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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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FBAR PENALTY RELIEF FOR TAXPAYERS. NON-WILLFUL FBAR PENALTY IS TO BE ASSESSED PER FORM

On February 28, 2023, in Bittner v United States, 598 U.S. (2023) the U.S. Supreme Court, in a five to four decision, ruled that the non-willful FBAR penalty should be assessed per form rather than per account. The decision settles the inconsistent conclusions reached by the Court of Appeals for the Fifth and Ninth Circuits as to whether 31 U.S.C.  § 5321 authorizes the IRS to impose multiple non-willful FBAR penalties for the untimely filing of an FBAR.

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, 31 U.S.C. § 5314(b) 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 requires 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 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.

The power to assess a civil monetary penalty for FBAR violations was vested with the Treasury Secretary but 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.

Alexandru Bittner (“Bittner” or the “Taxpayer”) was a dual citizen of Romania and the United States, who maintained Foreign Financial Accounts overseas during the years 2007-2011. Bittner was unaware that he was required to file FinCEN Form 114, commonly referred to as an “FBAR,” and consequently, failed to file FBARS for the years 2007-2011.

Following his return to the United States from Romania in 2011, the Taxpayer first learned that he was required to file FBARS.  Bittner subsequently submitted FBARS for the five year (2007 through 2011), but failed to include all of his Foreign Financial Accounts. After being notified by the Government that his FBAR filings were deficient, Bittner filed corrected FBARs providing information for each of his accounts. The Taxpayer maintained 61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011.

Thereafter the Government assessed a 2.72 Million non-willful FBAR penalty against Bittner, representing a $10,000 penalty for each account for each of the five years. The Government maintained that the non-willful FBAR penalty should be assessed per account rather than per form.

Bittner challenged that penalty in Court, arguing that the BSA authorizes a maximum penalty for non-willful violations of $10,000 per report, not $10,000 per account. The Fifth Circuit disagreed with the Taxpayer and sustained the penalty.

In an earlier decision the Ninth Circuit arrived at a different conclusion.  In United States v. Boyd, 991 F. 3d 1077, 1079 (CA9 2021), the Ninth Circuit concluded that the non-willful FBAR penalty should be applied per form rather than per account.

Jane Boyd (“Boyd” or the “Taxpayer”) is an American citizen, who had a financial interest in fourteen Foreign Financial Accounts located in the United Kingdom. The aggregate balance for Boyd’s accounts exceeded $10,000 in the year 2010. Consequently, the Taxpayer was required to file an FBAR for 2010, but failed to do so.

In addition, Boyd received interest and dividends in connection with her Foreign Financial Accounts, which she failed to report on her 2010 U.S. Income Tax Return. In 2012 the Taxpayer entered the now discontinued Offshore Voluntary Disclosure Program (“OVDP”) for purposes of coming into compliance with her U.S. Tax and financial reporting obligations.  In furtherance of her remediation efforts under the OVDP in October of 2012, Boyd filed her 2010 FBAR, reporting her fourteen accounts and also filed an amended U.S. Income Tax Return.

In 2014, the Taxpayer requested and was granted permission to “Opt Out” of the OVDP. Subsequently, the IRS examined the Taxpayer’s 2010 income tax return and concluded that Boyd’s failure to timely file an FBAR resulted in thirteen non-willful FBAR violations. Consequently, the IRS assessed $47,279 in non-willful FBAR penalties.

The Government subsequently filed suit in the United States District Court for the Central District of California and obtained a judgment against her for $47,279 together with interest and additional late payment penalties and interest. Thereafter, Boyd appealed to the Ninth Circuit.

The Ninth Circuit reversed the lower Court’s decision maintaining that the non-willful FBAR penalty should be applied per form rather than per account. The Bittner and Boyd decisions set the stage for a showdown at the Supreme Court.

The Supreme Court held that the BSA’s $10,000 maximum penalty for the non-willful failure to file a compliant report accrues on a per-report, not a per-account, basis. In support of its decision, the Court noted that 31 U. S. C. §§5321(a)(5)(A) and (B)(i) makes no mention of accounts or their number. The Court further reasoned that under 31 U.S.C. § 5314 a violation occurs when an individual fails to file a report and that the non-will penalty should be tied to the report rather than to the number of accounts.

