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

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

INTRODUCTION

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

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

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

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

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

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

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

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

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

ENFORCEMENT HISTORY AND DEVELOPMENT

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

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

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

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

United States of America v. Mark Anthony Gyetvay

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

Disclosing Offshore Bank Accounts

fbar quiet disclosureTaxpayers 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:

  1. Whether the taxpayer self-prepared his or her tax returns or whether the returns were prepared by a CPA.
  2. 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.
  3. If the taxpayer failed to file FBARs, whether he nonetheless reported all of the income derived from his or her foreign assets.
  4. 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).
  5. Any special arrangement the taxpayer has or had with the bank (unnumbered account, hold mail, nominee officers and directors, etc.).
  6. The number and size of foreign financial accounts.
  7. The length of time the foreign financial accounts have been open.
  8. The purpose for opening the accounts.
  9. 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).
  10. The taxpayer’s efforts to familiarize himself with the FBAR filing and return disclosure requirements.
  11. The taxpayer’s efforts to ascertain the selected tax professional’s competence in connection with the FBAR financial reporting requirements and disclosure rules.
  12. Where the taxpayer used a third party preparer, whether he or she completed a tax organizer.
  13. 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.
  14. 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.
  15. 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.
  16. The taxpayer’s level of education and sophistication.
  17. The source of funds deposited into the accounts; (inheritance, after tax savings, etc.).
  18. Whether the source of the funds in the foreign financial accounts is the by-product of legal vs criminal activity.
  19. Taxpayer’s history with the IRS.
  20. Whether the taxpayer has prior FBAR violations.
  21. Whether a civil fraud penalty has ever been assessed against the taxpayer.
  22. The existence of a current or past civil or criminal investigation by the IRS or other Government agency (i.e. SEC).
  23. 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.

 

 

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

Streamline

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.

 

 

 

 

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New Voluntary Disclosure Practice for willful u.s. taxpayers

 Termination of OVDP and way forward

Following the termination of the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018, willfully delinquent taxpayers with exposure to criminal prosecution were left without an option for coming into tax and financial reporting compliance. Termination of the Program was due, in part, to the fall off in the number of delinquent taxpayers coming forward. The closure of the Program has caused some non-compliant filers to erroneously conclude that they are in the clear. Quite the contrary, the IRS is resolute in its commitment to ferret out and prosecute those who are engaged in offshore tax evasion and who continue to secrete funds overseas in order to avoid detection by the IRS. The IRS response to 2014 OVDP FAQ Number 4 makes this clear:

“Stopping offshore tax noncompliance and evasion remain top priorities of the IRS. The IRS enforces offshore compliance with tax and FBAR requirements using information received under the Foreign Account Tax Compliance Act (FATCA), the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting, and other data-rich sources such as the Department of Justice’s Swiss Bank Program and various John Doe Summonses. The IRS leverages information resources using enhanced data analytics to continue to make it more difficult to evade tax by hiding offshore.”

Recognizing that the termination of the OVDP created a vacuum for individuals who are otherwise ineligible for either the Offshore or Domestic Streamlined Procedures, the IRS issued an Interim Guidance Memo on November 20, 2019 announcing the initiation of new Voluntary Disclosure Practice (VDP). However, the VDP is not a new iteration of the 2014 OVDP, but rather a modification of the existing VDP. Although the penalties under the VDP are significantly more severe than under the OVDP, the Practice still provides the taxpayer with an alternative to criminal prosecution. Making a voluntary disclosure does not guarantee non-prosecution, but can certainly enhance a taxpayer’s chances in most cases. Furthermore, in limited circumstances it may be possible to reduce the penalties.

The discussion that follows will shade light in understanding the new Voluntary Disclosure Practice that enhances a taxpayer’s chance of in the event of criminal prosecution. This discussion outlines the history of Offshore Voluntary Disclosures, filing requirements and penalty structure under the 2014 OVDP in comparison to the outline and essential elements of the VDP (Voluntary Disclosure Practice).

The History of Offshore Voluntary Disclosure Program (OVDP)

 From 2003 to 2018, the IRS has initiated four offshore programs permitting taxpayers to come forward and disclose their offshore accounts and pay delinquent taxes, interest and penalties. The first of the four initiatives was offered in 2003 and was related to the offshore Credit Card Project (CCP) the IRS pursued starting in 2000. The IRS served “John Doe” summonses on major credit card companies seeking records on foreign bank accounts, but by the time the agency gathered enough data to place files in the hands of revenue agents, most cases had approached the end of the 3-year statute of limitations period for assessment. It was around the time of this project, in 2003, when the IRS announced its first “Offshore Voluntary Compliance Initiative” (OVCI) in order to get taxpayers to come forward and “clear up their tax liabilities.” The 2003 OVCI resulted in $75 million dollars in taxes paid by taxpayers who participated.

