On June 26, 2023 the Supreme Court granted the Petitioners’ Application for a Writ of Certiorari for purposes of considering the constitutionality of the Mandatory Repatriation Tax as it pertains to U.S. Shareholders in a Controlled Foreign Corporation.


In the instant case the Taxpayers, Charles G. Moore and Kathleen F. Moore (the “Taxpayers” or the “Moore’s”) invested approximately $40,000 in KisenKraft Machines Tools Private Limited (“KisenKraft”), a small overseas company that was formed in 2006 for purposes of empowering small scale farmers in impoverished region of India.

KisenKraft is considered to be a Controlled Foreign Corporation (CFC), which is defined in the Internal Revenue Code as a foreign corporation whose ownership or voting rights are more than 50% owned by U.S. persons (See 26 U.S.C § 957). In exchange for their investment, the Moore’s retained an 11% interest in the foreign company.

In connection with the foregoing, the Moore’s never received any income from KisenKraft, nor did they have the authority as minority shareholders to a compel a dividend payment from the foreign entity. Furthermore, the Moore’s were not in any way involved in the management of the company or its day to day affairs.  It is also noteworthy  that KisenKraft did not have sufficient cash for purposes of making any distribution to the Moore’s.

In 2018 the Taxpayers learned that as a result of the TCJA and the MRT provisions, they were liable for a one time transition tax in the amount of $14,729 as is related to their pro rata share of KisenKraft lifetime earnings (See 26 U.S.C. § 965).

The Moore’s paid the tax and thereafter sued for a refund in the U.S. District Court. The Taxpayers challenged the constitutionality under the MRT which permits the taxation of a CFC’s income after 1986. The Taxpayers’ claim is based upon the argument that the MRT is an unapportioned direct Tax and that the MRT violates the Constitution’s Apportionment Clause. In this regard the Moore’s argue that income must be realized before it can be taxed.

In addition the Taxpayers argue that the MRT violates the Fifth Amendment Due Process Clause since it seeks to impose a tax retroactively.

The District Court dismissed the Taxpayers’ suit and the Ninth Circuit affirmed. (See Moore v United States, 36F. 4th 930, 935 (9th Cir. 2022).

Prior to the 2017 Tax Cuts and Jobs Act (“TCJA”), U.S. taxpayers did not pay U.S. taxes on foreign earnings until those earnings were distributed to them. However, when particular categories of undistributed earnings were repatriated to the U.S. in the form of distributions, loan to U.S. shareholders or in connection with an investment in U.S. property, U.S. shareholders who owned at least 10% of a CFC could be taxed on a proportionate share of those earnings. The primary method used to tax a CFC’s U.S. shareholders on foreign earnings held offshore was a provision of the tax code called Subpart F.

The TCJA, created a new, one-time Mandatory Repatriation Tax (MRT). Under the MRT, U.S. persons owning at least 10% of a CFC are taxed on the CFC’s profits after 1986, regardless of whether the CFC distributed earnings. Additionally, going forward, a CFC’s income taxable under subpart F includes current earnings from its business.

The Ninth Circuit affirmed the Dismissal of the Moore’s complaint by the lower court. In its opinion the Ninth Circuit citing Heiner v Mellon, 304 U.S. 271, 281 (1938) held that the issue of whether a Taxpayer has realized income is not relevant to the issue of taxation. The Court also cited Eder v. Commissioner of the Internal Revenue Services, 137 F.2d. 27, 28-29 (2d Cir. 1943) a Second Circuit Decision which held  that the inclusion of foreign corporate income under a statute predating Subpart F was constitutional.

The Appellate Court, in rejecting the Taxpayer’s Apportionment Claim, further held that the fact the distribution of income is prevented by operation of law, or be agreement is irrelevant to the issue of whether the income is subject to taxation.

The Ninth Circuit also rejected the Taxpayers due process challenge that the MRT violates the Due Process Clause of the Fifth Amendment. Although the Court acknowledged the presumption against retroactive laws, they duly noted, citing United States v. Carlton, 512 U.S. 26 30 (1994) that retroactive tax legislation is often constitutional. Furthermore, the Court, citing United States v. Hemme, 476 U.S. 558, 568 (1986) pointed out that ‘retroactive effect is not necessarily fatal to a revenue law.’  The Court, citing Quarty v. United States, 170 F3rd 961,965 (9th Cir. 1999), noted that for purposes of analyzing a due process challenge to retroactive tax legislation, courts use a “deferential standard of whether the retroactive application itself serves a legitimate purpose by rational means.

It is unlikely that the Supreme Court will  rule in favor of the Taxpayers. Accordingly, if  you are a U.S. Shareholder of a CFC, and have not declared your pro rata share of CFC earning from 1986, you could be at risk and should immediately contact and consult with an experienced and knowledgeable tax attorney.


The requirements for filing Form 5471 are quite complex and confusing.  The obligation to file Form 5471 depends upon the specific facts of each case. Hence, one size does not fit all.

In the context of the Form 5471 filing requirements, I have received a number of inquiries in connection with the application of the constructive ownership rules related  to Foreign Corporations where ownership is shared with a non-resident alien, spouse, parent or grandchild.

The following illustration and discussion considers the specific question as to whether a taxpayer who is married to a non-resident alien or has a parent, grandchild or child that is a foreign national, who share ownership of a foreign company is required to file Form 5471. For purposes of this illustration we assume that the non-resident alien spouse or immediate family member owns 50% or more of the shares in a foreign company.