The Bittner case represents a major victory for the Taxpayer and a blow to the government.  However, Bittner may result in the Government assessing the more crippling willful   FBAR penalty, given the low evidentiary bar (Preponderance of Evidence). FBAR enforcement will remain a top priority for the IRS. The 80 Billion in funding received by the IRS has certainly served to enhance their resolve and commitment to make FBAR investigations and enforcement a top priority.

If you have Foreign Financial Accounts and have failed to file FBARS and/or failed to make the necessary return disclosures, or failed to report income from your Foreign Financial Accounts, protocols, such as the Streamlined Foreign and Domestic Offshore Procedures, are in place to bring you into compliance. These protocols have been in place for  over ten years and have been widely publicized.

Non-filers who have yet to be detected may have a false sense that they are in the clear.  However, behind the scenes, the IRS has been diligently working with its global partners to secure information  related to the identity of U.S. account holders and their foreign bank accounts. For those individuals who have elected to utilize a shell company or a nominee as the named owner of a foreign account in order to  avoid detection by the IRS, new international agreements are now in place designed to ferret out offshore tax evasion and to promote transparency.

 

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FATCA REPORTING CHANGES AND INFLATION REDUCTION ACT SPELL TROUBLE FOR TAXPAYERS WHO HAVE FAILED TO FILE FORM 8938 AND FBARS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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FIFTH CIRCUIT RULES NON-WILLFUL FBAR PENALTY IS PER ACCOUNT AND NOT PER FORM

The Fifth Circuit recently held in United States v. Bittner,  ___ F. 4th ___ (5th Cir. 11/30/21) that the non-willful FBAR penalty should be applied on a per account basis, rather than on a per form basis.  The Court cited 31 U.S.C. §5314 and the regulations promulgated thereunder including 31 CFR §§ 1010.306 and 1010.350 as the predicate for applying the FBAR penalties on a per account basis. The Taxpayer in Bittner had a financial interest in over 25 foreign financial accounts over a three year period. The assessment of the FBAR penalty by the IRS resulted in an aggregate per account penalty of $1.77 million.

The unanimous decision in Bittner,  directly conflicts with the holding in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) where the Ninth Circuits ruled that the non-willful FBAR penalty should be assessed per form and not per account.

The Bittner and Boyd decisions may set the stage for a showdown in the U.S. Supreme Court in the event Bittner petitions for certiorari.  In the alternative, the Supreme Court may wait to see whether a consensus emerges among the other Circuits as to how to treat this issue.

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

The Government further argued that, because the penalty for willful violations is assessed with reference to each account, the non-willful penalty should also be assessed with reference to each account. The   District Court rejected both of the Government arguments and held that the $10,000 maximum penalty for a non-willful violation applies on a per form basis rather than on a per account basis.

The Fifth Circuit, relying heavily on the dissent in Boyd, reversed the lower court’s ruling which capped the $10,000 non-willful FBAR penalty on a per form basis. In ruling in favor of the Government, there is now authority for the IRS to assert the non-willful FBAR penalty on a per account basis.

The Bittner decision will certainly bolster the Government’s position that the non-willful FBAR penalty should be applied on a per account basis. Furthermore, the Boyd decision has no binding effect on the Government.  Consequently, taxpayers who have failed to file their FBARS may be subject to significant penalties.

A number of avenues exist where a taxpayer can make an offshore disclosure and either avoid or minimize FBAR penalties.  Depending upon the circumstances, a Taxpayer, who is seeking to make an offshore disclosure, may be eligible for either the foreign or domestic streamlined procedures which would result in significant savings.

In more complex cases where criminal risk is present, it may be necessary for a Taxpayer to make a disclosure using the Voluntary Disclosure Practice Rules announced in November of 2018. The new rules replace the procedures set forth in the Offshore Voluntary Disclosure Program (OVDP) and it prior iterations.

A note of caution. Anyone considering making an offshore disclosure should avoid the temptation of making a “quiet disclosure,” which is frowned upon by the Government and is indicia that the Taxpayer is attempting to prevent the Government from discovering the Taxpayer’s failure to comply with the FBAR statute and related regulations.

