that it is designed to deter.

The government has the burden of proving willfulness. Taxpayers should carefully review with a Tax Attorney United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) two recent cases on the issue of determining “willfulness” for assertion of the more significant “willful” FBAR penalties (of up to 50% of the account balance, per year).

In the wake of Williams and McBride and the admissions made by Zwerner, both in the August 2010 letter and by signing his original returns, it is likely  the Court will uphold the Government’s assertion that the failure to file was anything but willful, leaving the question of whether a 50% penalty is unconstitutional.

The Zwerner case will likely to have an impact on other Taxpayers who attempt a “quiet disclosure” as an alternative to participation in OVDP. While the Government cannot pursue everyone for FBAR violations, Taxpayers who have FBAR and income tax issues should consult with a competent Tax Attorney to determine the best overall strategy, since each case is fact sensitive.