Gadson, a U.S. Citizen, is married to Athena, a Kenyan National. Athena is considered a non-resident alien for U.S. Tax Purposes.   Harold and Athena jointly own and operate “Eye See You,” a foreign corporation (“ESY”) or (the “Company”) headquartered in Germany. ESY is engaged in the manufacture and sale of optical lenses. The lenses are produced in China. Gadson and Athena each own 50% of the shares of the Company’s common stock.   For purposes of this example, we assume that Gadson has been filing married filing separately, and further, that Athena does not a social security number.  Gadson’s obligation to file Form 5471 on behalf of ESY requires answering the following questions:

  1. Whether Gadson is considered a U.S. Shareholder within the meaning of 26 U.S.C. 958 (a) and (b)?
  2. Whether under the attribution rules Gadson is considered to constructively own Athena’s shares; and if so,
  3. Whether by reason of Gadson’s constructive ownership of Athena’s shares, the Company will be considered to be a Controlled Foreign Corporation.

The filing requirements for Form 5471 are dependent upon a number of factors including whether a “U.S. Person” is considered to be a “U.S. Shareholder.”  Under 26 U.S.C. § 958 (a) and (b), a “U.S. Shareholder” is a U.S. Person who owns “directly or indirectly” 10% or more of the of the total combined voting power of all classes of stock of all classes of voting stock of a Section 965 Specified Foreign Corporation (“SFC”) or 10% or more of the combined voting power or value of shares of all classes of stock of a Section 965 SFC under 26 U.S.C § 965 (a) or (b).

Generally a “U.S. Person” includes a citizen or resident of the United States, a Domestic Partnership, a Domestic Corporation; and an estate or trust that is not considered a foreign estate or trust under 26 U.S.C. § 7701(a)(3).  Based upon the foregoing Gadson is considered a U.S. Person, but Athena is not.

Gadson meets the first prong of Section 958 (a), in so far as; he owns 10% or more of the voting power of all classes of stock, for the Company. However, unless he is deemed to own Athena’s shares in ESY under the attribution rules, the Company will not considered a SFC under Sections 965 (a) or (b).

Under Section  965(a)  and (b) a SFC  is either a Controlled Foreign Corporation, as defined under section 26 U.S.C. §957 (a) (“CFC”), or any foreign corporation with respect to which one or more domestic corporations is a U.S. Shareholder. Under Section 957(a) a CFC is a foreign corporation that has U.S. Shareholders that own directly, indirectly or constructively, within the meaning of Sections 958(a) or (b) on any day of the tax year of the foreign corporation, more than 50% of either the total combined voting power of all classes of its voting stock or the total value of the stock of the corporation.

Since Gadson does not own more than 50% of either the total combined voting power of all classes of voting stock or the total value of the stock of the Company, the ESY would not be considered a CFC unless by reason of the attribution rules Gadson is deemed to constructively own Athena’s shares. If ownership of her shares is imputed to Gadson, the Company would be considered a CFC and Gadson would be required to file Form 5471.

The constructive ownership rules consider a person, in this case a Husband, to own the shares owned by someone to whom he is closely related. Section §958(b) tells us to use the default Section 318(a) constructive ownership rules to determine whether an individual is a U.S. shareholder. These rules, will determine whether Gadson is deemed to constructively own his wife’s shares under Section 958 (b), which in turn, will determine whether ESY is a CFC and whether Gadson must file Form 5471.

Section 318(a) (relating to constructive ownership of stock)  applies to the extent that the effect is to treat any United States person as a United States Shareholder within the meaning of Section 951(b) and to treat a person as a related person within the meaning of section 954(d)(3).  Accordingly, a U.S.  Person is considered to own the stock that is owned, directly or indirectly, by the Taxpayer’s spouse, children, grandchildren and parents.

The general rule under Section 318(a) (1) (A) (i) and (ii) provides in pertinent part, that:


“An individual shall be considered as owning the stock owned, directly or indirectly, by or for   .  .  .  his spouse and his children, grandchildren and parents.”


However, Section 958 (Rules for Determining Stock Ownership) provides an exception to the general rule under Section 318(a) (1) (A) (i) and (ii), in situations where a spouse, child, grandchild or parent is a nonresident alien.

Section 958(b) (1) entitled “Constructive Ownership” provides:

“In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.”

Consequently, the default rule under Section 318 for treating a U.S. Person as the owner of the stock in a foreign company that is owned by a family member does not apply where the family member is a non-resident alien.

In conclusion, Gadson is not required to file Form 5471 on the basis of the following:

  1. Gadson is not considered the constructive owner of Athena’s shares in the Company, by reason of Section 958(b)(1), and Athena’s status as a non-resident alien; and
  2. Gadson currently does not own more than 50% of the Company’s shares, and as such, the Company is not considered to be a CFC.
  3. Since the foreign company is not considered a CFC, Gadson is not required to file Form 5471.

The foregoing example makes clear the need for the advice of an experienced and knowledgeable tax attorney when forming a foreign entity or when considering inbound and outbound business transactions.


A recent report (the “Report”) from The Treasury Inspector General for Tax Administration (“TIGTA”) addressing Non-Filing and Non-Reporting Compliance under the Foreign Tax Compliance ACT (“FATCA”),  the Senate Finance Committee’s recent findings related to the use of shell banks  to avoid detection by the Internal Revenue Service and increased funding in connection with Inflation Reduction Act (“IRA”) spell trouble for those who have yet to file Form 8938 (“Statement of Specified Foreign Financial Assets”)  or FinCEN Form 114, commonly referred to as an “FBAR.”

Taxpayers who have failed to file Form 8938 and/or those who have failed to file FBARS may feel that they have successfully avoided detection by the Internal Revenue Service. There are even some Expats who have concluded, given the amount of time that has passed, that the IRS has forgotten about them or that they are unwilling or incapable of chasing down delinquent Non-Compliant Taxpayers.

