Verni Tax Law

Quiet Disclosure Guilty Plea

Florida man pleads guilty to tax evasion and hiding funds around the world

In April 2020, a Florida man pleaded guilty to tax evasion and the willful failure to file FBAR’s. What makes this case particularly interesting is that the taxpayer made use of a “quiet disclosure” rather than entering into the Offshore Voluntary Disclosure Program (OVDP). This is a classic case of greed on steroids.

Experienced tax attorneys will usually discourage their clients from making quiet disclosures. However, some practitioners may be tempted to recommend using a quiet disclosure to help close the deal with the client. An uninformed or greedy client will invariably opt for the least costly strategy. Unfortunately, these same practitioners routinely fail to provide the client with an explanation of the downside risks associated with making a quiet disclosure.

The following discussion is limited to the defendant’s foreign financial accounts, his failure to file FBAR’s and his unsuccessful attempt at making a quiet disclosure. If you interested in the tax evasion portion of the case you can click on the link hereand you will be linked to the Department of Justice, Tax Division, website.

Case background

–The taxpayer owned and operated a U.S. business that bought U.S.-made agricultural machinery and parts and sold them throughout the world. The taxpayer failed to not only file business, personal and employment income tax returns but also failed to pay corporate, employment or individual income taxes. Although the taxpayer never received a salary, he certainly was living large. In addition to the business paying all of his personal expenses, the defendant was also able to siphon off significant amounts of cash, which he used for a variety of reasons. In total, the taxpayer failed to report more than $7.7 million in income, resulting in a total tax loss to the Government of over $2.7 million.

-From 2007 to 2011, the taxpayer transferred 5.8 million from the company’s bank accounts to foreign financial accounts. The taxpayer maintained these foreign financial accounts in Croatia, Germany, Serbia, and Switzerland from 2008 to 2015. Despite knowing that he had an obligation to report these accounts on FinCEN Form 114 (FBAR), the defendant kept these accounts secret in order to avoid IRS detection.

–In 2010, an account the taxpayer held at Credit Suisse in Zurich, Switzerland reached a year-end high value of $6,177,586. The taxpayer used the Credit Suisse account to fund the purchase of a $1,350,000 yacht and a $1,650,000 waterfront home in Florida.

–In 2015, Credit Suisse closed the taxpayer’s account in Switzerland and advised him to enter the IRS’s Offshore Voluntary Disclosure Program (OVDP). To provide some context, the OVDP was terminated in September of 2018 and replaced that same year with the Voluntary Disclosure Practice rules.

–The taxpayer failed to heed the Bank’s advice and elected not participate in the OVDP. The last iteration of the OVDP provided taxpayer’s with undeclared offshore accounts the opportunity to come clean in exchange for the prospect of avoiding criminal prosecution. Under the OVDP, participating taxpayers were required to:

File 8 years of delinquent or amended tax returns
File FBARS for 8 years.
Submit his or her returns and copies of the electronically filed FBAR, together with a penalty worksheet to the OVDP unit of the IRS.
Pay any outstanding income tax, together with a 20% accuracy penalty and interest.
Pay a one-time miscellaneous offshore penaltyequal to 27.5% of the highest aggregate account balance(s) in any one disclosure year.

In exchange for making these disclosures and paying all taxes, penalties and interest as well as the miscellaneous offshore penalty, the taxpayer and IRS would enter into a “Closing Agreement” (Form 906). A Closing Agreement effectively bars any additional claims by the IRS or the taxpayer for any of the years included in the disclosure period.

The taxpayer’s quiet disclosure consisted of filing several delinquent tax returns with the hope that the filings would fly under the radar, and the taxpayer would avoid paying income taxes, penalties and interest as well as the miscellaneous offshore penalty. Ironically, the taxpayer did not file any FBAR as part of his quiet disclosure.

Findings of the case

As it turns out, the tax returns filed by the defendant were materially false in several respects. First, the income tax returns disclosed only the taxpayer’s Credit Suisse account but failed to disclose his other foreign financial accounts. Second, the income tax returns submitted by the taxpayer failed to include the income the defendant earned from his company as well as the foreign source income earned from the taxpayer’s undisclosed foreign financial accounts.

Making a quiet disclosure, even in cases where the taxpayer files all FBAR’s in addition to his or her amended or delinquent income tax returns, is strong evidence of the taxpayer’s intent to prevent or hinder the IRS from detecting the existence of the taxpayer’s foreign financial accounts. It also demonstrates the taxpayer’s intent to avoid the assessment and payment of FBAR penalties.

Takeaway from the defendant’s guilty plea

If you make a quiet disclosure and are caught, there are significant financial consequences, even if you are fortunate enough to avoid criminal prosecution. The use of a quiet disclosure will invariably result in the assessment of the Willful FBAR Penalties which are substantial. Any hope of merely paying the Non-Willful FBAR penalty is out the window. In addition, if you are discovered, you will have to pay the outstanding tax, as well as the related penalties and interest on any unreported income. Among the IRS penalties, you could be subject to the 75% Civil Fraud Penalty.

Where criminal risk is minimal or non-existent, it may be possible to utilize the foreign or domestic streamlined procedures, thereby eliminating or limiting the FBAR penalty to a onetime 5% penalty.

While some taxpayers have been successful in avoiding detection by the IRS by using a quiet disclosure, you do not want to be the last person without a chair when the music stops. If you have undisclosed foreign financial accounts and foreign income, don’t let greed cloud your judgment. Nor should you make a decision based upon any potential savings in legal costs. Take the time to meet with an experienced and knowledgeable tax attorney to see what your options are. If any practitioner mentions the use of a quiet disclosure as a potential disclosure strategy, run like hell!

July 3, 2020/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, OVDP

Offshore Disclosure of Foreign Financial Accounts: Deciding What Road to Take

Disclosing Offshore Bank Accounts

Taxpayers who are considering coming out of the shadows to disclose their offshore accounts need to be extremely careful when deciding what road to take. Too often, taxpayers simply default to the cheapest method (streamlined procedures) when deciding how to proceed in making an offshore disclosure without considering the significant financial and criminal risks associated with choosing the wrong method.

