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TAXPAYER’S PERSONAL CRISIS NO DEFENSE TO WILLFUL FBAR PENALTY

By: Anthony N. Verni, Attorney at Law, CPA

August 13, 2024

©2024

 

TAXPAYER’S ADHD DIAGNOSIS, STRESS, DEPRESSION AND STAGE 3 PROSTRATE CANCER

NO DEFENSE TO WILLFUL FBAR PENALTY

 

On August 6, 2024 the U.S. District Court for the Eastern District of Virginia  in United States v. Rund (E.D. Va. No. 1:23-CV-00549 Memo Opinion & Order 8/6/24) upheld the Government’s assessment of a $2.9M Willful FBAR Penalty under 31 U.S.C. § 5321 (a)(5).

In granting the Government’s Motion for Summary Judgment, the Court was unmoved by  the Taxpayer’s argument that his  conduct could not be considered “willful” due to  a number of physical and psychological  infirmities and personal challenges including ADHD,  stress, depression and stage 2 prostate cancer.

The Rund decision is consistent with prior case law that frothy emotional appeals, irrespective of the merits, will not be considered when evaluating the element of willfulness in an FBAR penalty case.

In rejecting the Taxpayer’s claims, the District Court cited U.S. v. Williams, (489 Fed. Appx. 655)  a 2012 Fourth Circuit unpublished opinion for the proposition that the statutory term “willful” includes both knowing and reckless violations of the civil FBAR requirements.

The Bank Secrecy Act requires United States taxpayers to report “any financial interests they have in any bank, securities, or other financial accounts in a foreign country” to the Internal Revenue Service on an annual basis (“IRS”). United States v. Williams, 489 Fed. App’x 655, 656 (4th Cir. 2012) (citing 31 U.S.C. § 5314(a)). Individuals must file a completed Report of Foreign Bank and Financial Accounts (“FBAR”) “on or before June 30 of each calendar year” for each foreign account which held over $10,000 in the prior calendar year. 31 U.S.C. § 5314; 31 C.F.R. § 103.27(c); 31 C.F.R. §§ 1010.350, 1010.306(c). Schedule B of the federal income tax form (Form 1040) puts taxpayers on notice of those reporting obligations. More specifically, Schedule B asks the taxpayer a simple “Yes” or “No” question: whether or not they have an “interest in or signature authority over.

In the context of willful violations of the FBAR reporting requirements, Section 5312 (a)(5)(C) authorized the Secretary to assess a maximum penalty of the greater of $100K or 50% of the account balance at the time of the reporting violations.

In Williams, the IRS assessed the “willful” FBAR Penalty against the Taxpayer for his failure to report his interest in two foreign bank accounts. Williams had previously pled guilty to Conspiracy to Defraud the IRS and Criminal Tax Evasion. Further, the Taxpayer’s checked “no” in response to the question on Schedule B Form 1040, regarding the existence of a foreign financial account, despite having transferred $7M to a Swiss bank account. The Taxpayer also completed a tax organizer, where he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over a foreign financial account. Notwithstanding the foregoing, the lower Court held that the Taxpayer’s eventual filing of the delinquent FBARS, “negated” willfulness.

In reversing the lower Court’s decision the Fourth Circuit held that the District Court  erred in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314. The Court of Appeals, relying upon precedent stated that ‘willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information, and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.’

In United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) the Sixth Circuit held that “willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and that “it can be inferred from a conscious effort to avoid learning about the reporting requirements.”

Likewise, “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts that point to such liability. United States v. Poole, 640 F.3rd 114, 122 (4th Cir. 2011)

Furthermore,  the Rund Court  citing  Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007) noted that ‘where ‘where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.’

With rare exception, cases sustaining the willful FBAR penalty have all been accompanied by either (i) deliberate action on the part of the Taxpayer designed to avoid detection by the Internal Revenue Service; or (ii) a conscious effort to avoid learning of the FBAR reporting requirements.

With the exception of his claims of physical and psychological infirmity, the facts in Rund are unremarkable and consistent with other willful FBAR penalty cases. Nevertheless, the decision is deserving of discussion given the Defendant’s unique circumstances.