The following discussion addresses problems associated with the effective implementation of FATCA and FBAR enforcement efforts, recommendations by TIGTA and the impact increased funding from the IRA will have on the overall effectiveness of these efforts. The discussion follows also addresses problem identified by the Senate Finance Committee with respect to the use of shell companies as a means of avoiding IRS detection of overseas tax evasion. These recent developments should serve as a wakeup call for those who have yet to come into compliance.

Citing lack of resources and other failures on the part of the IRS, the TIGTA Report concludes that the IRS has significantly departed from its original FATCA Compliance Roadmap finalized in 2016 in favor of more limited compliance initiatives. The Report further states that despite spending $573 million dollars on FATCA compliance through fiscal years 2020,   the IRS has taken limited or no action with respect to the objectives and initiatives outlined in its FATCA Compliance Roadmap. Instead, the IRS opted to focus on narrower strategy embodied in two Campaigns.

Specifically, TIGTA evaluated two Campaigns established by the Large Business and International (“LBI”) division of the Internal Revenue Service including Campaign 896 (“Offshore Private Banking Related to Individual Taxpayers”) and Campaign 975 (“FATCA Accuracy”).

Campaign 896, which is no longer active, focused solely on Taxpayers who filed Forms 8938, but underreported their foreign assets. The Report also noted that the IRS was in the planning stages of identifying those Taxpayers, who have failed to file Form 8938. The Report cites recent IRS data, which estimates that there are over 330,000 U.S. Taxpayers with foreign accounts over $50,000 who has not filed Form 8938. The IRS data further suggests that this pool of Taxpayers would each owe a minimum of $10,000 in FATCA related penalties and that the total penalties would result in $3.3 billion in penalties.

IRC Section 6038D requires U.S. Taxpayers who meet the filing threshold to report their specified foreign financial assets to the IRS.  If the aggregate value of the assets exceed certain dollar threshold, this reporting requirements is satisfied when a U.S. Taxpayer files Form 8938 together with his or her Federal Tax Return. Specified foreign financial assets include Foreign Financial Accounts (“FFA’s”), stocks, securities, financial instruments and contracts issued by a person other than a U.S. Person as well as any interest in a foreign entity.

For its part Foreign Financial Institutions (“FFI’s) are required to file Form 8966 (“FATCA Report”). The objective of Campaign 975 is to identify FFI’s that maintain FFA’s for U.S. Specified Persons, but did not submit Form 8966 on the accounts they hold on behalf of U.S. individuals.  The LB&I Division then matches Forms 8938 with Forms 8966, and in certain cases, Forms 1099.

In order to avoid being subject  to the 30% on U.S. Source payment received made to them, FFI’s are required to register and agree to report certain information about their accounts  owned by U.S. taxpayers including  the accounts of foreign entities with substantial ownership. This information is reported on Form 8966. If the FFI fails to certify, it may be subject to termination of the entity’s FATCA status and result in the entity’s Global Intermediary Identification Number (“GIIN”) being removed from the FFI list. Should this occur the FFI would then be subject to the 30% withholding.

In addition to the TIGTA report, the findings  by the Senate Finance Committee (the “Committee”), Chair, Ron Wyden, entitled: “The Shell Bank Loophole” together with  the indictment of  Robert T. Brockman  on 39 counts, including tax evasion, failure to file foreign bank account reports, money laundering and other offenses further highlight  problems with the effective implementation of FATCA  compliance  and  the enforcement challenges by the U.S. Government  with respect to the pervasive use of shell companies. The findings conclude with a recommendation that the IRS needs to focus on increased scrutiny and that funds from the IRA should be use in this regard.

As part of its findings the Committee conducted a case study on the allegations against Robert T. Brockman that he concealed $2.7 billion in income from the IRS and evaded hundreds of millions of dollars in Federal Income Taxes. In this regard, the Committee focused its attention on defects in FATCA’s regulatory framework, and a loophole utilized by Brockman in order to carry out its nefarious scheme.

FFI’s must registered with the IRS and are required to identify and report certain information about U.S. accounts.  For purposes of implementing these requirements the United States has entered into Intergovernmental Agreements (“IGA’s”) with foreign partner jurisdictions addressing a number of issues including whether and to what extent an FFI is required to determine if an account is held by a U.S. Person.  In cases where an account holder is believed to be a non U.S. financial institution in a partner jurisdiction and where the IRS has issued the account holder a Global Intermediary Identification Number (“GIIN”), depending upon the particular IGA, no further review, identification or reporting is required with respect to the account.  The foregoing is applicable to Swiss Banks as well as others.

According to the Committee’s Report, Brockman and his associates were able to exploit the shell bank loophole, by turning these shell companies into IRS approved financial institutions capable of self-certifying their offshore accounts to the IRS.  Under the current system, a U.S. Taxpayer is able to create an offshore shell company and register that company with the IRS. By registering with the IRS as a financial institution, the shell company operates as a shell bank and is able to self-certify reporting its offshore accounts for FATCA purposes.

According to the Committee findings and the indictment, Brockman and his associates opened up accounts in Switzerland using entities that had approved GIIN numbers approved and issued by the IRS for purposes of FATCA reporting. Consequently, Brockman and his confederates were able to open accounts in Switzerland without any due diligence conducted by the Swiss Banks. In turn, the Swiss Banks, including Mirabaud and Syz were able to accept billions in wire transfers from the United States into accounts that were opened by the shell companies.