The streamlined domestic offshore procedures and the Voluntary Disclosure Practice Rules both provide for a one time miscellaneous offshore penalty, as well as interest. An accuracy related penalty in the case of the Voluntary Disclosure Practice Rules is also assessed on any additional income tax due.

Given the complexities related to FBAR reporting, the penalty regimen, the various avenues available for making a disclosure and the possible application of the FBAR penalty mitigation guidelines, anyone considering making a disclosure should discuss their specific circumstances with an experienced and knowledgeable tax attorney who can assess the Taxpayer’s situation and quantify the potential savings by making an offshore disclosure.

 

 

 

 

 

 

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CAN THE FBAR PENALTY MITIGATION GUIDELINES LOWER YOUR FBAR PENALTY OBLIGATION?

NAVIGATING THE FBAR PENALTY MITIGATION GUIDELINES

Failure to report your foreign financial accounts on Report of Foreign Bank Account Reports can result in the imposition of steep penalties. The FBAR penalty regimen, which provides for willful and non-willful penalty assessments against taxpayers who have failed to report their foreign financial accounts, is complex and requires careful financial and risk analysis.

If you are worried about the consequences of coming clean, it may be time to discuss your particular situation with an experienced tax professional. Depending upon the circumstances, it may be possible to use the FBAR penalty Mitigation Guidelines (the “Guidelines”) as a means of reducing the overall penalty burden.

The application of the Guidelines may impact your decision of whether to utilize the Streamlined Procedures or the Voluntary Disclosure Practice Rules (“VDP”). It also may impact a decision to opt out of the VDP.   Consequently, deciding to make use of the Guidelines involves careful financial analysis, risk assessment and a quantitative comparison among various disclosure alternatives.

Failure to consider the application of the Guidelines can result in significant saving being left on the table. The discussion that follows is limited to the non-willful and willful penalties and does not include FBAR penalties that are applicable to financial institutions.

Under U.S. law, a U.S. person having a financial interest in or signature or other authority over a foreign financial account(s) in which the highest aggregate balance in U.S. Dollars exceeds $10,000 at any time during the year, must report these accounts on FinCEN Form 114, commonly referred to as an “FBAR” (See 31 CFR § 1010.350 for FBAR definitions and filing requirement).

The FBAR due date for 2015 and later years is April 15.  Prior to 2015, the due date was June 30. The change brings the FBAR filing due date in alignment with the filing deadline for individuals. Where a taxpayer files an extension to file a federal income tax return, the due date for filing an FBAR is October 15 without the need for filing a separate extension.

Married taxpayers may report their foreign financial accounts on one FBAR if the following conditions are met:

  • All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
  • The filing spouse reports the jointly owned accounts on a timely, electronically filed FBAR; and
  • Both spouses complete and sign Part I of FinCEN Form 114a, Record of Authorization to Electronically File FBARs. The filing spouse completes Part II of Form 114a in its entirety.

If all of the preceding conditions are not met, each spouse must file a separate FBAR reporting both individual and joint accounts.

Although the FBAR statutes are part of the Bank Secrecy Act  under Title 31, authority for the assessment and collection of FBAR penalties has been delegated to the IRS under 31 CFR §1010.810(g).

The IRS Examiner is given discretion to determine whether the facts and circumstances of a particular case do not justify asserting a penalty and instead a “warning letter.” Furthermore, subject to Manager review and approval, the Examiner has discretion in determining the amount of the penalty. In certain cases, the facts and circumstances may be such that the Examiner may consider whether the issuance of a warning letter and the securing of delinquent and/or amended FBARs, rather than the determination of a penalty, will achieve the desired result of improving compliance with the FBAR reporting and recordkeeping requirements in the future (See IRM 4.26.16.5.2.1).

Factors to consider when applying Examiner discretion may include, but are not limited to, the following:

  • Whether compliance objectives would be achieved by issuance of a warning letter;
  • Whether the person who committed the violation had been previously issued a warning letter or assessed an FBAR penalty;
  • The nature of the violation and the amounts involved;
  • The filer’s conduct contributing to the violation;
  • Whether the filer cooperated during the examination;
  • The balance in each account during the year; and
  • The total amount of all penalties to be asserted for all violations.