Richard M. Rund (“Rund”) or (the “Taxpayer” or “Defendant”) is a U.S. Citizen who has had a long career as an inventor and international businessman. Rund’s career began in 1982 when he moved to Hong Kong where he continued to reside until 2000. While in Hong Kong the Taxpayer formed a number of business entities including FOB Products (“Products”), an entity engaged in the sale and export of appliances. Rund was listed as the sole shareholder and also named a signatory over Product’s foreign financial accounts.  In 1999 the Taxpayer closed Products and transferred all of Products assets to a second entity, FOB Instruments, Ltd.  (“Instruments”).

During this time Rund also purchased York Luen, a Hong Kong real estate holding company which owned an apartment. The Defendant purchased York Luen for purposes of acquiring the apartment as well as other real estate in Hong Kong. To facilitate the purchase of York Luen, the Taxpayer used Instruments as the named purchaser.  Immediately following the acquisition, Rund executed a Declaration of Trust transferring control of Instruments to a colleague, Pierre Charlety (“Charlety”). However, the Taxpayer retained beneficial ownership of Instrument’s shares with Charlety merely serving as the “nominee” for Instruments. To complete the scheme Charlety became the named owner of 95% of Instrument’s shares.

Notwithstanding the foregoing, the Defendant would routinely issue instructions to Charlety and continued to operate Instructions from behind the scenes. He also remained in charge of all major decisions and expenditures, and received regular cash flow statements. In addition, the Taxpayer had knowledge of and was aware of all foreign bank accounts held by Instruments and York Luen.   As time passed, Rund became more emboldened.

In 2003 and 2004, following the sale of an apartment by York Luen,  Rund instructed Charlety to transfer one third of the proceeds from the York Luen account to a USB Swiss Account held by Far East Ventures, Ltd. (“FEV”), a newly formed Mauritius company. The Taxpayer also made numerous other requests for funds that resulted in Charlety transferring more than a million dollars from a York Luen account to an FEV account.

At the Defendant’s request, Instruments also made monthly payments in the amount of $25,000 into FEV’s UBS account. In turn, Rund paid Sovereign Managers Ltd to set up FEV and provide the Company with a director. The UBS account opened under FEV’s name listed Rund as the client, identified him as the beneficial owner of FEV’s assets. The biographical data for the client profile even matched the Defendant’s profile.

As time passed, Rund became more aggressive.  In this regard, the Taxpayer would request funds from the FEV’s UBS account for purposes of making business investments, and on at least one occasion, the Defendant used a credit card associated with UBS for personal expenses. The FEV UBS account was eventually closed in 2010, at which time, Rund directed that the funds in the FEV account be moved into a personal account he maintained at HSBC.

The relationship with Charlety eventually soured in 2007 when Rund discovered that Charlety has been stealing from Instrument. The business breakup resulted in litigation in Hong Kong. In that litigation the Defendant asserted in court documents that he was the owner of 100% of the shares in Instruments. In that same year Rund also caused himself to be named a director and owner of York Luen.

From 2003-2009 Rund failed to timely report for FBAR purposes his interest in numerous foreign financial accounts in which he maintained a beneficial interest in. Nor did he disclose the existence of these accounts on Schedule B of his 2003 individual U.S. Income Tax Return.

In 2010 after learning that UBS was closing his Swiss Account and that the Bank was under investigation by the Department of Justice, Rund decided to enter the Offshore Voluntary Disclosure Program (“OVDP”).  While participating in the OVDP from 2010-2016 the Defendant was obligated to make a truthful, timely and complete disclosure of all his foreign financial accounts.  Needless to say, the Taxpayer was less than forthcoming. In addition to failing to make a disclosure of all his existing accounts, Rund opened several new accounts, which he, likewise, elected not to disclose.

After finding that Rund had willfully violated the FBAR reporting requirements no less than 43 times during the years 2003-2008, 2013 and 2014, the IRS assessed the willful FBAR penalty in excess of $2.9M. The Government subsequently filed an action in the U.S. District Court for the Eastern District of Virginia for purposes of reducing the assessment to judgment.  Rund filed an answer. The Government then moved for Summary Judgment and Rund responded by  filing a Cross Motion for Summary Judgment.

In its decision, the Court rejected the Defendant’s argument that since he relied upon advisers that his FBAR violations were not willful. He maintained that he honestly believed that he was only required to report the accounts in his name, over which he had signature authority.  In fact, in its findings, the Court concluded that from 2003-2008 and in 2013 and 2014, Rund had a financial interest in foreign financial accounts which would subject him to the FBAR filing requirements and that he knew of his reporting requirements and intentionally or recklessly disregarded his compliance obligation.