In order to carry out his nefarious scheme, Brockman and his associates took the following steps:

  1. Establish a shell company in a FATCA partner jurisdiction;
  2. Submit IRS Form 8957 to register the shell company as an FFI and obtain a GIIN Number;
  3. Open an account in Switzerland or other FATCA partner jurisdiction, in the name of the IRS registered Shell Company;
  4. Use an attorney or other intermediary as the signatory of the account; and
  5. Invest in a private equity firm or other investment vehicle and direct the fund manager to wire proceeds earned from investment activities in the U.S. to the shell company’s account in Switzerland or in another FATCA partner jurisdiction.

In its findings, the Senate Committee found that under the current system, a shell company is able to obtain a GIIN by simply completing and filing Form 8957 or by registering via an online portal. The application for a GIIN is almost always approved without any IRS scrutiny. In this regard, representatives from the IRS conceded that they never contact a financial institution’s FATCA Responsible Officer prior to the issuance of a GIIN number, nor do they ever make any inquiry into an entity’s assets, source of funds or wealth, beneficial ownership or business and investment activities.

The Senate Committee report includes a finding that there are over 128,000 entities registered with the IRS as FFI’s for FATCA purposes. Citing numerous IRS budget cuts as well as recommendations to gut the IRS, the Senate Report concluded that the IRS lacks the human resources, IT capabilities and financial resources to adequately determine whether offshore entities are properly reporting accounts belonging to U.S. Persons. In its findings, the Senate Committee recommends that the $80 billion in funding from the IRA be used to address FATCA Loophole.

The problems identified in the TIGTA Report and in the Senate Committee Findings include:

  1. Departure from the FATCA Compliance Roadmap due to budget constraints has hampered IRS efforts to improve FATCA compliance;
  2. Pervasive use of shell companies as shell banks and the absence of any meaningful due diligence in obtaining a GIIN Number promotes offshore tax evasion and hampers detection by the IRS;
  3. The IRS provided optional codes for TINs that reduced FFI compliance with FATCA requirements to report TINs for TY 2020;
  4. Campaign 896 has only recently undertaken compliance actions to address potential under reporters;
  5. Campaign 896 initially did not address potential non-filers;
  6. Campaign 975 has not reduced FFI non-compliance;
  7. The use of FATCA data for compliance;
  8. Lack of valid and complete Taxpayer Identification Numbers (TIN) and Global Intermediary Identification numbers (GIIN) reporting continues to provide challenges in matching forms;
  9. FATCA campaigns were established without milestones to determine the level of voluntary compliance; and
  10. Some FFI’s either failed to file Form 8966 of filed Form 8966 with missing or incorrect information.
  11. Lack of fields common to both Form 8938 and Form 8966.

As a result of its review of the two Campaigns, TIGTA made a number of recommendations, some of which have been adopted by the IRS. The recommendations that were agreed to or implemented by the IRS include, but are not limited to:

  1. Additional compliance actions for under-reporters identified in its matching, including assessing penalties to taxpayers based on the variance amounts or conducting examinations on taxpayers who consistently underreport;
  2. Implementing protocols to address noncompliance by the FFIs from Intergovernmental Agreement (IGA) countries and follow through with compliance action on the identified IGAs;
  3. Implementing procedures to identify non-filers of Forms 8938 and encourage compliance of non- filers through examination or penalty assessments;
  4. Establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their goals and affecting tax compliance; and
  5. Partner with the Small Business/Self-Employed (SB/SE) Division Directors for the Examination and Collection functions to establish an information sharing program that would allow the SB/SE Division to conduct examinations and perform collection actions using Form 8938 data.

For its part the Senate Finance Committee recommended that Congress and the Treasury Department should consider the following:

  1. The imposition of additional due diligence requirements on transfers between FFI’s involving large transfers into small, closely held FFI’s;
  2. Improve and develop more rigorous screening of applications for GIIN numbers;
  3. Strengthen incentives for Whistleblowers to come forward and report incidence of offshore tax evasion;
  4. Increase IRS enforcement resources, including increasing human resources and IT capabilities;
  5. Increase the number of audits of partnerships;
  6. Increase disclosure of high value financial accounts domestically; and
  7. Increase information sharing and coordination among partner jurisdictions and align U.S. reporting with the Organization for Economic Cooperation and Development’s (“OECD”) Common Reporting Standards (“CRS”).

While many Taxpayers have been lulled into a false sense that they will not be detected, the TIGTA and Senate Committee reports make clear that the Government considers offshore tax evasion and unreported foreign financial assets a serious problem and is a top priority to the IRS. Given the new round of funding under the IRA and the additional 87,000 new IRS agents, there is a substantial likelihood that both non-filers as well as those who deliberately underreport there foreign financial assets will be detected.

A number of options are available for those who have yet to report their foreign financial assets and income including utilizing the Voluntary Practice Rules or making a disclosure using the Streamlined Foreign or Domestic Offshore Procedures.

Failure to come forward more than likely will result in dire consequences including additional income tax, civil tax and FBAR penalties, interest and the possibility of criminal prosecution.





The U.S. District Court for the Southern District of Florida recently held that the statute of limitations for assessment of the FBAR penalty may be waived by the person against whom the penalty is assessed. In United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021), the Court concluded that the limitations period for assessment may be waived, even where the period for assessment has expired. In addition, the Court held that the assessment of the Non-Willful FBAR penalty is per account, rather than per form.

In the instant case, the Taxpayer failed to file FBARS for the tax years 2004-2010.  On March 13, 2012, the Taxpayer filed her delinquent FBARS as part of the Taxpayer’s participation in the Offshore Voluntary Disclosure Program (“OVDP”).

