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.