When a penalty is appropriate, an Examiner must consider whether assessment of multiple penalties is commensurate to the harm caused by the FBAR violation IRM 4.26.16.5.2.1(4).

Acknowledging that one size does not fit all, the IRS has developed the Guidelines to assist Examiners in determining:  (i) whether the willful or non-willful FBAR penalty is applicable; and (ii) whether a lower amount is appropriate under the Guidelines. Discussion of the Guidelines can be found in IRM 4.26.16.5.3, IRM 4.26.16.5.4 and IRM 4.26.16.5.5. Under the Guidelines the determination of an FBAR penalty by an Examiner, is subject to close scrutiny by the Examiner’s Manager, prior to any assessment IRM 4.26.16.5.6 and will typically include consideration of the IRM 4.26.16.5.2.1(3) factors listed above.

31 USC 5321(a)(5)(B)(i) authorizes the imposition of a non-willful FBAR penalty up to $10,000 against any filer who violates or causes any violation of the FBAR filing, reporting and recordkeeping requirements.  The penalty may be abated where the taxpayer can establish “reasonable cause” and the amount of the transaction or balance that caused the violation was properly reported 31 USC 5321(a)(5)(B)(ii).

Prior to determining the penalty amount for non-willful violations, an Examiner must first determine whether the Guidelines are met IRM 4.26.16.5.4.1(1). If the Guidelines are met, the Examiner must perform a preliminary calculation using the Guidelines and limiting the total mitigated penalties for each year to the statutory maximum for a single non-willful violation.  The statutory maximum penalty for each year must be allocated among all violations IRM 4.26.16.5.4.1(2).

In the case of multiple owners of a foreign financial account, the Examiner must conduct a separate analysis for each owner and determine if a violation occurred and whether it was willful or non-willful.

The penalty authorized for a filer who either “willfully violates” or “willfully causes a violation of any provision of Section 5314,” is the greater of $100,000 or 50% of the balance in the account at the time of the violation 31 USC § 5321(a)(5)(D)(i)(II). The reasonable cause exception provided for in the case of the non-willful penalty is not applicable where the FBAR violation was willful 31 USC § 5321(a)(5)(D)(ii).

The Guidelines for non-willful violations provide the following:

  1. Level I-NW. Where the maximum aggregate balance for all accounts does not exceed $50,000 at any time during the year, the mitigated penalty is $500 per non-willful violation with a cap of $5,000 per year;
  2. Level II N.W. In cases where the maximum aggregate balance exceeds $50,000, but does not exceed $250,000, the mitigated penalty amount is $5,000 per violation.
  3. Level III N.W. Where the maximum aggregate account balance for all accounts exceeds $250,000, the penalty amount is equal to the statutory maximum ($10,000) per violation.

 

Where the Guidelines do not apply, the Government’s position is that a filer is subject to the $10,000 non-willful penalty for each violation rather than per form.  Despite the overwhelming number of cases that have rejected the Government’s position, the U.S. District Court for the Southern District of Florida in a recent decision held that the non-willful FBAR penalty is per account rather than per form. United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021). The Solomon Court adopted the dissent in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) (Ikuta, J. dissenting).  This issue will continue to be litigated, despite favorable decisions favoring the taxpayer.

 

Furthermore, where the Guidelines do not apply, the Government’s position with respect to cases involving spouses is that the penalty should be assessed against each spouse.

In cases involving willful violations, the Guidelines provide the following:

  1. Level I-Willful. In cases where the maximum aggregate balance for all accounts to which the willful violation related does not exceed $50,000, the mitigated penalty amount is the greater of $1,000 per year or 5% of the maximum aggregate balance of the accounts to which the violations relate. The total mitigated willful penalty is allocated among all willful violations being penalized in that year;
  2. Level II-Willful. Where the maximum aggregate balance exceeds $50,000 but does not exceed $250,000, the mitigated penalty is the greater of $5,000 or 10% of the maximum account balance during the calendar year at issue;
  3. Level III-Willful. In cases where the maximum aggregate balance exceeds $250,000 but does not exceed $1,000,000, the penalty for each account for which there is a violation, the penalty is the greater of 10% of the maximum aggregate account balance during the calendar year at issue or 50% of the account balance on the violation date; and
  4. Level IV-Willful. Where the maximum aggregate account balance for all accounts exceeds $1,000,000, the penalty is 50% of the account balance on the violation date or the statutory maximum penalty for willful violations.