In addition, taxpayers who have elected to opt out of the Offshore Voluntary Disclosure Program rather than paying the miscellaneous offshore penalty have found that opting out was ill-advised. The rationale for opting out is the belief that the taxpayer will somehow be able to convince the IRS that his or her failure to (i) report their financial accounts on FinCEN Form 114 (FBAR) (ii) make the appropriate disclosure on Schedule B; and (iii) report the income derived from their foreign financial assets was not willful. While justification does exist for opting out of the OVDP in select cases, by and large, most taxpayers are best served by staying in the program and securing a Closing Agreement.

Other taxpayers have opted for using the streamlined procedures for disclosing their foreign financial accounts, based entirely upon 0% to 5% penalty, without carefully considering the veracity of their representations under oath or the likelihood that their statements will be vetted.

Taxpayers have also placed undue reliance upon the reasonable cause defense or the advice of a tax professional defense to support their certifications of non-willfulness, without fully understanding whether these defenses are legitimately available to them. Unfortunately, many of these taxpayers now face the imposition of the willful FBAR penalty, and in extreme cases, criminal prosecution.

The Government has become increasingly aggressive in both the assessment of the willful civil FBAR penalties as well as in the prosecution of those who make false statements. Just ask Brain Nelson Booker, who was recently charged by the Department of Justice for, among other things, filing a false document under 26 U.S.C. § 7206 (1) when he submitted a certification of non-willfulness in October 2015 as part of a submission using the Streamlined Domestic Offshore Procedures. The DOJ alleges that Booker “falsely certified that he met all the eligibility requirements for treatment under the streamlined procedures, and falsely claimed, among other things, that his failure to report all income pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct.” Mr. Booker is now a fugitive from Justice and has since taken up residency in a non-extradition jurisdiction.

Likewise, Taxpayers who either opted out of the OVDP or rolled the dice with the streamlined procedures, and in doing so, stretched the truth in their certifications, are quickly learning that the IRS has seen it all and can easily discern when a taxpayer is lying or stretching the truth. The IRS is making good on its pledge to carefully scrutinize opt out and streamlined disclosure cases. They will go after those who have been less than candid.

There are common characteristics in both criminal and civil FBAR cases including (i) the failure to report foreign financial assets; (ii) a “no” response to question 7(a), in Part III of Schedule B as to the existence of an interest in or signatory authority over a foreign financial account; (iii) the failure to report the income associated with the foreign financial accounts; and (iv) a signed income tax return. These characteristics are generally present in FBAR cases where the taxpayer self-prepared his or her return as well as in cases where the return was prepared by a third party.

The presence of the above common characteristics is by no means all inclusive. Nevertheless, in nearly all cases, these characteristics have been sufficient to sustain the assessment of non-willful FBAR penalties, despite taxpayer claiming of reasonable cause or reliance upon the advice of professionals as a defense.

More importantly, the presence of these factors is now routinely cited by the Courts in sustaining the assessment of willful FBAR penalties as well as in criminal prosecutions.

Accordingly, a decision to make an offshore disclosure as well as the method of disclosure is a serious decision that must be carefully evaluated, particularly in light of the closure of the OVDP in September 2018. Likewise, those who have participated in the OVDP need to carefully consider the financial and potential criminal risks associated with opting out. In this regard, it is necessary to analyze the total costs under the OVDP as well as the potential down side risks associated with opting out.

Factors to consider when deciding which type of offshore disclosure to make

Since each case will differ, a decision as to what type of offshore disclosure to make will depend on a many factors including, but not limited to:

Whether the taxpayer self-prepared his or her tax returns or whether the returns were prepared by a CPA.
Whether the taxpayer checked “no,” in response to disclosure question 7(a), Part III, Schedule B as to the existence of an interest in or signatory authority over a foreign financial account.
If the taxpayer failed to file FBARs, whether he nonetheless reported all of the income derived from his or her foreign assets.
The extent to which the taxpayer sought to evade Government detection of his or her foreign financial assets and any income associated therewith (nominee entity, foundation or straw person).
Any special arrangement the taxpayer has or had with the bank (unnumbered account, hold mail, nominee officers and directors, etc.).
The number and size of foreign financial accounts.
The length of time the foreign financial accounts have been open.
The purpose for opening the accounts.
Whether the foreign financial accounts are active (regular deposits and withdrawals, or atm use) or dormant (no activity in account for extended period of time).
The taxpayer’s efforts to familiarize himself with the FBAR filing and return disclosure requirements.
The taxpayer’s efforts to ascertain the selected tax professional’s competence in connection with the FBAR financial reporting requirements and disclosure rules.
Where the taxpayer used a third party preparer, whether he or she completed a tax organizer.
The existence of any written communications between the taxpayer and third party tax return preparer related to the existence of foreign financial accounts and the reporting requirements.
Whether the taxpayer provided the third party return preparer with sufficient documentation from which the return preparer could determine FBAR filing requirements and other return filing obligations.
Whether the taxpayer sought and obtained written advice from a tax attorney, independent from any advice he or she may have received from the tax return preparer.
The taxpayer’s level of education and sophistication.
The source of funds deposited into the accounts; (inheritance, after tax savings, etc.).
Whether the source of the funds in the foreign financial accounts is the by-product of legal vs criminal activity.
Taxpayer’s history with the IRS.
Whether the taxpayer has prior FBAR violations.
Whether a civil fraud penalty has ever been assessed against the taxpayer.
The existence of a current or past civil or criminal investigation by the IRS or other Government agency (i.e. SEC).
Whether the taxpayer was ever convicted of a felony.

The preceding represents some, but certainly not all, of the factors to be considered when deciding which method of disclosure to be used, or whether to opt out of the OVDP. Taxpayers are best served when they consult with a seasoned tax attorney, who has both the knowledge and experience with offshore disclosures. While some may be tempted to use a CPA or enrolled agent, these professionals generally lack the ability to understand the legal and financial implications associated with such a decision. Nor do they understand the discovery and the rules of evidence. In fact, these professionals often-times become fact witnesses in both civil and criminal FBAR cases.