In granting the Government’s Motion for Summary Judgment, the Court found that the facts were not in dispute. Specifically, the Court found that Rund knew of the FBAR filing requirements since he had previously filed FBARS in 2001 and 2002.

The Court also rejected the Defendant’s plea that his personal challenges precluded the Court from finding that Rund was willful in his failure to comply with the FBAR reporting requirements. In a last ditch effort to avoid the willful FBAR penalty, Rund claimed that he was: (i) unsophisticated in business and tax matters; (ii) was diagnosed with ADHD; in 2006; (iii) under a great deal of stress from 2009 diue to the Hong Kong litigation; (iv) diagnosed with stage 3 prostate cancer; and (v) finding it difficult to retain an accountant in 2014 and 2015.

In its opinion, the Court noted that even if all of Rund’s difficulties were true, Rund’s violations were still considered willful. The Court correctly found that a finding of willfulness is based upon an objective standard, and as such, the defendant’s personal problems were not a factor in determining whether his conduct was willful. The Court went on to explain, quoting from Farmer v. Brennan, 511 U.S. 825, 836, 114 S. Ct. 1970, 128 L.Ed. 2d 811 (1994) that ‘the standard is whether Rund failed to act in the face of an unjustifiably high risk of harm that is either know or so obvious that is should be known.’

In conclusion, when faced with the assessment or potential assessment of an FBAR Penalty, whether willful or non-willful, it is important to secure  representation from an experienced and knowledgeable  tax attorney who is familiar with the FBAR reporting requirements, the relevant case law and the available offshore disclosure options that are available.

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FBAR PROSECUTIONS-FORMER CFO SENTENCED TO EIGHTY SIX MONTHS IN PRISON

On September 21, 2023 a  former CFO of  a Russian natural gas company was sentenced to seven years in prison, ordered to pay $4 million dollars in restitution and an additional $350,000 in fines in connection with a number of tax and financial reporting crimes that included engaging in a scheme to hide millions of dollars in income in undisclosed Swiss bank accounts, submitting false filings with the IRS,  failure to file  a Report of Foreign Bank and Financial Accounts (“FBAR”), making false statement to the IRS, and willfully failing to file tax returns.  The Russian CFO was also named a defendant in a $44 million dollar FBAR Penalty Suit commenced by the U.S. Government  in June of 2023 (See Complaint styled as: United States of America v. Mark Anthony Gyetvay).

INTRODUCTION

31 U.S.C.  § 5314 requires U.S. Citizens and Permanent Resident of the United States to file a “report.”  The FBAR implementing regulations provide that a “U.S Person who has a financial interest in or signature or other authority over a bank, securities or other financial account in another country” is required to file an FBAR “for any year in which the aggregate balance for such foreign financial account or accounts exceeds $10,000 at any time during the calendar year” See 31 C.F.R. § 1010.350(a) and 31 C.F.R. § 1010.306(c) (2011).

31 U.S.C. § 5321(a)(2) authorizes the Secretary of the Treasury  to impose penalties for failure to file an FBAR report. The relevant FBAR penalty provisions include a $10,000 Penalty under Section 5321(a)(5)(B) for non-willful violations (the “Non-Willful FBAR Penalty”), which may be excused where “reasonable cause” can be established as well as a Willful FBAR Penalty for willful violations. The Willful FBAR Penalty under Section 5321(a)(5)(C) is the greater of $100,000 or 50% percent of the amount of the “transaction” or in cases where no FBAR is filed, the balance in the account at the time of the violation.

Persons who fail or refuse to file their FBARS and/or those who fail or refuse to report the income derived from their Foreign Financial Accounts (“FFA’s”) may feel that the Government has overlooked them. Those who have hidden their foreign assets by placing them in the name of a nominee, Shell Company or some other entity may, likewise, now feel they are safe.

Prior to the termination of the Offshore Voluntary Disclosure Program (“OVDP”) in September of 2018, at risk Taxpayers sought protection from criminal prosecution by entering into the OVDP.  Some OVDP participants deliberately omitted large account balance FFA’s from their FBAR filings in order to reduce the Miscellaneous Offshore Penalty.  Other elected to “Opt Out” of the OVDP in hopes of either no penalty or paying the less onerous Non Willful FBAR Penalty.

There were also those who attempted to game the system by foregoing the use of the OVDP or it prior iterations and instead utilizing one of the two Streamlined Procedures as a means of avoiding the costly Willful FBAR Penalty, associated legal costs and possible criminal prosecution.