According to the facts outlined by the Court, Ms. Solomon then signed two Consent Agreements (the “Agreement”) entitled: “Consent to Extend the Time to Assess Civil Penalties Provided for by 31 U.S.C. § 5314.” The first Agreement, dated August 26, 2013 extended the statute of limitations to December 31, 2015.  Subsequently, the Taxpayer signed a second Agreement dated February 10, 2017, which extended the statute of limitations to December 31, 2018.

The Taxpayer and her tax advisor also signed Form 13349 (Agreement to Assessment and Collection of Penalties) on November 17, 2018, wherein the Taxpayer agreed to the assessment of Non-Willful FBAR penalties totaling $200,000. The total amount assessed represents the $10,000 Non-Willful FBAR penalty for each of the accounts for each of the tax years 2004-2010. Based upon the Taxpayer’s execution of the Agreements and Form 13349, the IRS assessed the agreed upon penalties on December 12, 2018.

The Taxpayer elected to forego paying the FBAR penalties, resulting in the United States filing suit in the early part of December 2020 in the District Court, seeking to reduce the assessment of the Non-Willful penalties to a judgment. In response to the Complaint, on February 1, 2021, the Taxpayer filed a Motion for Partial Summary Judgment (the “Motion”) in an attempt to limit the FBAR penalties to $70,000. The Taxpayer also argued in her Motion that the FBAR penalties should be assessed on a per form basis rather than based on a per account basis.

The Taxpayer’s  moving papers asserted that the Statute of Limitations for the tax years 2004-2009 should be time barred by reason of  31 U.S.C. § 5321 (b)(1).  In addition, the Taxpayer maintained that non-willful violations of 31 U.S.C. 5314 should be assessed on a per form basis rather than a per account basis.

The Taxpayer’s position is based upon the premise that the Agreements she signed did not have the effect of extending the statute of limitations, since the limitation periods had already expired.


In particular, the Taxpayer asserted that by the time she signed the first Agreement on April 26, 2013, the six year statute of limitations for the tax years 2004-2006 had already expired.  With respect to the tax years 2007-2009, the Taxpayer conceded that the first Agreement extended the statute of limitations until December 15, 2015, but maintained  that the April 26, 2013 Agreement had already expired by the time she signed the second Agreement on February 10, 2017.

In response to the Taxpayer’s Motion, the Government filed a Cross Motion for Partial Summary Judgement. In its Cross Motion, the Government argued that pursuant to 31 U.S.C. § 5321(b) (1), the six year statute of limitations is non-jurisdictional in nature, and as such, waivable. They also argued that the Taxpayer clearly and knowingly waived the limitations period by signing the two Agreements and Form 13349.

In addition, the Government argued in its Cross Motion that under the plain text and structure of Bank Secrecy Act and implementing regulations, the assessment of the Non Willful FBAR Penalties should be per account and not per form.

It is noteworthy that the procedural history of this case fails to mention whether the  Taxpayer opted out of or was removed from the OVDP, since the miscellaneous offshore penalty provided for in the  last iteration of the OVDP was a one-time  27.5% penalty based upon the highest aggregate balance in any one of the years in the disclosure period. The assessment of the Non-Willful FBAR penalties rather than the 27.5 miscellaneous offshore penalty under the OVDP suggests that the Taxpayer either opted out of or was removed by the IRS from participation in the OVDP.

The statute of limitations under 31 U.S.C. § 5321(b) (1) provides:

“The Secretary of the Treasury may assess a civil penalty under subsection (a) at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed.”

In its analysis, the Court stated:

“The key inquiry in determining if a limitations period can be waived is  whether the waiver limits courts’ subject matter jurisdiction—in which case its time bar is not waivable—or is instead a non-jurisdictional claim processing rule—in which case waiver is permissible.”  (See U.S. Dept. of Lab. v. Preston, 873 F.3d 877, 881 (11th Cir. 2017) (citing In re Pugh, 158 F.3d 530, 543 (11th Cir. 1998)).”

The Court concluded that 31 U.S.C. § 5321 (b) (1) did not operate as a limitation on the Court’s jurisdiction. The Court quoting from United States v Schwarzbaum 18-CV-81147, 2019 WL3997132, at *4 (S.D. Fla. Aug. 23, 2019) stated:

‘If a statute is not jurisdictional, then as merely an affirmative defense, the statute of limitations can be waived by the parties even for claims that have expired.’

In deciding in favor of the United States, the Court noted the absence of any reference to the Court’s jurisdiction in Section 5321 (b) (1), and concluded that the statute merely operates as an affirmative defense.

The Court also rejected the Taxpayer’s claim that she did not knowingly waive the limitations period when she signed the two Agreements, stating that:

“The language is clear, unambiguous, and unlimited…..”

Finally, the Court rejected the Taxpayer’s argument that the assessment of the Non-Willful FBAR Penalty should be assessed per form rather than per account.  In its decision, the  Court, citing United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), where the Court rejected the  Government’s position on the issue), observed that, with the exception of one case, Courts have consistently held that the assessment of the Non-Willful FBAR penalty is per account and not perform.

Signing an Agreement can have far reaching consequences for a Taxpayer and should first be carefully evaluated with an experienced tax attorney. In addition, the Taxpayer needs understand the context in which the waiver is being presented, as well as the expiration of the statute of limitations for each of the years in question.

This case is unclear as to whether Taxpayer opted out of or was removed from the OVDP, and if so, whether the assessment of the Non-Willful FBAR penalties exceeded the amount the Taxpayer would have otherwise paid under the OVDP.

Equally unclear is whether the Taxpayer’s tax advisor ever discussed the option of filing an appeal with the IRS. In some instances, Taxpayers have achieved favorable results in appeals.