The takeaway is simple, offshore disclosures are becoming much more complicated due to the changing legal landscape as well as the new rules related to voluntary disclosure practice that were announced in November of 2018. Equally important, the Government has had a succession of FBAR victories, both civil and criminal, and as such, is now emboldened.

September 3, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FBAR, OVDP

DOJ Announces Indictment of Taxpayer for Filing False Non-Willful Certification Under the Federal Streamlined Procedures

Case Background

On August 27, 2019 the Department of Justice (DOJ) announced a superseding indictment of a Florida business man and former Texas CPA for allegedly filing a false document. This was because he made an offshore disclosure using streamlined filing procedures.

The supplemental indictment alleges that, Brain Nelson Booker, a Florida resident, who was in the cocoa trading business in Venezuela, Panama and Florida, filed false Foreign Bank Account Reports (FBARs) for the years 2011-2013. The new indictment also included charges from the original indictment which was brought because Booker filed false income tax returns (under 26 USC § 7206(1) ) for the tax years 2010-2012.

In addition to the false FBAR and tax return charges, the Government alleges that Booker filed a false document under 26 U.S.C. § 7206 (1) when he submitted a certification of non-willfulness in October 2015 as part of a submission using the Streamlined Domestic Offshore Procedures. According to the charging document, Booker “falsely certified that he met all the eligibility requirements for treatment under the streamlined procedures, and falsely claimed, among other things, that his failure to report all income, and pay all tax and submit all required information returns including FBARs was due to non-willful conduct.”

Booker was unavailable for comment, since he fled the United States to a non-extradition jurisdiction.

Government Argument

According to the Government, Booker only reported two foreign financial accounts he maintained in Venezuela on his FBARs and tax returns for 2008-2010, while omitting other accounts in Switzerland, Panama and Singapore.

In 2009 Booker was contacted by the Swiss Bank where he maintained one of his foreign financial accounts. The Bank, who participated in the DOJ’s Swiss Bank Program, notified Booker to either report his account to the IRS or leave the Bank. Subsequently, Booker moved his account to another Swiss Bank.

In July 2015 Booker filed delinquent FBARs for 2008 through 2015, this time reporting all his foreign financial accounts, including the two Venezuelan accounts as well as his Swiss, Panamanian and Singapore accounts. In October 2015 Booker made an offshore disclosure using the streamline procedures. As part of the streamlined procedures, Booker submitted a certification of non-willfulness claiming that his failure to file FBARs identifying all of his accounts was due to the fact he first learned about FBARs in 2008 and was under the mistaken belief that he was only required to report personal foreign financial account and not the accounts held by his business.

How does Booker’s indictment affect tax payers in a similar situation?

This indictment represents the first prosecution for filing a false document in connection with a submission under the streamlined procedures and clearly signals that the IRS is making good on their earlier pledge that they intend to closely scrutinize taxpayer certifications submitted in connection with the streamlined procedures, and further, that they will pursue persons who make false statements in their certifications.

Taxpayers with undeclared foreign financial accounts are afforded an opportunity to come into compliance. The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Offshore Procedures represent two alternatives for coming into compliance, depending upon whether the failure to file was willful or simply due to negligence. Closely tied to the issue of willfulness is the criminal risk associated with using the streamline procedures to make an offshore disclosure.

Prior to the closure of the OVDP in September of 2018, taxpayers who willfully failed to disclose their offshore assets and/or were at risk of criminal prosecution, could make application to participate in the OVDP.

Once the taxpayer was cleared to make the offshore disclosure, he or she would file eight years of amended income tax returns, as well as eight years of FBARs. The individual would also submit a Miscellaneous Offshore Penalty Worksheet. The Taxpayer would also be required pay the outstanding amount of tax due, together with interest and a 20% accuracy related penalty. Depending upon the circumstances and when the disclosure was made, the taxpayer would pay a miscellaneous offshore penalty equal to 20-50% of in the disclosure year with the highest aggregate balance.

In exchange for the taxpayer coming into compliance, payment of all amounts due, and assuming there were no material misstatements in the taxpayer’s submissions, the IRS would generate a Closing Agreement (Form 906). The Closing Agreement would generally include a representation that the IRS would not refer the case for criminal prosecution. Furthermore, the Closing Agreement would foreclose the possibility of any further income tax or FBAR penalty assessment by the IRS for any year in the disclosure period. The Agreement would also preclude the taxpayer from making any claim for a refund at a later date.

In November of 2018, the IRS the announced the updated Voluntary Disclosure Practice Rules which now include both domestic and offshore disclosures. The penalties under the new regimen are quite onerous when compared to the penalties under prior iterations of the OVDP.

Recognizing that one size doesn’t fit all, the IRS permits taxpayers, whose offshore disclosures present little risk to no risk of criminal prosecution or the assessment of the civil willful FBAR Penalty, to use the streamline offshore procedures. There are two scenarios. One for persons residing outside of the U.S and the other for persons residing in the US

In both cases, the taxpayer will file three years of amended returns and six years of FBARs. In addition, the taxpayer must submit a certification of non-willfulness, wherein he or she must set forth in detail the reasons why the failure to file FBARs was non-willful.

Those residing outside of the U.S. who meets the physical presence requirements are not subject to any FBAR penalty, while those residing in the U.S. pay a 5% penalty in the disclosure year with the highest aggregate balance. In addition, the taxpayer must pay any additional income tax due related to the unreported income associated with his or he offshore accounts.

The key difference between the OVDP and the streamlined procedures is that the OVDP provides a taxpayer with closure, whereas a submission using streamlined procedures does not. As such, those using the streamlined procedures are at risk that the IRS may determine that the taxpayer’s representations, as contained in the certification of non-willfulness were false or unsubstantiated. If such a determination is made, the taxpayer could be subject to the assessment of civil willful FBAR penalties, as well as the possibility of a referral to IRS Criminal Investigation.