Considering the Guidelines a means of reducing your overall FBAR penalty obligation is not a simple decision when deciding to come clean. Any such decision requires a careful analysis of the taxpayer’s situation including the account balances, source of account funds, the applicability of the Guidelines, the taxpayer’s residence, the overall cost of using the Guidelines compared to proceeding under an alternate method, whether making a disclosure presents any criminal risk and whether there are income tax consequences associated with failure to report foreign financial accounts. Consequently, consulting with an experienced and knowledgeable tax attorney should be the first order of business.

Remember! The FBAR statutes, regulations and judicial decisions are complex and confusing and one size doesn’t fit everyone.

 

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COURT ORDERS REPATRIATION OF FOREIGN ASSETS TO AID IN FBAR PENALTY COLLECTIONS

The issue of whether the Government can repatriate a taxpayer’s foreign assets for purposes of satisfying a taxpayer’s outstanding FBAR penalty judgment has not been extensively reported on or discussed. However, the issue was recently addressed by the U.S. District Court for the Southern District of Florida in United States v. Schwarzbaum (S.D. Fla. Dkt # 18-CV-81147-BLOOM/Reinhart).  The decision signals the Biden Administration’s intent to become more aggressive in the collection of outstanding FBAR penalty judgments.

Taxpayers, who have offshore assets, but have yet to report them, should be concerned.  In particular, those who are contemplating expatriation or those who no longer reside in the United States may find themselves subject to FBAR penalties, extradition, criminal prosecution, and the imposition of additional civil fines. Likewise,  U.S. persons against whom FBAR penalties have been assessed, who continue to reside in the United States and who have parked their assets overseas as a means of preventing the Government from collecting need to rethink this strategy.

In Schwarzbaum, the Government commenced an FBAR collection suit against the taxpayer in August of 2018. At the conclusion of a five day bench trial in May of 2021, the Court entered an FBAR penalty judgment in favor of the Government in the amount of $12,555,813. The judgment was based upon Schwarzbaum’s willful failure to file FBARs in compliance with 31 U.S.C. § 5314.

The Government’s post judgment discovery revealed that the taxpayer lacked sufficient assets in the United States from which the outstanding judgment could be satisfied.  However, the discovery did make clear that the taxpayer had sufficient assets located in Switzerland from which the judgment could be satisfied.

Consequently, the Government filed a Motion with the Court for an Order directing Schwarzbaum to repatriate sufficient funds to the United States in order to satisfy the judgment, by depositing such amounts in the form of an appeal bond.

In its Motion, the Government maintained that authority for such an Order exists under, the Fair Debt Collection Procedures Act of 1990 (“FDCPA”), 28 U.S.C. § 3001 et seq.

Judge Bloom referred the Motion to a Magistrate for purposes of issuing a Report and Recommendations (“R&R”).  On June 30, 2021 the Magistrate issued his R&R, recommending that the Government’s Motion be granted. The taxpayer filed Objections to the R&R and the Government filed a Response to the Objections. On October 26, 2021, the Court, adopting the Magistrate’s R&R, entered an Order in favor of the Government.

Prior to the Courts October 26, 2021 Order, the Taxpayer filed an appeal to the U.S. District Court for the Eleventh Circuit.

The Magistrate’s R&R concluded that the Court has authority under the FDCPA by virtue of its express incorporation of the All Writs Act, 28 U.S.C. § 1651 to Order the Taxpayer to repatriate $18,227,465.89 in addition to any additional post judgment interest accrued since May 31, 2021.

The Court rejected the Schwarzbaum’s argument that the All Writs Act does not provide an independent collection remedy and that the FDCPA provides the sole remedy for collections.

The footnotes to the Order provide some context with respect to the taxpayer’s scheme. Specifically, Schwarzbaum took steps to render himself judgment proof in the U.S. including selling his home in Palm Beach County Florida, and moving from Florida to Switzerland, where he maintained three Swiss accounts totaling in excess of $49 million. The footnotes also reveal the taxpayer transferred the bulk of his liquid assets from the United States to Switzerland, prior to the Complaint being filed by the Government.