The Government will examine efforts by a Taxpayer to avoid detection by the Internal Revenue Service, when deciding whether to assess the Civil Willful FBAR penalty. In particular, the IRS considers  making a quiet disclosure, an indicator of Willful conduct on the part of the Taxpayer and will often use such a disclosure to support the assessment of the Civil Willful FBAR Penalty under 31 U.S.C. § 5321(a)(5)(C), and in certain cases, the commencement of criminal prosecution.

In this regard, consider the recent collection case filed by the Government in United States v. Gaynor, (M.D. Fla. Dkt.  2:21-CV-00382 Dkt # 1 Complaint 5/14/21), wherein the Government is seeking to collect $17M in Willful FBAR penalties from a Taxpayer, who utilized the illegal practice of making a quiet disclosure.

The Gaynor case involves a suit brought against George Gaynor, Jr. in his capacity as the personal representative of the Estate of   Lavern N. Gaynor (the “Decedent”) who died on April 12, 2021.

The Decedent’s grandfather was a wealthy oil tycoon who left the Decedent a sizable fortune.

In 2000 the Decedent’s late husband, George Gaynor, Sr.  (“Gaynor”) opened a Swiss bank account at Cantrade Privatbank AG (“Cantrade”) under the name of “Gery Trading Corporation,” (“GTC”), a nominee company  formed in Panama for purposes of preventing the IRS from discovering that Gaynor was in fact the beneficial owner.  Although unclear from the Complaint, the original source of funds for the account came from the Decedent’s inheritance from her grandfather.

In furtherance of Gaynor’s clandestine scheme, GTC appointed a Swiss Trust Company to handle any and all business with the bank. The account was moved several times first due to a bank merger and then due to an acquisition. In 2004 Cantrade merged with Ehringer & Armand, which was subsequently acquired by Julius Baer in 2005.

Following the death of Gaynor in 2003, and while the account was still with Cantrade, the Decedent became the beneficial owner of the account. According to the allegations in the Complaint, a form was filled out designating the Decedent as the beneficial owner of the account, and included the Decedent’s Florida Address and a notation that the Decedent’s nationality is “USA.”

Subsequently, in 2004 a representative of GTC executed a false certification asserting that GTC was the account’s beneficial owner and that GTC is not a U.S. Person. The certification directly contradicts the form that was filled out by the Decedent.

In 2009 Julius Baer was one of many Foreign Financial Institutions targeted by the IRS for being complicit in facilitating offshore tax evasion by U.S. Persons. In an effort to comply with U.S. law and avoid criminal prosecution, Julius Baer contacted GTC and requested that the company furnish proof that it had complied with the U.S. tax law and financial reporting requirements. The request, which had a deadline of September 30, 2009, fell on deaf ears. Similarly, a follow-up letter in October of 2009 was ignored. Instead, the Decedent acting through GTC’s Agents moved the account to Banque Louis in Switzerland. In 2011, the Decedent once again caused the account to be moved to Bank Frey under the GTC’s name.

From 2003-2011, the Decedent’s federal income tax returns were prepared by a CPA in Naples, Florida.  Not surprising, the Decedent never told the tax preparer about the existence of her foreign financial account or the income associated with the account.

For the tax years 2009-2011, the Decedent’s income tax returns included Schedule B, which contains certain disclosures related to the existence of foreign financial accounts and the obligation to file FinCEN Form 114 (FBAR).  In each year, the Decedent answered “no” in response to the disclosure question 7(a) on Schedule B.

In an effort to belatedly disclose her offshore assets and related income, in November 2012 the Decedent filed amended returns for 2009 and 2010 and in 2013 also filed an amended return for 2011 as well as FinCEN Form 114 (FBAR) for the years 2009 -2011. It is noteworthy that the Decedent used a Swiss accountant, rather than the Naples CPA for purposes of preparing the amended returns. The tax on the additional foreign source income for the 3 year period resulted in an additional $1M in tax due.

The IRS has repeatedly cautioned Taxpayers not to use a quiet disclosure as a method of coming into compliance with the U.S. tax laws and financial reporting requirements.  The IRS further maintains that making a quiet disclosure carries the risk of an IRS examination and potential criminal prosecution.

While the outcome of this case remains to be seen, it is unlikely that the Taxpayer will survive a motion for summary judgment by the Government.

The takeaway from the Gaynor case is this: If you have failed to declare your offshore assets and the income related to thereto, there is a substantial likelihood that you will be outed by your foreign financial institution.  Making a quiet disclosure, while tempting, is a  recipe for the assessment of the Civil Willful FBAR penalty,  which is equal to the greater of $100k  or 50% of the balance in the foreign account at the time of the violation. Furthermore, it may result in criminal prosecution.

The IRS has placed procedures in place that enable delinquent taxpayers to disclose their offshore assets and related income in order to come into compliance.    The procedures for coming into compliance include the Streamlined Procedures or making an offshore disclosure using the new Voluntary Disclosure Practice Rules.

My office has successfully represented hundreds of Taxpayers with coming into compliance with the U.S. tax laws and financial reporting obligations.

Biden tax proposalThe Biden Tax Proposal, if enacted, will have a significant impact on estate planning for those who have failed to take advantage of the current gift and estate tax rules.  According to the Proposal, estate and gift tax exemption will be reduced from 11.58 million under the current law to $3.5 million. In addition, the Biden Proposal will increase the top rate for estate tax from 40 percent to 45 percent.

The proposed changes to the gift and estate tax exemption and rate increase will largely depend on whether Biden, in fact, becomes our 46thPresident and whether the Republican Party retains control of the Senate.