The indictment of Booker serves as a cautionary tale for those taxpayers who elect to use the streamlined procedures rather than the new voluntary disclosure practice rules in order to avoid paying higher legal fees and FBAR penalties associated with the later protocol. In this regard, some taxpayers may be tempted to stretch the truth in an effort save on the FBAR penalties and legal fees, only to later find themselves in serious trouble.

The instant indictment should also serve as a wake up call that undertaking an offshore disclosure requires a careful review of the facts with an experienced tax attorney to assess whether a person’s failure to file an FBAR and his “no” response to the Schedule B FBAR disclosure was the result of negligence or a willful attempt to prevent the Government from discovering the taxpayer’s foreign assets and the income derived therefrom.

Ultimately, whenever a criminal risk is present, streamline procedures should be avoided. Likewise, streamline procedures should be avoided where there is a possibility that the facts otherwise support the assessment of the civil willful FBAR penalty, rather than a finding of mere negligence. Taxpayers who struggle with the truth and particularly those with prior dealings with the IRS that have resulted in the taxpayer’s integrity coming into question, should think long and hard before making a false statement in a certification when making a streamlined disclosure. Such actions are shorted sighted and almost always meet with financial disaster.

August 31, 2019/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FATCA, FBAR, Law Office News, OVDP

Willful FBAR penalty Case Study.

Wilfull FBAR Penalty.

The following is intended as an update to my January 26, 2019 Blog on the subject of the limitation of the willful FBAR (Foreign bank Account Report) penalty under United States v. Colliot, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018) which capped the maximum willful FBAR penalty at $100,000. The predicate for the District Court’s decision is 31C.F.R. § 1010.820. In addition to Norman v United States (Ct. Fed. Cl. Dkt 15-872T, Order dated 7/31/18- (please see my January 26, 2019 Blog)), United States v. Horowitz, 2019 U.S. Dist. LEXIS 9484 (D. Md. 2019) and other recent decisions have dealt the Colliot decision a fatal blow. Consequently, individuals who are subject to the willful FBAR penalty should avoid using the Colliot decision as a basis for limiting their liability.

The District Court in Colliot held that the earlier regulation was still valid, notwithstanding the changes to the FBAR penalty structure under the American Jobs Creation Act of 2004 (AJCA), which increased the maximum FBAR penalty for willful violations to the greater of $100,000 or 50% of the Balance of the Account. § 5321(a) (5) (C)(i). The Court’s logic in reaching its conclusion was the absence of a new regulation adopting the higher penalty amount provided for under § 5321(a) (5)(C)(i).

The Horowitz and other recent decisions make clear that the Colliot decision is fatally flawed. While the Horowitz decision focused on the taxpayers’ “willful blindness” in sustaining the willful civil FBAR penalty, the Court also addressed the taxpayers’ reliance on the Colliot in asserting that the willful civil FBAR penalty was capped by 31 C.F.R. § 1010.820. The Horowitz decision came before the Court on a Motion for Summary Judgment filed by the Government seeking to sustain the FBAR penalties assessed against the Horwitz’s. The taxpayers filed a Cross Motion for Summary Judgement.

Is willful civil FBAR penalty limited?

The following discussion only addresses the issue of whether the willful civil FBAR penalty is limited under 31 C.F.R. § 1010.820(g) (2) in light of the 2004 Amendment which increased the maximum willful civil FBAR penalty to the greater of $100,000 or 50% of the account balance at the time of the violation.

United States v. Horowitz case analysis.

Peter Horowitz and his wife, Susan, lived in Saudi Arabia from 1984-2001 where Peter worked as an anesthesiologist. In 1988 the taxpayers opened a joint bank account at UBS. The account was funded with the money Peter earned as an anesthesiologist. The taxpayers returned to the United States in 2001 but did not close their UBS account, which as of 2008 had a balance of almost $2 million. Late in 2008, after learning of the legal problems UBS was experiencing, Peter travelled to Switzerland and closed the UBS account. After closing the UBS account, Peter transferred the account balance to an account that he opened at Finter Bank, another Swiss Bank, in which he designated the account as a “hold mail” account. The Finter bank account was opened solely in Peter’s name because Susan was not present at the time.

Peter was responsible for communicating with the taxpayers’ accountant who prepared their 2007 and 2008 federal income tax returns. Peter never disclosed the foreign financial accounts to the taxpayers’ accountant. In response to the questions that appear on Schedule B, Part III, concerning the existence of foreign financial accounts, the taxpayers always checked the “No” box. In addition, the Horwitz’s failed to file FBAR reports for 2007 and 2008. The taxpayers subsequently entered the Offshore Voluntary Disclosure Program sometime in January of 2010, but later elected to opt out.

The IRS assessed the willful FBAR penalty against each of the taxpayers for both the 2007 and 2008 tax years in the amount of $247,030. The Horwitz’s filed a timely protest letter and the matter was affirmed by IRS Appeals. The Government thereafter brought suit to reduce the assessment to a judgment.

In response to the Government’s Motion for Summary Judgment, the taxpayers filed a Cross Motion for Summary Judgment asserting their conduct did not rise to the level of willfulness. In their Cross Motion, the taxpayers, relying upon Colliot, also asserted that the willful FBAR penalty should be capped at $100,000. They cited 31 C.F.R. § 103.27, which is now 31 C.F.R. § 1010.820(g) (2) in support of their argument.

In granting the Government’s Motion for Summary Judgment, the District Court of Maryland for the Southern District laid to rest any hope of future reliance on Colliot. The Court, citing United States v. Larionoff, 431 U.S. 864, 873, 97 S.Ct. 2150, 53 L.Ed.2d 48 (1977 articulated a long standing principle that: “it is settled law that an agency’s regulations “must be consistent with the statute under which they are promulgated.” Furthermore, the Court, quoting from Norman v. United States 138 Fed.Cl. at 196 stated:

“Since the civil penalty amount for a “willful” violation in 31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i) (2004), the April 8, 1987 regulations are “no longer valid.”

