TAXPAYER’S PERSONAL CRISIS NO DEFENSE TO WILLFUL FBAR PENALTY
By: Anthony N. Verni, Attorney at Law, CPA
August 13, 2024
©2024
TAXPAYER’S ADHD DIAGNOSIS, STRESS, DEPRESSION AND STAGE 3 PROSTRATE CANCER
NO DEFENSE TO WILLFUL FBAR PENALTY
On August 6, 2024 the U.S. District Court for the Eastern District of Virginia in United States v. Rund (E.D. Va. No. 1:23-CV-00549 Memo Opinion & Order 8/6/24) upheld the Government’s assessment of a $2.9M Willful FBAR Penalty under 31 U.S.C. § 5321 (a)(5).
In granting the Government’s Motion for Summary Judgment, the Court was unmoved by the Taxpayer’s argument that his conduct could not be considered “willful” due to a number of physical and psychological infirmities and personal challenges including ADHD, stress, depression and stage 2 prostate cancer.
The Rund decision is consistent with prior case law that frothy emotional appeals, irrespective of the merits, will not be considered when evaluating the element of willfulness in an FBAR penalty case.
In rejecting the Taxpayer’s claims, the District Court cited U.S. v. Williams, (489 Fed. Appx. 655) a 2012 Fourth Circuit unpublished opinion for the proposition that the statutory term “willful” includes both knowing and reckless violations of the civil FBAR requirements.
The Bank Secrecy Act requires United States taxpayers to report “any financial interests they have in any bank, securities, or other financial accounts in a foreign country” to the Internal Revenue Service on an annual basis (“IRS”). United States v. Williams, 489 Fed. App’x 655, 656 (4th Cir. 2012) (citing 31 U.S.C. § 5314(a)). Individuals must file a completed Report of Foreign Bank and Financial Accounts (“FBAR”) “on or before June 30 of each calendar year” for each foreign account which held over $10,000 in the prior calendar year. 31 U.S.C. § 5314; 31 C.F.R. § 103.27(c); 31 C.F.R. §§ 1010.350, 1010.306(c). Schedule B of the federal income tax form (Form 1040) puts taxpayers on notice of those reporting obligations. More specifically, Schedule B asks the taxpayer a simple “Yes” or “No” question: whether or not they have an “interest in or signature authority over.
In the context of willful violations of the FBAR reporting requirements, Section 5312 (a)(5)(C) authorized the Secretary to assess a maximum penalty of the greater of $100K or 50% of the account balance at the time of the reporting violations.
In Williams, the IRS assessed the “willful” FBAR Penalty against the Taxpayer for his failure to report his interest in two foreign bank accounts. Williams had previously pled guilty to Conspiracy to Defraud the IRS and Criminal Tax Evasion. Further, the Taxpayer’s checked “no” in response to the question on Schedule B Form 1040, regarding the existence of a foreign financial account, despite having transferred $7M to a Swiss bank account. The Taxpayer also completed a tax organizer, where he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over a foreign financial account. Notwithstanding the foregoing, the lower Court held that the Taxpayer’s eventual filing of the delinquent FBARS, “negated” willfulness.
In reversing the lower Court’s decision the Fourth Circuit held that the District Court erred in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314. The Court of Appeals, relying upon precedent stated that ‘willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information, and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.’
In United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) the Sixth Circuit held that “willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and that “it can be inferred from a conscious effort to avoid learning about the reporting requirements.”
Likewise, “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts that point to such liability. United States v. Poole, 640 F.3rd 114, 122 (4th Cir. 2011)
Furthermore, the Rund Court citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007) noted that ‘where ‘where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.’
With rare exception, cases sustaining the willful FBAR penalty have all been accompanied by either (i) deliberate action on the part of the Taxpayer designed to avoid detection by the Internal Revenue Service; or (ii) a conscious effort to avoid learning of the FBAR reporting requirements.
With the exception of his claims of physical and psychological infirmity, the facts in Rund are unremarkable and consistent with other willful FBAR penalty cases. Nevertheless, the decision is deserving of discussion given the Defendant’s unique circumstances.
Richard M. Rund (“Rund”) or (the “Taxpayer” or “Defendant”) is a U.S. Citizen who has had a long career as an inventor and international businessman. Rund’s career began in 1982 when he moved to Hong Kong where he continued to reside until 2000. While in Hong Kong the Taxpayer formed a number of business entities including FOB Products (“Products”), an entity engaged in the sale and export of appliances. Rund was listed as the sole shareholder and also named a signatory over Product’s foreign financial accounts. In 1999 the Taxpayer closed Products and transferred all of Products assets to a second entity, FOB Instruments, Ltd. (“Instruments”).
During this time Rund also purchased York Luen, a Hong Kong real estate holding company which owned an apartment. The Defendant purchased York Luen for purposes of acquiring the apartment as well as other real estate in Hong Kong. To facilitate the purchase of York Luen, the Taxpayer used Instruments as the named purchaser. Immediately following the acquisition, Rund executed a Declaration of Trust transferring control of Instruments to a colleague, Pierre Charlety (“Charlety”). However, the Taxpayer retained beneficial ownership of Instrument’s shares with Charlety merely serving as the “nominee” for Instruments. To complete the scheme Charlety became the named owner of 95% of Instrument’s shares.