Taxpayers who intentionally omitted FFA’s with significant balances have been subject to the Willful FBAR Penalty, and in some cases, have also been prosecuted.  Some U.S. Taxpayers, who Opted Out of the OVDP, have been successful in reducing or totally avoiding any FBAR Penalty. However, many others have been less fortunate and consequently subject to the Willful FBAR Penalty in amounts far in excess of the Miscellaneous Offshore Penalty they would have paid had they remained in the OVDP.

The offshore tax evasion playbook, which has been around for quite some time with some slight variations, is still in use. Some of the practices include, but are not limited to, forming an offshore nominee entity in a blacklisted or designated tax haven jurisdiction and opening an FFA in the name of the nominee, Shell Company or other entity to obscure the identity of the true account owner. In many cases, the true account owner will secretly retain beneficial ownership in the FFA or asset as a means of retaining control and dominion over the account proceeds.

A savvy tax cheat will on occasion will have the mail related to the offshore account or asset held at the Foreign Financial Institution. The true account owner will then periodically travel to the foreign country to retrieve the mail in person or make arrangements for someone else to. Alternatively, the account owner will meet with a representative from the Foreign Financial Institution in the U.S. for the handoff.

For their part, Foreign Financial Institutions (“FFI’s”), Wealth Management Firms and other foreign counterparts have historically accommodated, promoted, and actively facilitated the secreting of offshore assets and income by U.S. taxpayers in exchange for receiving substantial bank, legal and advisory fees. Foreign governments have also been complicit by either turning a blind eye to these illicit practices or by relying on bank secrecy laws.  That has all changed thanks to U.S. global enforcement initiatives, international cooperation and the recent 80 billion dollars received by the IRS.

ENFORCEMENT HISTORY AND DEVELOPMENT

The catalyst for change started in 2008 when the DOJ prosecuted Swiss UBS, as well as a number of its advisors, attorneys and financial professionals for assisting U.S. taxpayers in hiding foreign assets and income from the IRS.  To avoid prosecution, UBS and the U.S. Government entered into a deferred prosecution agreement (DPA’s) wherein UBS was, among other things, required  to pay stiff penalties and admit that it’s cross border banking practices made use of Swiss privacy laws to aid and assist U.S. Taxpayers in committing offshore tax evasion.  As part of the deal, UBS also agreed to take affirmative steps to improve transparency and to provide the U.S. Government with information on its U.S. account holders.

Since the UBS case and the DOJ’s establishment of the Swiss Bank Program, many FFI’s have been subject to prosecution and have entered into either DPA’s or a non-prosecution agreements (“NPA’s”). These institutions have also been required to pay large penalties, agree to compliance reforms and have had to provide information on their U.S. account holders. Even small FFI’s that rely on correspondent banks to process financial transactions have not escaped DOJ scrutiny. They too have had to tow the line.

While the U.S. assault on international banking practices and U.S. account holders over the past fifteen years has motivated some U.S. customers to come out of the dark and disclose their foreign assets and income, many taxpayers persist in holding out and are actively engaged in unlawful practices, designed to avoid detection by the IRS.

Many U.S.  account holders have scrambled to close existing accounts at one FFI and transferring the proceeds or assets to another.  In some instances the move entails transferring an existing account in one country to an FFI in another. Still others have elected to form multiple entities as means of making detection more difficult.

United States of America v. Mark Anthony Gyetvay

The IRS resolve in making offshore tax evasion a top priority is evidenced by the sentence handed down by Judge Joan Ericksen of the United States District Court for the Middle District of Florida against Gyetvay as well as by the commencement of Willful FBAR Penalty collection suit.

The facts related to the conviction and sentencing of Gyetvay and the FBAR Penalty collection suit are worthy of mention given the level of premeditation and amount of time and effort expended by the defendant in carrying out his nefarious plan.  The dire consequences Gyetvay now faces should serve as an ominous warning to those who not know when to stop digging.

The defendant, Mark Anthony Gyetvay (“Gyetvay,” “defendant” or “taxpayer”) is a birthright citizen of the United States and also a citizen of Russia and Italy. From the court records, the defendant is well educated having earned various degrees including an accounting degree from Arizona State University and a graduate degree in Strategic Management from Pace University.  Gyetvay is also a Certified Public Accountant, licensed in the State of Colorado.

The court records also reveal an impressive work history on the part of the taxpayer.  The defendant worked for PriceWaterhouse Coopers, a Big Four public accounting firm, until 1995 when Gyetvay became a partner.