The Norman decision is bolstered by Kimble v. United States No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018), a recent 2018 decision by the United Court of Claims, wherein the Court rejected the conclusion reached in Colliot that the IRS was bound by the maximum penalty provided for prior to the amendment in 2004. In Kimble, the Court, in sustaining the IRS assessment for willful violations of the FBAR statute, stated that the conclusion reached in Colliot:

“conflicts with the decision of the United State Court of Appeals in Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997), where the Federal Circuit concluded that the fact that regulations ‘had not been formally withdrawn from the Code of Federal Regulations [did] not save them from invalidity’ based on a conflicting federal statute.” Id.

Finally, the Court in Horowitz’s case, in rejecting the taxpayers’ arguments, cited I.R.M. § 4.26.16.6.5(3) which provides:

“[f]or violations occurring after October 22 2004, the statutory ceiling is the greater of$100,000 or 50% of the balance in the account at the time of the violation.” I.R.M. § 4.26.16.6.5(3) (Nov. 6, 2015).

Considering the Horowitz, Kimble and Norman decisions as well as I.R.M. § 4.26.16.6.5(3), a successful challenge to the willful FBAR penalty based upon 31 C.F.R. § 1010.820(g) (2) is no longer viable. Congress also created a separate provision for a civil penalty for Non-Willful violations, making a clear distinction between willful and non-willful violations. H.R. Rep 108-755 at 615 (2004) (Conf. Rep.).

United States v. Colliot case analysis.

In Colliot, the IRS filed a lawsuit against Dominque G. Colliot to reduce the assessed penalties to a money judgment. The action filed in the United States District Court for Western Texas related to penalties that were assessed for willful failure to file FBAR’s for 2007-2010. The IRS assessed a $544,773 penalty for the tax year 2007 and $196,082 for the tax year 2008. Smaller penalties were also assessed for the tax years 2009 and 2010. In assessing the penalties, the IRS relied upon the authority contained in § 5321(a) (5) and 31 C.F.R. § 1010.820(g)(2). In response, Colliot filed a motion for summary judgment asserting that IRS incorrectly applied the law in calculating the civil willful FBAR penalties.

In its analysis, the Court discussed the 2004 amendment to § 5321 which increased the maximum civil penalties that could be assessed for the willful failure to file an FBAR, and in doing so, acknowledged the increase in the willful FBAR penalty to a minimum of $100,000 and a maximum of 50% of the balance in the unreported account at the time of the violations. The Court also noted the absence of any change to 31 C.F.R. § 1010.820(g) (2), which caps the maximum willful FBAR penalty at $100,000. In granting Colliot’s motion for summary judgement, the Court wholly ignored United States v. Larionoff, 431 U.S. 864, 873 (1977) and instead focused on the powers delegated by Congress to the Treasury Secretary under § 5321(a)(5) to determine the amount of penalty so long as it did not exceed the ceiling set by § 5321 (a)(5)(C).

In Larionoff, the Supreme Court, citing Bowles v.Seminole Rock Co, 325 U.S. 410,414 (1945) and quoting language from the Bowles decision stated:

“In construing administrative regulations, ‘the ultimate criterion is the administrative interpretation, which becomes of controlling weight, unless it is plainly erroneous or inconsistent with the regulation”. Id. at 873.

The Court, citing Manhattan General Equip Co. v Commissioner, 297 U.S. 129,134(1936) further stated:

“For regulations, in order to be valid, must be consistent with the statute under which they are promulgated.” Id at 873.

In Manhattan General Equip Co., the Supreme Court held that:

“A regulation which does not do this, but operates to create a rule out of harmony with a statute, is a mere nullity” Id at 134.

United States v. Norman case analysis.

In the Norman decision, the IRS assessed a penalty against Mindy P. Norman in the amount of $803,530 for the willful failure to file an FBAR in connection with a Swiss bank account she maintained during the tax year 2007. The taxpayer appealed the assessment with the IRS Office of Appeals, who affirmed the IRS assessment, concluding that Ms. Norman willfully failed to file an FBAR. The Taxpayer then paid the penalty in full and instituted an action In the United States Court of Federal Claims. Following a one day trial and in response to a letter sent by the Norman citing the Colliot decision, the Court of Claims, Ordered the IRS to respond and comment on Colliot. The IRS filed a timely response. However, the Court did not permit the Taxpayer to file a reply. After considering the IRS response and the trial testimony and other documents, the Court ruled in favor of the IRS and concluded that Ms. Norman willfully failed to file an FBAR in 2007 and that the assessed penalty in the amount of 50 percent of the balance of the unreported account was proper.

In arriving at its decision, the Norman Court painstakingly dissected the Colliot decision and properly pointed out the defects in the District Court’s logic in ruling in favor of the Ms. Colliot. The Court of Claims traced the legislative history of the BSA, the relevant statutory and regulatory provisions and the impact of the changes to the FBAR penalty structure as a result of the AJCA. The Court concluded that the District Court in Colliot ignored the mandate created by the amendment in 2004 and instead elected to focus on the language in §5321(a) (5) that vests the Secretary of the Treasury with the discretion to determine the amount of the penalty.

The Court of Claims cited the following language used by Congress in amending the statute as a basis for invalidating C.F.R. § 1010.820:

“Congress used the imperative ‘shall’ rather than the permissive, ‘may,’ thereby raising the ceiling for the penalty, and in doing so, removed the Treasury Secretary’s discretion to regulation any other maximum.” Norman at Pg. 8.

The Norman Court cited Larionoff for the proposition that Congress has the power to supersede regulations by amending a statute. The Court stated that “in order to be valid [,] [regulations] must be consistent with the statute under which they are promulgated.” The Norman Court concluded that § 5321 (a) (5) (C) (i) which sets the maximum penalty to the greater of $100,000 or 50% of the balance of the account, is inconsistent with 31C.F.R. § 1010.820 rendering 31 C.F.R. § 1010.820 invalid.

Conclusion.

The foregoing has particular relevance for those who have failed to take advantage of the Offshore Voluntary Disclosure Program, which is now closed, or otherwise failed to utilize the Streamlined procedures and those who have made quiet disclosure and now found themselves the subject of a grand jury subpoena. The IRS has consistently maintained that offshore financial crimes are a top priority and continues to work with its global partners in unmasking those with unreported foreign financial accounts. FATCA is also producing a steady stream of taxpayer information from which the IRS develops leads. In addition, current prosecutions of facilitators and taxpayers as well as taxpayers who have elected to come forward have yielded a treasure trove of information which the IRS is using to identify other non-compliant taxpayers.