The Court adopted the R&R and held that the FDCPA incorporates the All Writs Act. Quoting from the language in 28 U.S.C. § 1651, the Court noted that that the “All Writs Act empower federal courts to ‘issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usage and principles of law.’ “

The Court further noted that the FDCPA provides for issuance of various writs including writs of execution and writs of garnishment. Judge Bloom, citing United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962) and United States v. McNulty, 446 F. Supp. 90, 90 (N.D. Cal. 1978), pointed out that the cases supporting the Courts interpretation of the interplay between the FDCPA and the All Writs Act rely upon the Court having personal jurisdiction over the defendant to reach assets overseas in cases where the defendant has an outstanding judgment or tax liability to the Government.

The takeaway from this Decision is that an individual who is subject to the assessment of FBAR penalties, and who has not otherwise challenged the assessment, can certainly expect the Government to file a collection action. Any attempt to place assets outside of the reach of the Government, by maintaining or otherwise transferring assets overseas, will be dealt with by the Government in short order. One can reasonably expect that the Government will utilize post judgment Orders of Repatriation to assist in the collection of an outstanding FBAR penalty judgment. The foregoing is true whether a taxpayer expatriates moves overseas or continues to reside in the U.S.

Some may be wondering why Scwarzbaum was not indicted and extradited. Although the U.S. has an extradition treaty with Switzerland, Switzerland does not typically honor such requests. Moreover, such an indictment may have been sealed.

It is noteworthy that the number of extraditions to the U.S. in tax and FBAR related cases is on the rise. Consequently, as the saying goes:  “No matter where you go, there you are.”

 

 

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Quiet Disclosures and the Civil Willful FBAR Penalty. Even Death Will Not Help You

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.

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Former Harvard Chemistry Chair indicted for failing to file FBAR and filing false tax returns

IRS Hard at Work Despite the Pandemic

Financial crimesIndividuals, who have failed to report their foreign financial accounts, may feel a sense of relief, in light of the corona virus and its effects on IRS investigations. Better think again!

The DOJ recently announced the superseding indictment of Dr. Charles Lieber, a former Chemistry chair at Harvard University for:

  • Failureto file Foreign Bank and Financial Accounts (FBAR) and;
  • Filing false federal income tax returns.

The initial indictment charges the former Harvard Chair withmaking false statements to federal authorities.

Lieber served as the principal investigator of the Lieber Research Group at Harvard University and received more than $15 million in federal research grants from 2008-2019. In addition, the charging document records that from 2012 until 2015,  Lieber served as a Strategic Scientist at Wuhan University of Technology (WUT) and thereafter as a Contract Participant in the Thousand Talents Plan (a program established by the Chinese government in 2008 for purposes of attracting global scholars to assist in Chinese development).

Subsequent indictment shows that Lieber entered into a three-year agreement with Thousand Talents that required WUT to pay Lieber a salary of up to $50k a month, living expenses totaling $150k and $1.5 million for purposes of establishing a research lab at WUT. The DOJ alleges that Lieber failed to report the income he received from WUT in 2013 and 2014 on his federal income tax return. Individual U.S. tax residents are required to report their income on a worldwide basis, irrespective of where the income is earned.

In addition to his failure to report the income Lieber received from WUT, the superseding indictment alleges that Lieber failed to file FBARS for 2014 and 2015 with respect to a foreign financial account he opened while in China in 2012. The account was opened to enable WUT and Thousand Talents to directly deposit Lieber’s salary and other payments. A U.S. person is required to file an FBAR (FinCen Form 114) if that person had a financial interest in or signatory authority over foreign financial accounts with an aggregated balance in excess of $10k during any time during the year. It is clear from the indictment that Lieber received more than $10k between salary and living expenses. Failing to report this amount as required by law under FBAR is a crime.

To avoid being indicted by IRS, it is crucial that U.S. persons in foreign countries to report all income earned for tax return purposes and file FBAR for any account(s) they have financial interest in/ signatory authority over with aggregate balance in excess of $10,000. 

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Courts Split on FBAR non-willful Penalty

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

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

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

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

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

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

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

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

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