In 2003 the defendant left public accounting and became the CFO of Novatek, a Russian independent gas producer. In 2005 the Taxpayer was successful in navigating Novatek through an initial public offering on the London Stock Exchange. In recognition of his services Gyetvay was promised and eventually received a significant block of Novatek Shares.

In October of 2005 the taxpayer formed Opotiki Marketing (“Opotiki), a nominee entity organized under the laws of Belize. He thereafter opened an Account (“Opotiki Account”) at Coutts & Company, LTD (“Coutts”), a Swiss Private Baking and Wealth Management Firm located in Zurich, naming Opotiki as the record owner of the account, but naming himself as the beneficial owner of the account.

To prevent the IRS from discovering the existence of the Opotiki Account, the defendant also requested that Coutts hold all mail related to the Opotiki Account at the Firm’s “Hold Mail” counter. The hold mail tactic was very common prior to DOJ’s crackdown on the international banking industry. At this time, the maximum assets under management in the Opotiki Account were $12, 650, 792.

The taxpayer was so impressed with himself that in 2007 he decided to form Felicis Commercial Corp (“Felicis”), a British Virgin Island nominee entity. Thereafter, Gyetvay opened a separate account with Coutts (the “Felicis Account”), naming Felicis as the account holder and designating himself as the sole beneficiary of the Felicis Account. At this time Felicis had over $53 million dollars’ worth of assets under management.

The defendant failed to file U.S. Income Tax Returns, failed to file FBARS and took further steps to frustrate the U.S. Government, including removing himself as the beneficial owner of the FFI’s and making his wife, a Russian Citizen, the beneficial owner of the accounts. He also used his wife’s Moscow address as her residence, despite the fact that both Gyetvay and his wife resided in Naples Florida.

In response to pressure from the U.S. Government and in light of the UBS prosecutions and the Swiss Bank Program, Coutts instituted compliance procedures which included bringing in outside U.S. attorneys and accountants to review whether the U.S. account holders were in compliance with U.S. Tax and financial reporting laws. As part of its compliance procedures, Coutts also required its U.S. clients to sign a declaration permitting the disclosure of their account to the IRS.

 

Sensing that the posse was on his trail, Gyetvay closed the Opotiki and Felicis Accounts at Coutts and transferred the assets to the newly created accounts at Hyposwiss (the “Hyposwiss Accounts”), listing defendant’s wife as the beneficial owner and using a Moscow address as Ms. Gyetvay’s principal residence. In 2013 Falcon Private Bank acquired the assets of Hyposwiss.

Gyetvay did not retain an accountant to prepare his tax returns for 2006 through 2008 until July of 2010, when Ms. Gavrilova decided to pursue becoming a Permanent Lawful Resident of the United States. That decision required the defendant to explain to immigration authorities why he failed to file tax returns for the 2006 through 2008.  Consequently, the defendant retained an Atlanta-based accounting firm (the “Atlanta Firm”).

As part of the information gathering and due diligence processes, the Atlanta Firm sent Gyetvay a tax organizer for each year. The defendant completed and returned the organizer to the Atlanta Firm. Gyetvay also provided the accountants with information on his income and foreign bank accounts. The defendant falsely represented to the Atlanta Firm that he had no foreign financial accounts during the 2006-2008 tax years. He also deliberately underreported his earnings to the Atlanta Firm.

Based upon the responses and information provided by Gyetvay, the Atlanta Firm did not prepare FBARs on behalf of the defendant and also underreported defendant’s income for 2006 through 2008 for U.S. tax purposes.

In addition to filing false tax returns for the tax years 2006 through 2008, Gyetvay rejected the Atlanta Firm’s advice that Gyetvay file FBARs for the 2006 through 2008 tax years and that he completely disclose all of his FFA’s.

For the tax years 2009-2015 Gyetvay received significant amounts of income in the form of wages, dividends and interest income from his FFA’s. Once again, the defendant failed to file timely tax returns, failed to timely pay to the taxes due and owing to the IRS and failed to file FBARS.

In 2015 Falcon announced that it had entered into a Non-Prosecution Agreement with the DOJ under the Swiss Bank Program.  Sensing the need to make some form of offshore disclosure, the defendant decided to utilize the Streamlined Foreign Offshore Procedures rather than participate in the OVDP.