Those who have failed to come forward and report their foreign financial accounts are more likely than not, going to be subject to the willful civil FBAR penalty consistent with Norman decision. Mitigation of the willful FBAR penalty is only possible where the taxpayer comes forward and makes an honest disclosure.

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

February 1, 2019/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FATCA, FBAR, Law Office News, OVDP, Tax Returns

Streamline Disclosures- The Art of the Non-Willful Certification.

Offshore disclosure to IRS.

The key to making an offshore disclosure to the IRS using either the Domestic or Foreign Filing Compliance procedures requires a thorough and painstaking analysis of the facts involving an individual’s failure to;

report his or her foreign financial accounts.
report income from foreign sources.
make the necessary disclosures.
report foreign financial assets consistent with FATCA.

Details in a Non-Willful Certification can spell the difference between closure and a subsequent examination by the IRS which leads to assessment of multiple Civil FBAR Non-Willful Penalties over a number of years, or even worse, the assessment of the Willful Civil FBAR Penalty.

Components of offshore disclosure.

The starting point for any case is gathering all facts, including whether the tax return was self-prepared or prepared by a paid preparer, the length of time the foreign financial accounts have been open and the Taxpayer’s status in the United States. It is also necessary to determine whether Schedule B was included with the Taxpayer’s original returns, and if so, whether the Taxpayers checked “no” in response to Question 7(a) and 7 (b) concerning the existence of Foreign Financial Accounts and the acknowledgement of an obligation to file an FBAR.

In addition, detailing the origin of the funds in the Foreign Financial Accounts and whether those funds represent after tax dollars as well as the initial purpose for opening the Foreign Financial Accounts. Closely tied to this inquiry is whether the Foreign Financial Accounts are legacy accounts, which were in existence prior to an Individual’s arrival in the United States.

Since Streamlined Filing Procedures are less costly to a Taxpayer than participating in the Offshore Voluntary Disclosure Program (both in terms of penalties and legal cost), there is a tendency by those considering an offshore disclosure to default to the Streamlined Filing Procedures, without first considering all of the facts. This can have catastrophic consequences especially in light of the recent IRS announcement that OVDP will be closed on September 18, 2018. The IRS has also intimated that it may also scrap the Streamlined Filing Procedures. This means that those who have failed to come forward can expect turbulence in the future.

January 31, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FBAR, Law Office News, OVDP

The Willful FBAR Penalty: Is it Limited to $100,000? Not so Fast.

Assessment of FBAR penalty

Some practitioners have applauded the decision in United States v. Colliot, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018) and have even suggested that the assessment of the willful FBAR penalty is limited to the “greater of the amount (Not to Exceed $100,000) equal to the balance in the account at the time of the violation or $25,000.” The Court in Colliot, ruled in favor of the Taxpayer, relying upon 31 C.F.R. § 1010.820 (Previously cited as 31 C.F.R. § 103.57), a regulation promulgated under a prior version of the Bank Secrecy Act. The U.S. District Court held that the earlier regulation was still valid, notwithstanding the changes to the FBAR penalty structure under the American Jobs Creation Act of 2004 (AJCA), which increased the maximum FBAR penalty for willful violations to the greater of $100,000 or 50% of the Balance of the Account. The Court reached its conclusion citing the absence of any new regulation adopting the higher penalty amount provided for under § 5321(a)(5).

Reliance upon Colliot is inaccurate, misplaced and inconsistent with Congressional intent. The limitation articulated by the Court in Colliot with respect to the willful FBAR penalty is in direct conflict with § 5321(a) (5) (C) (i) of the AJCA. Furthermore, the decision in Norman v United States case (Ct. Fed. Cl. Dkt 15-872T, Order dated 7/31/18) and the legislative history related to § 5321(a) (5) (C)(i) of the AJCA make clear that taxpayers who argue for the lower penalty provided for under 31 C.F.R. § 1010.820 will in all likelihood be unsuccessful. The question of whether the willful FBAR penalty is limited to the greater of $100,000 or 25% of the account balance at the time of the violation, requires a detailed discussion of Colliot and Norman, The Bank Secrecy Act and the relevant statutes and regulations as well as an examination of the legislative history and case law addressing statutory and regulatory conflicts.

Bank Secrecy Act (BSA)

On October 26, 1970 Congress enacted the Bank Secrecy Act (BSA) also known as the “Currency and Foreign Transaction Reports” to the address the legal and economic impact of foreign banking in the United States. The BSA was enacted, in part, based upon the findings by the House Committee on Banking and Currency (the “Committee”). Following a one day investigative hearing held on December 9, 1968, the Committee concluded that Americans were using secret foreign bank accounts and foreign financial institutions for nefarious purposes including income tax evasion, money laundering and other crimes.

As part of the BSA, Congress tasked the Treasury Secretary with the responsibility of promulgating regulations designed to facilitate the implementation of the BSA. As part of the implementation of the BSA, 31 C.F.R.§103.27, a U.S. Citizen with an interest in or control over one or more foreign financial accounts with a value exceeding $10,000 at any time during that calendar year is required to file FinCen Form 114 (previously TDF 90-22.1) with the Commissioner of Internal Revenue on or before June 30 of the following year. Although the power to assess a civil monetary penalty for FBAR violations was initially vested with the Treasury Secretary, it was later delegated to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). Authority was once again delegated to the Internal Revenue Service. 31 C.F.R. § 103.57.

Prior to 2004, The BSA permitted the imposition of an FBAR penalty only for willful violations of §5314. The penalty for willful violations prior to 2004 was capped at the greater of $25,000 or $100,000 under § 5321(a) (5) (B). Enforcement of § 5321(a)(5)(B) is mirrored in the regulations under 31 CFR §103.57(g)(2). Although §5314 is silent on the assessment of a negligence penalty, the regulations permit the assessment of a negligence penalty not to exceed $500.00. 31 CFR §103.57(h).