The next program took place in 2009 in conjunction with a crackdown on offshore tax evasion involving Swiss bank accounts, specifically those held at Union Bank of Switzerland (UBS). The U.S. government compelled UBS to name its U.S. clients and ended up charging the bank with “conspiring to defraud the United States by assisting account holders in evading the IRS.” Following this suit, the IRS announced its 2009 Voluntary Disclosure Program and collected $3.4 billion from 15,000 disclosures. The window of opportunity that taxpayers had to come forward was from March 23, 2009 to October 15, 2009.

After the close of the 2009 OVDP, taxpayers continued to seek compliance in regards to their offshore accounts and as a result, on February 8, 2011, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative (OVDI). The agency reported that almost 12,000 disclosures were made under the 2011 OVDI.

In 2012, the IRS announced the fourth iteration of the disclosure program. Unlike the previous initiatives, the OVDP was to remain open indefinitely. Under the 2012 OVDP, individuals voluntarily disclosing offshore bank accounts were assessed a 27.5 percent miscellaneous offshore penalty on the highest aggregate account or asset balance for the prior 8 years, i.e. 2003-2010 (“disclosure period”). Taxpayers participating in the Program were also required to amend or file Federal Income Tax Returns for the prior eight years and pay any income tax due and owing, together with an accuracy penalty of 20% and interest. Participants in the OVDP would, however, not be subject to other tax penalties such as the civil fraud penalty, filing late penalty, late payment penalty and others.

The 2014 Offshore Voluntary Disclosure Program

On June 18, 2014 the IRS announced modifications to the 2012 Program including transitional treatment for taxpayers currently participating in OVDP who met the eligibility requirements for the expanded Streamlined Filing Compliance Procedures announced on June 18, 2014. The modification to the OVDP provided certain taxpayers with the opportunity to remain in the OVDP while taking advantage of the favorable penalty structure of the expanded Streamlined Procedures.

On March 13, 2018, the IRS announced that it would begin to wind down the OVDP and that the Program would close on September 28, 2018. In announcing the closure of the OVDP, the IRS lauded the success of the Program by stating that:

“Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.” March 13, 2018 IRS Announcement

In its announcement, the IRS also cautioned that they will continue with their domestic and global enforcement efforts:

“The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistle blower leads, civil examination and criminal prosecution.” Id.

History of the Voluntary Disclosure Practice (VDP)

 The concept of making a voluntary disclosure has been in existence in one form or another for quite some time. Generally, the Practice has been used in domestic tax cases. The VDP permitted taxpayers with criminal exposure an opportunity to come into compliance and possibly avoid criminal prosecution. I.R.M § 9.5.11.9. Under the VDP,the IRS considers a voluntary disclosure “timely” if they received the disclosure prior to the initiation of an investigation or examination and prior to the receipt of information from either a third pay or another criminal enforcement agency concerning a taxpayer’s non-compliance. In addition to the requirement that the taxpayer’s disclosure be truthful and complete, the VDP is limited to legal source income.

With the termination of the OVDP and the November 20, 2018 announcement, the VDP is now applicable to both domestic and offshore disclosures. It should be noted that the VDP is effective for voluntary disclosures received after September 28, 2018. The Interim Memo provides that all voluntary disclosures received or postmarked by September 28, 2018 would be handled under the 2014 OVDP procedures. Finally, the Interim Memo provides that the IRS has discretion with respect to domestic voluntary disclosures received or postmarked on or before September 28, 2019 to apply the new VDP.

Under the new Practice, a taxpayer seeking to make a disclosure is required to make a pre-clearance request on Form 14457 and submit the request to Criminal Investigation (CI) of the IRS, who is tasked with screening all voluntary disclosure requests including offshore and domestic to determine if the taxpayer is eligible to make such a disclosure.

Once CI grants a taxpayer pre-clearance, the taxpayer must promptly submit all required voluntary disclosure documents using Form 14457. The revised Form 14457 will require the taxpayer to provide information related to non-compliance including a narrative that contains the facts and circumstances surrounding the noncompliance, as well as the disclosure of the taxpayer’s assets and any entities and/or related parties involved. The Form also requires the taxpayer to provide the name of any professional adviser, including but not limited to, accountants, lawyers, bankers and investment advisors that facilitated the taxpayer’s non-compliance in any manner.