Notwithstanding the foregoing, the Defendant would routinely issue instructions to Charlety and continued to operate Instructions from behind the scenes. He also remained in charge of all major decisions and expenditures, and received regular cash flow statements. In addition, the Taxpayer had knowledge of and was aware of all foreign bank accounts held by Instruments and York Luen. As time passed, Rund became more emboldened.
In 2003 and 2004, following the sale of an apartment by York Luen, Rund instructed Charlety to transfer one third of the proceeds from the York Luen account to a USB Swiss Account held by Far East Ventures, Ltd. (“FEV”), a newly formed Mauritius company. The Taxpayer also made numerous other requests for funds that resulted in Charlety transferring more than a million dollars from a York Luen account to an FEV account.
At the Defendant’s request, Instruments also made monthly payments in the amount of $25,000 into FEV’s UBS account. In turn, Rund paid Sovereign Managers Ltd to set up FEV and provide the Company with a director. The UBS account opened under FEV’s name listed Rund as the client, identified him as the beneficial owner of FEV’s assets. The biographical data for the client profile even matched the Defendant’s profile.
As time passed, Rund became more aggressive. In this regard, the Taxpayer would request funds from the FEV’s UBS account for purposes of making business investments, and on at least one occasion, the Defendant used a credit card associated with UBS for personal expenses. The FEV UBS account was eventually closed in 2010, at which time, Rund directed that the funds in the FEV account be moved into a personal account he maintained at HSBC.
The relationship with Charlety eventually soured in 2007 when Rund discovered that Charlety has been stealing from Instrument. The business breakup resulted in litigation in Hong Kong. In that litigation the Defendant asserted in court documents that he was the owner of 100% of the shares in Instruments. In that same year Rund also caused himself to be named a director and owner of York Luen.
From 2003-2009 Rund failed to timely report for FBAR purposes his interest in numerous foreign financial accounts in which he maintained a beneficial interest in. Nor did he disclose the existence of these accounts on Schedule B of his 2003 individual U.S. Income Tax Return.
In 2010 after learning that UBS was closing his Swiss Account and that the Bank was under investigation by the Department of Justice, Rund decided to enter the Offshore Voluntary Disclosure Program (“OVDP”). While participating in the OVDP from 2010-2016 the Defendant was obligated to make a truthful, timely and complete disclosure of all his foreign financial accounts. Needless to say, the Taxpayer was less than forthcoming. In addition to failing to make a disclosure of all his existing accounts, Rund opened several new accounts, which he, likewise, elected not to disclose.
After finding that Rund had willfully violated the FBAR reporting requirements no less than 43 times during the years 2003-2008, 2013 and 2014, the IRS assessed the willful FBAR penalty in excess of $2.9M. The Government subsequently filed an action in the U.S. District Court for the Eastern District of Virginia for purposes of reducing the assessment to judgment. Rund filed an answer. The Government then moved for Summary Judgment and Rund responded by filing a Cross Motion for Summary Judgment.
In its decision, the Court rejected the Defendant’s argument that since he relied upon advisers that his FBAR violations were not willful. He maintained that he honestly believed that he was only required to report the accounts in his name, over which he had signature authority. In fact, in its findings, the Court concluded that from 2003-2008 and in 2013 and 2014, Rund had a financial interest in foreign financial accounts which would subject him to the FBAR filing requirements and that he knew of his reporting requirements and intentionally or recklessly disregarded his compliance obligation.
In granting the Government’s Motion for Summary Judgment, the Court found that the facts were not in dispute. Specifically, the Court found that Rund knew of the FBAR filing requirements since he had previously filed FBARS in 2001 and 2002.
The Court also rejected the Defendant’s plea that his personal challenges precluded the Court from finding that Rund was willful in his failure to comply with the FBAR reporting requirements. In a last ditch effort to avoid the willful FBAR penalty, Rund claimed that he was: (i) unsophisticated in business and tax matters; (ii) was diagnosed with ADHD; in 2006; (iii) under a great deal of stress from 2009 diue to the Hong Kong litigation; (iv) diagnosed with stage 3 prostate cancer; and (v) finding it difficult to retain an accountant in 2014 and 2015.
In its opinion, the Court noted that even if all of Rund’s difficulties were true, Rund’s violations were still considered willful. The Court correctly found that a finding of willfulness is based upon an objective standard, and as such, the defendant’s personal problems were not a factor in determining whether his conduct was willful. The Court went on to explain, quoting from Farmer v. Brennan, 511 U.S. 825, 836, 114 S. Ct. 1970, 128 L.Ed. 2d 811 (1994) that ‘the standard is whether Rund failed to act in the face of an unjustifiably high risk of harm that is either know or so obvious that is should be known.’
In conclusion, when faced with the assessment or potential assessment of an FBAR Penalty, whether willful or non-willful, it is important to secure representation from an experienced and knowledgeable tax attorney who is familiar with the FBAR reporting requirements, the relevant case law and the available offshore disclosure options that are available.