The Streamlined Foreign Offshore Procedures is only available to taxpayers who meet the non-residency requirement that in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed: (1) the individual did not have a U.S. abode and (2) the individual was physically outside the United States for at least 330 full days.

Both the Foreign and Domestic Streamlined Procedures require that the taxpayer submit original or amended returns for the previous three years and FBARS for the previous six, along with a Statement of Facts, which is attached to either Form 14653 or 14654, certifying that the compliance failure was the by-product of non-willful disregard. Forms 14653 and 14654 as well as the accompanying Statement of Facts, both must be signed under penalties of perjury.

The Streamlined Domestic procedures require a miscellaneous offshore penalty of 5% of the offshore assets, while the Streamlined Foreign procedures carry no penalty. There is no mystery as to why Gyetvay utilized the Streamlined Foreign procedures.

Seeking to avoid any penalty, on July 13, 2015 Gyetvay signed  Form 14653, (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures) covering the tax years 2011-2013. In the certification, the defendant falsely claimed that he worked and resided in Russia from 1995. He also falsely claimed that while abroad, he made annual tax payments to the IRS and tried to file his U.S. Tax Returns.

The defendant’s excuse for non-compliance was that Gyetvay, a CPA, was unable to file his returns due the complexity of the U.S. tax laws and his inability to find capable U.S. tax preparers in Russia. Based upon his explanation, the taxpayer maintained that his actions were not willful.   The foregoing statements were made despite the fact that defendant and his wife owned a residence and lived, in Naples, Florida during the time period at issue.

Gyetvay also signed under the penalties of perjury, Form I-684, Affidavit of Support under Section 213A of the Immigration and Nationality Act in connection with sponsoring his wife for Permanent Resident status in the United States. In his Affidavit the defendant stated that his mailing address and place of residence was in Naples, Florida.  In addition, the defendant also represented that he was registered as a Florida voter and that he held a Florida driver license.

In connection with his Streamlined Foreign filings, Gyetvay paid taxes, interest, and penalties in the amount of $4,649,609.77 for unfiled 2011 through 2013 tax returns, but paid no FBAR penalty since he claimed overseas residence.

Despite having an interest in foreign bank accounts since at least 2001 and despite being advised by the Atlanta Firm that he should file FBARs, Gyetvay did not file an FBAR until he made his false disclosures in his Streamlined Foreign submission.

As part of his Streamlined Foreign filings, the defendant filed FBARs for calendar years 2008 through 2013, where Gyetvay disclosed his accounts at Coutts (Switzerland), Citibank (Russia), First United Bank (Russia), Hyposwiss (Switzerland), and Falcon (Switzerland). However, the disclosures were incomplete. The defendant also failed to properly report the account number and account value of certain FFA’s.

Defendant timely filed his FBAR for 2014, but once again, his FBAR filing contained deliberate misrepresentations.  Gyetvay falsely reported that he had signatory authority, but no financial interest, in a Falcon Account ending in 3116. In this regard, the defendant also failed to report the highest balance of the Falcon 3116 Account, despite having reported the highest balance in his 2013 FBAR filing.

In addition Gyetvay failed to report his interest in a Falcon Account with account number ending in 4056, despite having included the account in his 2013 FBAR filing. The glaring omissions resulted in defendant having to file an amended FBAR for 2014.

As a consequence of the defendant’s systematic and deliberate attempts to defraud the U.S. Government, the jury trial found Gyetvay guilty of the following:

  1. willfully failing to timely file a 2013 and 2014 federal income tax returns, in violation of  26 U.S.C. § 7203;
  2. willfully making a false statement in Gyetvay’s Streamline Submission that his failure to report all income, pay all tax, and submit all required information returns, including FBARs, was “not due to any willfulness” in violation of 18 U.S.C. § 1001 and 18 U.S.C. 1002; and
  3. willfully failing to file an accurate FBAR for 2014, in violation of 31 U.S.C. § 5314; 31 U.S.C. 5322(a); 31 C.F.R. § 1010.350, 31 C.F.R. § 1010.306(c)-(d), and 31 C.F.R. § 1010.840(b).

In addition, the United States filed a FBAR collection suit against Gyetvay. The U.S. Government alleges that defendant owes close to 44 million dollars in Willful FBAR Penalties for 2014, together with accrued interest and failure to pay penalties under 31 U.S.C. § 3717, and fees.