Upon receipt of the taxpayer’s voluntary disclosure, CI has the option of granting or denying the taxpayer’s request for preliminary acceptance. If CI grants the taxpayer’s request, CI will notify the taxpayer in writing of preliminary acceptance and contemporaneously forward the preliminary acceptance letter and attachments to the Large Business and International (LBI) Unit of the IRS in Austin, Texas. The LBI Unit will determine the most recent year in the disclosure period, and thereafter forward the case to the appropriate “Operating Division and Exam for civil examination.” Id.

The new Practice includes a six year disclosure period and requires examination of the most recent six years of a taxpayer’s Federal Income Tax Returns. The VDP also permits the examiner to extend the scope of the examination to include other years of non-compliance. In certain instances, a taxpayer who cooperates, with the consent of the IRS, may be allowed to include additional tax years.

The taxpayer must submit all required returns as well as all FBAR reports for each year included in the disclosure period. Once all of the required returns and reports for the disclosure period are filed, the examiner will determine any additional tax, interest and penalties to be assessed. Depending upon the circumstances, the IRS will impose either the 75% civil fraud penalty under 26 I.R.C. § 6663 or the civil fraud penalty for the fraudulent failure to file tax returns under 26 U.S.C. § 6651(f) in the year of the disclosure period with the highest tax liability. In certain instances, the examiner may assert one of the two civil fraud penalties to more than one year. Where the taxpayer fails to cooperate in the resolution of the examination by agreement, the examiner may also extend the civil fraud penalty beyond the six years and request that CI revoke preliminary acceptance. I.R.M. § 9.5.11.9.4.

The willful FBAR penalty will be asserted consistent with 31 U.S.C. §5321(a)(5)(C) which provides for a maximum penalty of the greater of 50% of the balance in the account at the time of the violation or $100,000. The willful FBAR penalty may be assessed for multiple years. In addition, the examiner has the discretion to assess additional penalties for failure to file information returns.

Although the taxpayer can request that the lower accuracy penalty (20%) under 26 U.S.C. §6662 be applied in lieu of the civil fraud penalty or that the non-willful FBAR penalty be applied rather than the willful FBAR penalties, the granting of such requests is “expected to be exceptional.” The taxpayer must establish by clear and convincing evidence that the assessment of the civil fraud penalty or the willful FBAR penalty was not justified.

Under the VDP, the taxpayer retains the right to appeal with the IRS Office of Appeals. This Practice differs from the OVDP. Unless the taxpayer elected to opt out there was no right to appeal under the OVDP.

COMPARISON OF 2014 OVDP AND VDP 

2014 OVDP VDP
Disclosure Period 8 years 6 Years but can be expanded
Accuracy Related penalty (assessed for each year of

additional tax liability)

  

 

 

20%

  

 

 

Subject to taxpayer request
and clear and convincing proof
75% Civil Fraud Penalty or Civil Fraud Penalty for Fraudulent Failure to File Income Tax Returns Not Applicable 75% applied in year of highest tax liability or 15% per month or fraction thereof not to exceed 75%
Civil FBAR Penalties 27.5% of the highest Aggregate balance in Any year during the disclosure procedure The greater of 50% of the highest aggregate in the year of violation or $100,000

(Can be applied to multiple years).

Conclusion

 While the penalties under the new Practice rules for making a voluntary disclosure are severe in comparison the penalty structure under the OVDP, the new Practice does provide non-filers with an avenue to avoid criminal prosecution. The severity in penalties reflects the philosophy that those who have failed to come forward previously should not be rewarded for their delay. The new penalties also demonstrate that the longer you wait the more serious the consequences. Depending upon the circumstances, it may be possible to convince an IRS examiner that the penalties under the VDP are harsh and that lower penalties should be applied. In addition, individuals who do not have criminal exposure, should take advantage of either the Offshore or Domestic Streamlined Procedures where, depending upon the circumstances, the penalty will either is 0 or 5%. Failing to come forward is no longer an option. As each iteration of the OVDP and the VDP has demonstrated, the longer you wait, the more severe the penalties.

 

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Willful FBAR penalty Case Study.

FBAR

 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

© 1/29/2019

 

 

 

 

 

 

 

 

 

 

 

 

 

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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;

  • OVDP Lawyerreport 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.

 

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

 Assessment of FBAR penalty

FBAR

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:

“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.

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.

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.
© 1/26/2019
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Willful FBAR Penalty- Legal Decisions Diminish Taxpayer Prospects for Successful Defense.

The Foreign Bank Account Report (FBAR) can be submitted with the advice of a tax law attorney.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 (4th 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.

 

 

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OVDP Coming to an End Soon

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

Offshore Voluntary Disclosure Program

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.”

 

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