Civil FBAR penalty Amendment and willful failure

The civil FBAR penalty structure was amended in 2004 as part of the AJCA to include a maximum penalty of $10,000 for any violation of the provisions of §5314. In addition, the penalty for willful FBAR violations previously provided for in § 5321(a) (5) (B) was increased under §5321(a)(5)(C)(i), a newly created provision, to the greater of $100,000 or 50% of the of the account balance. The legislative history related to the changes to the willful FBAR penalty and the addition of the non-willful civil FBAR penalty chronicles Congressional concern over the lack of compliance in financial reporting related to offshore accounts. Congress made clear that improved compliance was the impetus behind raising the maximum penalty for willful FBAR violations:

“The Congress understood that the number of individuals using offshore bank accounts to engage in abusive tax scams has grown significantly in recent years. For one scheme alone, the IRS estimates that there may be hundreds of thousands of taxpayers with offshore bank accounts attempting to conceal income from the IRS. The Congress was concerned about this activity and believed that improving compliance with this reporting requirement is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams. The Congress believed that increasing the prior-law penalty for willful noncompliance with this requirement and imposing a new civil penalty that applies without regard to willfulness in such noncompliance will improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005).

Congress also created a separate provision for a civil penalty for Non-Willful violations, making a clear distinction between willful and non-willful violations. H.R. Rep 108-755 at 615 (2004) (Conf. Rep.).

In Colliot, the IRS filed a lawsuit against Dominque G. Colliot to reduce the assessed penalties to a money judgment. The action filed in the United States District Court for Western Texas related to penalties that were assessed for willful failure to file FBAR’s for 2007-2010. The IRS assessed a $544,773 penalty for the tax year 2007 and $196,082 for the tax year 2008. Smaller penalties were also assessed for the tax years 2009 and 2010. In assessing the penalties, the IRS relied upon the authority contained in § 5321(a)(5) and 31 C.F.R. § 1010.820(g)(2). In response, Colliot filed a motion for summary judgment asserting that IRS incorrectly applied the law in calculating the civil willful FBAR penalties.

In its analysis, the Court discussed the 2004 amendment to § 5321 which increased the maximum civil penalties that could be assessed for the willful failure to file an FBAR, and in doing so, acknowledged the increase in the willful FBAR penalty to a minimum of $100,000 and a maximum of 50% of the balance in the unreported account at the time of the violations. The Court also noted the absence of any change to 31 C.F.R. §1010.820(g)(2), which caps the maximum willful FBAR penalty at $100,000. In granting Colliot’s motion for summary judgement, the Court wholly ignored United States v. Larionoff, 431 U.S. 864, 873 (1977) and instead focused on the powers delegated by Congress to the Treasury Secretary under § 5321(a)(5) to determine the amount of penalty so long as it did not exceed the ceiling set by § 5321 (a)(5)(C).

In Larionoff, the Supreme Court, citing Bowles v.Seminole Rock Co, 325 U.S. 410,414 (1945) and quoting language from the Bowles decision stated:

The Court, citing Manhattan General Equip Co. v Commissioner, 297 U.S. 129,134(1936) further stated:

“For regulations, in order to be valid, must be consistent with the statute under which they are promulgated.” Id at 873.

In Manhattan General Equip Co., the Supreme Court held that:

“A regulation which does not do this, but operates to create a rule out of harmony with a statute, is a mere nullity” Id at 134.

In arriving at its decision, the Norman Court painstakingly dissected the Colliot decision and properly pointed out the defects in the District Court’s logic in ruling in favor of the Ms. Colliot. The Court of Claims traced the legislative history of the BSA, the relevant statutory and regulatory provisions and the impact of the changes to the FBAR penalty structure as a result of the AJCA. The Court concluded that the District Court in Colliot ignored the mandate created by the amendment in 2004 and instead elected to focus on the language in §5321(a)(5) that vests the Secretary of the Treasury with the discretion to determine the amount of the penalty.

The Court of Claims cited the following language used by Congress in amending the statute as a basis for invalidating C.F.R. § 1010.820:

The Norman Court cited Larionoff for the proposition that Congress has the power to supersede regulations by amending a statute. The Court stated that “in order to be valid [,] [regulations] must be consistent with the statute under which they are promulgated.” The Norman Court concluded that § 5321 (a) (5) (C) (i) which sets the maximum penalty to the greater of $100,000 or 50% of the balance of the account, is inconsistent with 31C.F.R. § 1010.820 rendering 31 C.F.R. § 1010.820 invalid.

The foregoing has particular relevance for those who have failed to take advantage of the Offshore Voluntary Disclosure Program, which is now closed, or otherwise failed to utilize the streamlined procedures and those who have made quiet disclosure and now found themselves the subject of a grand jury subpoena. The IRS has consistently maintained that offshore financial crimes are a top priority and continues to work with its global partners in unmasking those with unreported foreign financial accounts. FATCA is also producing a steady stream of taxpayer information from which the IRS develops leads. In addition, current prosecutions of facilitators and taxpayers as well as taxpayers who have elected to come forward have yielded a treasure trove of information which the IRS is using to identify other non-compliant taxpayers.

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

© 1/26/2019

January 26, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FBAR, Law Office News, OVDP

Willful FBAR Penalty- Legal Decisions Diminish Taxpayer Prospects for Successful Defense.

Case Facts.

April 3, 2018, the U.S. District Court in United States v. Garrity held that, for purposes of the assessment of the Willful FBAR penalty, the Government’s burden of proof is a “preponderance of evidence,” rather than the higher “clear and convincing” standard. The Garrity decision involved the Government suit to reduce the Willful FBAR Penalty to a Judgement. The Court also found that “the Government may prove the element of willfulness in this case with evidence that Mr. Garrity Sr. acted recklessly.” The decision is in keeping with a recent line of Court decisions favoring the Government.

In Garrity, the Government assessed the 31, U.S.C. U.S 5321(a) (5) Willful FBAR Penalty against Paul G. Garrity, Sr., who died in 2008 for his willful failure to report his interest in a foreign account he held in 2005.

Court’s response.