The Gyetvay conviction as well as the FBAR Willful Penalty suit underscores the seriousness associated with taking steps to hide your foreign assets and income from the IRS.  Waiting to see if the U.S. Government is coming after you is no plan at all. For those who think they can continue to avoid detection, I urge you to listen to the Ojay’s “For the Love of Money.”

 

 

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CAN THE FBAR PENALTY MITIGATION GUIDELINES LOWER YOUR FBAR PENALTY OBLIGATION?

NAVIGATING THE FBAR PENALTY MITIGATION GUIDELINES

Failure to report your foreign financial accounts on Report of Foreign Bank Account Reports can result in the imposition of steep penalties. The FBAR penalty regimen, which provides for willful and non-willful penalty assessments against taxpayers who have failed to report their foreign financial accounts, is complex and requires careful financial and risk analysis.

If you are worried about the consequences of coming clean, it may be time to discuss your particular situation with an experienced tax professional. Depending upon the circumstances, it may be possible to use the FBAR penalty Mitigation Guidelines (the “Guidelines”) as a means of reducing the overall penalty burden.

The application of the Guidelines may impact your decision of whether to utilize the Streamlined Procedures or the Voluntary Disclosure Practice Rules (“VDP”). It also may impact a decision to opt out of the VDP.   Consequently, deciding to make use of the Guidelines involves careful financial analysis, risk assessment and a quantitative comparison among various disclosure alternatives.

Failure to consider the application of the Guidelines can result in significant saving being left on the table. The discussion that follows is limited to the non-willful and willful penalties and does not include FBAR penalties that are applicable to financial institutions.

Under U.S. law, a U.S. person having a financial interest in or signature or other authority over a foreign financial account(s) in which the highest aggregate balance in U.S. Dollars exceeds $10,000 at any time during the year, must report these accounts on FinCEN Form 114, commonly referred to as an “FBAR” (See 31 CFR § 1010.350 for FBAR definitions and filing requirement).

The FBAR due date for 2015 and later years is April 15.  Prior to 2015, the due date was June 30. The change brings the FBAR filing due date in alignment with the filing deadline for individuals. Where a taxpayer files an extension to file a federal income tax return, the due date for filing an FBAR is October 15 without the need for filing a separate extension.

Married taxpayers may report their foreign financial accounts on one FBAR if the following conditions are met:

  • All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
  • The filing spouse reports the jointly owned accounts on a timely, electronically filed FBAR; and
  • Both spouses complete and sign Part I of FinCEN Form 114a, Record of Authorization to Electronically File FBARs. The filing spouse completes Part II of Form 114a in its entirety.

If all of the preceding conditions are not met, each spouse must file a separate FBAR reporting both individual and joint accounts.

Although the FBAR statutes are part of the Bank Secrecy Act  under Title 31, authority for the assessment and collection of FBAR penalties has been delegated to the IRS under 31 CFR §1010.810(g).

The IRS Examiner is given discretion to determine whether the facts and circumstances of a particular case do not justify asserting a penalty and instead a “warning letter.” Furthermore, subject to Manager review and approval, the Examiner has discretion in determining the amount of the penalty. In certain cases, the facts and circumstances may be such that the Examiner may consider whether the issuance of a warning letter and the securing of delinquent and/or amended FBARs, rather than the determination of a penalty, will achieve the desired result of improving compliance with the FBAR reporting and recordkeeping requirements in the future (See IRM 4.26.16.5.2.1).

Factors to consider when applying Examiner discretion may include, but are not limited to, the following:

  • Whether compliance objectives would be achieved by issuance of a warning letter;
  • Whether the person who committed the violation had been previously issued a warning letter or assessed an FBAR penalty;
  • The nature of the violation and the amounts involved;
  • The filer’s conduct contributing to the violation;
  • Whether the filer cooperated during the examination;
  • The balance in each account during the year; and
  • The total amount of all penalties to be asserted for all violations.

When a penalty is appropriate, an Examiner must consider whether assessment of multiple penalties is commensurate to the harm caused by the FBAR violation IRM 4.26.16.5.2.1(4).

Acknowledging that one size does not fit all, the IRS has developed the Guidelines to assist Examiners in determining:  (i) whether the willful or non-willful FBAR penalty is applicable; and (ii) whether a lower amount is appropriate under the Guidelines. Discussion of the Guidelines can be found in IRM 4.26.16.5.3, IRM 4.26.16.5.4 and IRM 4.26.16.5.5. Under the Guidelines the determination of an FBAR penalty by an Examiner, is subject to close scrutiny by the Examiner’s Manager, prior to any assessment IRM 4.26.16.5.6 and will typically include consideration of the IRM 4.26.16.5.2.1(3) factors listed above.