A new administration may also result in the imposition of a new wealth tax, should Elizabeth Warren become the new Treasury Secretary.

The growing uncertainty should serve as a call to action for those who have failed to do any estate planning. Failure to act prior to January of 2021 creates a significant risk that those with large estates may face a higher tax burden.

If you have not already done so, it is not too late to do so. Please feel free to contact the Law Office of Anthony N. Verni at (561)531-8809 or by visiting my website at https://vernitaxlaw.com


Why it’s a Very Bad Idea?

Tax fraudA taxpayer who owes or anticipates owing a substantial amount of income tax to the IRS may be tempted to transfer his or her property to a spouse, a relative or a nominee entity with the hope of preventing the IRS from collecting the outstanding tax debt. Similarly, a taxpayer may have an incentive to transfer property to a third party, in circumstances where the taxpayer may be subject to the 26 U.S.C. § 6672(Trust Fund Penalty). The taxpayer usually justifies such a transfer as “strategic planning.” Sometimes the taxpayer acts alone. In other instances, the taxpayer may be aided by a complicit, inexperienced or incompetent attorney.

These tactical maneuvers almost always fail and invariably result in the property transfer being judicially set aside, and/or the imposition of personal liability on the part of the transferee. In addition, the illicit transfer of property can result in significant civil and criminal penalties as well as criminal prosecution.

The discussion that follows examines the judicial remedies available to IRS including the commencement of a fraudulent conveyance action in either a state or federal court pursuant to state law or the Federal Debt Collections Practices Act (“FDCPA”). The discussion will also examine the imposition of transferee personal liability under 26U.S.C. § 6901.

Fraudulent conveyance

In general, a fraudulent conveyance represents a conveyance of property to a third party without consideration or for less than adequate consideration. Procedurally, the IRS has the burden of proving that either constructiveor actual fraudexists. Constructive fraudexists where a taxpayer’s property is transferred for less than its fair value and the taxpayer is insolvent at the time of the transfer or is rendered insolvent following the transfer. Actual fraudexists where a taxpayer transfers property to a third party with actual intent to hinder, delay, or defraud the IRS in the collection of the tax debt.

Constructive fraud

In the context of constructive fraud, the IRS must establish the following elements in order to set aside a transfer of property:

    1. That the alleged transferee received property of the transferor.
    2. That the transfer was made without consideration or for less than adequate consideration.
    3. That the transfer was made during or after the period for which the tax liability accrued.
    4. That the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distribution of property that resulted in the insolvency of the transferor.
    5. That all reasonable efforts to collect from the transferor were made and further collection efforts would be futile.

The above elements suffice to establish constructive fraud and it is unnecessary for the IRS to prove actual intent to defraud.

Actual fraud

In order to establish actual fraud, the IRS must prove the taxpayer’s actual intent to hinder or delay or defraud the IRS. The FDCPA identifies eleven non-exclusive factors to be considered including:

    1. Whether the transfer was made to an insider.
    2. Whether the transfer represents substantially all of the taxpayer’s assets.
    3. Whether the value of consideration received by the taxpayer was reasonably equivalent.
    4. Whether the taxpayer was insolvent or became insolvent shortly after the transfer was made.
    5. Whether the transfer occurred shortly before or shortly after the tax debt was incurred.

In addition to commencing an action to set aside a fraudulent conveyance, IRC § 6901provides the IRS with a procedural mechanism for holding the transferee personally liable for the debt of the taxpayer. In contrast to an action to set aside a property transfer, Section 6901 is focused on the transferee rather than to the property. It is noteworthy that commencing an action to set aside a fraudulent transfer and imposing personal transferee liability under Section 6901 are not mutually exclusive remedies. The IRS may consider reliance on the FDCPA or a state’s fraudulent conveyance statute as the basis for imposing personal transferee liability and may also pursue multiple remedies.

Transferee liability

To establish personal transferee liability, the IRS has the burden of proving the existence and extent of the transferee’s liability. In addition, where the taxpayer unsuccessfully contests the liability in a judicial proceeding, the taxpayer as well as the transferee is estopped from contesting the liability either in a fraudulent conveyance action or for purposes of imposing personal transferee liability. The IRS has the burden of establishing the taxpayer’s tax liability and the amount. However, the transferee’s liability is capped at the value of the property transferred. The transferee seeking to avoid or mitigate transferee liability must prove the taxpayer’s liability is less than the amount asserted by the IRS.

A taxpayer, who is considering making a transfer of property to avoid his or her income tax obligations is creating a substantial risk that the transfer will be set aside and/or the transferee will be personally liable. Moreover, a taxpayer may soon find himself/ herself the subject of a criminal investigation. When considering such a decision, a taxpayer should always first consult with a knowledgeable and experienced tax attorney for a comprehensive review of all the relevant facts. Depending on the circumstances, payment arrangements can be made with the IRS.


Duration the IRS Has to Assess Federal Income Tax?

Statue of limitationThe statute of limitation for assessment purposes represents the last day in which the Internal Revenue Service may assess federal income tax. The statute of limitations for assessment should not be confused with the statute of limitations for collections. In many instances, taxpayers and their advisors rely on the general three year rule as a defense to the assessment of additional income tax without fully understanding the assessment rules. The discussion that follows will examine the general rules, the various exceptions and instances where the statute of limitations is suspended. The discussion is limited to income taxes.