In the Court’s Memorandum and Order, in response to legal brief submitted by the parties, the Court rejected the Taxpayers’ argument that the civil FBAR statute is analogous to the civil tax fraud statute, requiring proof by clear and convincing evidence. The Court also rejected the Taxpayers’ argument that an internal memo by the of Office of Chief Counsel of the IRS calls for a higher standard of proof similar to the burden of proof the Service has when asserting the civil fraud penalty under 26 U.S.C. §6663. In dismissing the Defendants argument, the Court noted that the internal memo predated any Court decision on the subject and further, opined that the internal memo was not binding on the Court.

Instead, the Court relied upon the consistent application of the preponderance of the evidence standard in a civil FBAR action established in United States v. Williams No. 09-437, 2010 wl 3473311, at *1 (E.D. Va. Sept. 1, 2010), rev’d on other grounds, United States v. Williams,489 F. App’x 655 (4^th Cir 2012) and consistently followed by other Courts. (See also United States of America v. McBride, 908 F. Supp. 2d 1201-1202 (D. Utah 2012)). Some observers have commented that the decision in Bedrosian should provide hope for the Taxpayer. However, the case is of limited value.

In Bedrosian v. United States of America, 2017 U.S. Dist. LEXIs 56535 (ED PA 2017) the District Court for the Eastern District of Pennsylvania held that the Taxpayer was not willful in his failure to report a larger account on his FBAR. However, the Bedrosian decision should be distinguished on the facts and not viewed as a departure, from Williams or McBride on the application of the criminal standard to the Willful FBAR cases or the standard of proof required to sustain a Willful FBAR penalty assessment.

Despite its ruling in favor of the Taxpayer, the Pennsylvania District Court for the Eastern District did hold that the criminal standard on willfulness does not apply in the case of a Willful FBAR Case and that the government only need show a reckless violation of the statute to apply the higher FBAR penalty. The Court also stated that the preponderance of evidence standard should apply. These principles are in keeping with the prevailing view.

The Court also rejected the Defendants argument that the Government must show that Mr. Garrity, Sr. violated a “known legal duty” in order to establish the “willful element under 31 U.S.C. § 5314 and instead applied the “reckless” criteria.

The recent Court decisions make it difficult, if not impossible, for a Taxpayer to overcome the Assessment of the Willful FBAR penalty since these decisions have emboldened the IRS.

With the recent decision by the IRS to end the Offshore Voluntary Disclosure Program in September of 2018 and the suggestion that Domestic Filing Compliance Procedures may also come to an end, the stakes for Taxpayers could not be higher. Without question, the IRS will pursue these cases with vigor. For those Taxpayers who have yet to make a voluntary disclosure, the failure to do so could have financially catastrophic consequences in the form of the assessment of the Willful FBAR Penalty.

April 10, 2018/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, FBAR, IRS Payments, Tax Audit, Tax Returns

The Non-willful FBAR Penalty and the Slow Death of Reasonable Cause.

Non Willful FBAR Penalty Ruling.

A December 2017 decision of the Court of Federal Claims in Jarnagin v. United States begs the question: Whether a Taxpayer can ever have a reasonable cause defense to the assessment of the Non-Willful FBAR Penalty. The Court concluded that a Taxpayer, who failed to read his return and correctly ascertain that a timely FBAR was due could not have a reasonable cause defense. This may have serious implications in light of the recent announcement by the IRS that the Offshore Voluntary Disclosure Program will end on September 18, 2018 and their suggestion that the Streamline Filing Compliance Procedures may also be scrapped in the future.

The Jarnagin decision involved a Taxpayers’ suit to recover $80,000 in Non-Willful FBAR penalties assessed over a four-year period for their failure to file FinCen Form 114 (FBAR). The Taxpayers were successful business people, who maintained Foreign Financial Accounts in Canada. They used a return preparer during the four-year period but did not tell the return preparer about the accounts. They argued that they were unaware of the FBAR filing obligations and that their return preparer should have raised the issue based on the information the Taxpayers furnished the return preparer. The Court disagreed.

The Court relied upon the meaning of reasonable cause found in Title 26 (the Tax Laws) under I.R.C. §§ 6651(a) and 6664(c) (1) in sustaining the penalties. Citing Moore v. Unites States, the Court concluded that “there is no reason to think that Congress intended the meaning of ‘reasonable cause’ in the Bank Secrecy Act to differ from the meaning ascribed to it in the tax statutes.” Consequently, those who have yet to come forward and make a disclosure of their Foreign Financial Accounts could face the assessment of the Non-Willful FBAR penalty for each of their accounts for multiple years. Furthermore, if the Streamlined Filing Compliance Procedures survive, routine rejection of a Taxpayer’s reasonable cause defense may become the order of the day.

April 8, 2018/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, News, OVDP

OVDP Coming to an End Soon

Internal Revenue Service plans to close the Offshore Voluntary Disclosure Program (OVDP) on September 18, 2018.

The Internal Revenue Service recently announced that they will be winding down the Offshore Voluntary Disclosure Program (OVDP) and plan to close the program on September 18, 2018. As such, taxpayers who have yet to come forward have a limited amount of time in which to make a disclosure or face the new penalties. This is of particular importance for those taxpayers who may be deemed to have been “willful” in their failure to file FinCen Form 114 (FBAR) and as such would not otherwise qualify for the Streamlined Filing Compliance Procedures. This announcement is intended to give taxpayers who have yet to come forward one last chance to do so.

The Streamlined Filing Compliance Procedures will still continue to be available to eligible taxpayers. However, the IRS has indicated they may also close this method for making an offshore disclosure.

The IRS will continue with its global enforcement initiatives to detect the offshore evasion of income tax, and further, to uncover those who have undeclared foreign assets. These global initiatives include reporting under the Foreign Account Tax Compliance Act (FATCA), Whistleblower leads, civil examination and criminal prosecution. As the Chief of the IRS Criminal investigation recently stated:

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics.” “Stopping offshore tax noncompliance remains a top priority of the IRS.”

March 23, 2018/by Anthony N Verni, Attorney at Law, CPA