31 USC 5321(a)(5)(B)(i) authorizes the imposition of a non-willful FBAR penalty up to $10,000 against any filer who violates or causes any violation of the FBAR filing, reporting and recordkeeping requirements.  The penalty may be abated where the taxpayer can establish “reasonable cause” and the amount of the transaction or balance that caused the violation was properly reported 31 USC 5321(a)(5)(B)(ii).

Prior to determining the penalty amount for non-willful violations, an Examiner must first determine whether the Guidelines are met IRM 4.26.16.5.4.1(1). If the Guidelines are met, the Examiner must perform a preliminary calculation using the Guidelines and limiting the total mitigated penalties for each year to the statutory maximum for a single non-willful violation.  The statutory maximum penalty for each year must be allocated among all violations IRM 4.26.16.5.4.1(2).

In the case of multiple owners of a foreign financial account, the Examiner must conduct a separate analysis for each owner and determine if a violation occurred and whether it was willful or non-willful.

The penalty authorized for a filer who either “willfully violates” or “willfully causes a violation of any provision of Section 5314,” is the greater of $100,000 or 50% of the balance in the account at the time of the violation 31 USC § 5321(a)(5)(D)(i)(II). The reasonable cause exception provided for in the case of the non-willful penalty is not applicable where the FBAR violation was willful 31 USC § 5321(a)(5)(D)(ii).

The Guidelines for non-willful violations provide the following:

  1. Level I-NW. Where the maximum aggregate balance for all accounts does not exceed $50,000 at any time during the year, the mitigated penalty is $500 per non-willful violation with a cap of $5,000 per year;
  2. Level II N.W. In cases where the maximum aggregate balance exceeds $50,000, but does not exceed $250,000, the mitigated penalty amount is $5,000 per violation.
  3. Level III N.W. Where the maximum aggregate account balance for all accounts exceeds $250,000, the penalty amount is equal to the statutory maximum ($10,000) per violation.

 

Where the Guidelines do not apply, the Government’s position is that a filer is subject to the $10,000 non-willful penalty for each violation rather than per form.  Despite the overwhelming number of cases that have rejected the Government’s position, the U.S. District Court for the Southern District of Florida in a recent decision held that the non-willful FBAR penalty is per account rather than per form. United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021). The Solomon Court adopted the dissent in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) (Ikuta, J. dissenting).  This issue will continue to be litigated, despite favorable decisions favoring the taxpayer.

 

Furthermore, where the Guidelines do not apply, the Government’s position with respect to cases involving spouses is that the penalty should be assessed against each spouse.

In cases involving willful violations, the Guidelines provide the following:

  1. Level I-Willful. In cases where the maximum aggregate balance for all accounts to which the willful violation related does not exceed $50,000, the mitigated penalty amount is the greater of $1,000 per year or 5% of the maximum aggregate balance of the accounts to which the violations relate. The total mitigated willful penalty is allocated among all willful violations being penalized in that year;
  2. Level II-Willful. Where the maximum aggregate balance exceeds $50,000 but does not exceed $250,000, the mitigated penalty is the greater of $5,000 or 10% of the maximum account balance during the calendar year at issue;
  3. Level III-Willful. In cases where the maximum aggregate balance exceeds $250,000 but does not exceed $1,000,000, the penalty for each account for which there is a violation, the penalty is the greater of 10% of the maximum aggregate account balance during the calendar year at issue or 50% of the account balance on the violation date; and
  4. Level IV-Willful. Where the maximum aggregate account balance for all accounts exceeds $1,000,000, the penalty is 50% of the account balance on the violation date or the statutory maximum penalty for willful violations.

Considering the Guidelines a means of reducing your overall FBAR penalty obligation is not a simple decision when deciding to come clean. Any such decision requires a careful analysis of the taxpayer’s situation including the account balances, source of account funds, the applicability of the Guidelines, the taxpayer’s residence, the overall cost of using the Guidelines compared to proceeding under an alternate method, whether making a disclosure presents any criminal risk and whether there are income tax consequences associated with failure to report foreign financial accounts. Consequently, consulting with an experienced and knowledgeable tax attorney should be the first order of business.

Remember! The FBAR statutes, regulations and judicial decisions are complex and confusing and one size doesn’t fit everyone.

 

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