Three Year Statute of Limitations

In general, the IRS has three years from the date a tax return is filed or deemed filed in which to assess additional income tax.  A tax return that is received by the IRS on or prior to the due date is deemed to be filed on the normal due date. In contrast, a return received by the IRS after the normal due date is considered filed on the date the IRS receives the return.  An exception exists where a timely filed return is mailed. In such an instance, the postmark date will be considered the date of filing. In the case of a qualified private delivery service, the date the taxpayer delivers the return to a qualified delivery service will be considered the filing date.

Exceptions to the Three Year Statute of Limitations

There are a number of exceptions to the general three year statute of limitation that include filing a false return, failing to file a return and instances where the three year statute is extended by agreement.

  • Filing a False Return: There is no statute of limitations in cases where an individual files a false tax return with the intent to evade income tax (26 U.S.C.6501(c) (1)). Similarly, where a taxpayer files a non-fraudulent amended tax return in attempt to cure a fraudulent original return, the non-fraudulent amended return does not void the unlimited statute of limitations (Badaracco v. Commissioner). Likewise, the statute of limitations will remain open where a joint return is filed, but only one of the taxpayers had fraudulent intent when signing the return.

In the case where the fraud is attributable to the return preparer rather than the taxpayer, the question remains in flux. In Allen v. Commissioner the Tax Court held that, for purposes of Section 6501(c)(1), the limitations period remains open indefinitely regardless of whether it was the taxpayer or the taxpayer’s tax return preparer who had the intent to evade tax. Subsequently, the U.S. Court of Appeals for the Second Circuit in City Wide Transit, Inc. V. Commissioner agreed with the U.S. Tax Court. In contrast, the Court of Appeals for the Federal Circuit, in BASR Partnership et al. v. United States held that a showing of taxpayer’s fraud is required in order for the unlimited statute of limitations to apply.Where a taxpayer is convicted of criminal tax evasion under 26 U.S.C. §7201, the question of fraud is established for purposes of Section 6501(c) (1).

  • No Return Filed: There is no statute of limitations where no return is filed (26 U.S.C. 6501(c) (3)).
  • Extension by Agreement: The statute of limitations may also be extended by written agreement between the taxpayer and the IRS under Section 6501(c) (4) (A).The most commonly used form for extending the statute of limitation is Form 872 (Consent to Extend the Time to Assess Tax).
  • Significant Omissions of Income: The three year statute of limitations is extended to six years, in cases where a taxpayer omits from gross income more than 25% of the gross income stated in the filed return (26 U.S.C. 6501(e) (1) (A) (i)). An exception to the application of the six year statute of limitations is where the taxpayer makes an adequate disclosure of the omitted income on the return or in a statement attached to the return. However, where the original return contains a substantial omission, the filing of an amended return will not cure the substantial omission and the six year statute of limitations will apply.
  • Omission of Greater than $5,000 of Income Generated from Foreign Financial Assets: If a taxpayer omits gross income from foreign financial assets in an amount that exceeds $5,000, the statute of limitations is six years rather than three years. Disclosure of foreign financial assets as well as the income derived therefrom is required to be reported on Form 8938. Furthermore, if the taxpayer fails to provide the disclosures required on Form 8938, the statute of limitations will not begin to run until the required information is provided to IRS, even if the income is reported on the tax return.

Suspension of the Three Year Statute of Limitations

There are a number of instances where the statute of limitations is suspended. Where the IRS issues a notice of deficiency, the three year statute is initially suspended for 90 days. During this period, the IRS is prohibited from making any further assessment. If a taxpayer elects not to file a Tax Court petition, the statute is suspended for an additional 60 days. Where a Tax Court Petition is filed, the statute is suspended for an additional 60 days from the date the Tax Court decision becomes final. In addition, where a taxpayer files a bankruptcy petition, the statute is suspended while the bankruptcy is pending and continues for an additional 60 days following the final disposition of the bankruptcy.

Taxpayers should always consult with an experienced and knowledgeable tax attorney when faced with issues related to the statute of limitations.

Should FBAR non-willful penalty be charged per form or per account?

FBAR non willful penalty dilemmaThe Courts have recently addressed the issue of whether the FBAR Non-Willful penalty should be assessed per form rather than per account with conflicting results.  InUnited States v. Bittner, the U.S. District Court for the Eastern District Court held that the non-willful FBAR penalty should be assessed per form rather than per account.  The Bittner decision is in direct conflict with the holdings in United States v. Gardner, and United States v. Boyd.In two separate decisions, the District Court for the Central District of California held that the non-willful FBAR penalty should be assessed per account.

Logic dictates that because non-willful penalty provisionrelates to the failure to file an FBAR and not the failure to report a foreign financial account, the non-willful penalty should be limited per FBAR report rather than applying the penalty to each account. However, the Government does not interpret the statute in the same way.

In Bittner, the IRS argued that because the reasonable cause exception to the non-willful FBAR penalty references the “balance in the account” language, the reasonable cause exception should be applied on an account by account basis.

The Government further maintained in Bittner that the same reasoning should be applied in the assessment of the non-willful penalty. The Government further argued that, because the penalty for willful violations is assessed with reference to each account, the non-willful penalty should also be assessed with reference to each account.

The Court rejected both arguments. Bittner is on appeal and scheduled to be heard in September of 2020.  

Depending upon the appellate court’s decision, taxpayers could be subject to significant penalties. For example, a taxpayer who has ten accounts and failed to file FBARS for the past three years could be subject to a $300,000 or a $30,000 penalty.

Taxpayers, who have yet to come forward, should seriously consider using the Streamlined Procedures as the process for coming into compliance and limiting financial risk. In more serious cases, Taxpayers need to consider making a disclosure using the Voluntary Disclosure Practice Rules. In both cases, Taxpayers should consult with a knowledgeable and experienced tax attorney.