FBAR Case Summaries - Part 2

Facts: In 1993, Taxpayer began selling Swiss annuities. In 1998, Taxpayer became concerned with asset protection when he was sued by an individual in the U.S. To protect his assets, Taxpayer created Sugar Creek Stiftung in 1999, originally funding it with $200,000 worth of profits he made from selling Swiss annuities. Taxpayer then opened two foreign accounts in the foundation’s name, one in Liechtenstein and one in Canada. Between 2003 and 2008, Taxpayer withdrew $13,629,253 from the two foreign accounts. The highest aggregate balance was $23,146,295 in 2010. Taxpayer did not file FBARs reporting these accounts even though he had filed FBARs in 1994 and 1995 for separate foreign accounts. In 2011, Taxpayer applied for the OVDI and subsequently withdrew from the program. The IRS audited Taxpayer and assessed a willful FBAR penalty in the amount of $5,466,892.

Holding: Taxpayer acted willfully in failing to report his ownership and interests in his foreign bank accounts. He filed FBARs in 1994 and 1995 proving he knew of his obligation to file an FBAR in subsequent years. Under penalty of perjury and with knowledge of his foreign bank accounts, Taxpayer checked “no” when asked if he had a foreign bank account.

Facts: Prior to 1980, Taxpayer’s parents had opened an investment account at UBS as an emergency fund and designated Taxpayer as a joint owner and instructed her to never tell anyone about the account. In 1998, Taxpayer and her husband, Michael Kimble (“Michael”) opened a bank account at HSBC in Paris, France. Even though Michael learned about the FBAR reporting requirement in the late 1990s, he “never reported any investment income derived either from the HSBC or UBS accounts,” when preparing their joint tax returns. Taxpayer paid UBS for hold mail service. She and Michael also met with UBS representatives on numerous occasions. Furthermore, the offshore income she failed to disclose was 52 percent of her overall earnings in 2007. In 2008, Taxpayer learned that the U.S. government issued a John Doe Summons to UBS requesting names of U.S. taxpayers who may be using their accounts to evade U.S. taxes. Therefore, Taxpayer entered into the OVDP in 2009. Taxpayer decided to withdraw from OVDP because the penalty was excessive. She was subsequently examined by the IRS who determined her failure to file an FBAR for tax year 2007 was willful, and therefore, imposed a penalty of 10 percent of the maximum balance of the HSBC account and 50 percent of the maximum value of the UBS account, for a total penalty amount of $697,229. Taxpayer paid the assessed penalty in full and filed a complaint for a refund in the United States Court of Federal Claims.

Holding: Taxpayer’s failure to file an FBAR for tax year 2007 was willful. The court explained that because Taxpayer did not review her tax returns for accuracy and because she did not answer affirmatively that she had an interest in a foreign bank account on her 2007 Schedule B, she “exhibited a ‘reckless disregard’ of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a [sic] FBAR.”

Facts: Taxpayer was a U.S. citizen. Taxpayer’s father opened a Swiss bank account in the 1980s. When his father died, Taxpayer’s mother inherited the account and added Taxpayer as a signatory. After his mother’s death in 1989, Taxpayer traveled to Switzerland, opened a new numbered account, and transferred all funds to his new Swiss account. He paid for hold mail service. He did not tell his CPA about his Swiss account until 2011, even though Taxpayer informed his CPA about other property he inherited from his mother. Taxpayer met with a Swiss bank representative yearly about his account. In 2000, when the Swiss bank gave Taxpayer the option to disclose his account to the IRS or divest all of his U.S. securities, he chose to divest the account of all U.S. securities. Taxpayer’s CPA provided him with a tax organizer each year that asked about any foreign income and any foreign accounts. Taxpayer stated he had no foreign income or foreign accounts on the questionnaire for 2008, 2009, and 2010. In 2010, Taxpayer opened a bank account in Italy and asked his CPA if there are any required forms related to the account. The Italian account was under the threshold of $10,000 so it was not reported. After receiving a letter from the Swiss bank informing him of his U.S. tax reporting requirements, Taxpayer closed his Swiss account and decided to participate in the OVDI. Taxpayer eventually opted-out and was subject to an examination, after which the IRS assessed a penalty of $274,000 for Taxpayer’s willful failure to file FBARs for 2008, 2009, and 2010.

Holding: Taxpayer willfully failed to file an FBAR for 2008, 2009, and 2010 by recklessly setting up a foreign account in a manner that made it more difficult for the government to discover, by recklessly failing to disclose income generated in the account, and by recklessly signing tax returns indicating he had no foreign accounts.

Facts: Taxpayer had been a naturalized citizen of the U.S. since 1982. He owned and operated several businesses. In 1998, Taxpayer opened his first foreign bank account at UBS and deposited $1.1 million from his personal checking account. He used hold mail service and a numbered account. Taxpayer actively communicated with UBS regarding investment strategies. He also traveled to Switzerland to meet with bank officers. When UBS told Taxpayer that earnings from U.S. securities had to be reported to the IRS, he directed UBS not to invest in U.S. securities. In 2008, Taxpayer transferred $1.4 million from UBS to Arab Bank in Switzerland and closed his UBS account. In the same year, Taxpayer was audited for tax year 2006. Taxpayer told the IRS agent that he closed his UBS account, but did not tell her about his Arab Bank account. In 2009, Taxpayer filed his first FBAR in response to a letter he received from UBS regarding the IRS Treaty Request. On his 2009 tax return, Taxpayer reported $40,000 of the $300,000 of investment income generated by his foreign accounts. In 2013, the IRS audited Taxpayer’s 2005 and 2007 through 2010 tax years. At the conclusion of the audit, the IRS assessed a willful FBAR penalty of $693,607 against Taxpayer.

Holding: the appropriate standard of willfulness to warrant the FBAR penalty is an objective standard: an action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known. The evidence is overwhelming that Taxpayer sought to hide his overseas accounts from the U.S. government. Maximum penalty for a willful violation is established by § 5321(a)(5)(C) and (D) (the greater of 50% or $100,000)—not by the regulation found at 31 C.F.R. § 1010.820(g)(2).

Facts: In 2000, Taxpayer opened a numbered account with UBS to protect her divorce proceeds from her vengeful ex-husband. In 2001, Taxpayer sold a property for $7 million, earning about $3.5 million in net sale proceeds. Taxpayer hired a CPA to file her 2002 tax return reporting the sale of the property. Taxpayer also instructed her attorney to transfer the proceeds from the sale to her UBS account. Taxpayer’s UBS account earned a considerable amount of interest income annually. Taxpayer regularly transferred money from UBS to her domestic account. Taxpayer never reported the accounts or the income. When her account manager told her the Swiss government was making Americans close their Swiss bank accounts, Taxpayer moved her money to a bank in the Czech Republic and listed her Czech relatives’ names as the owners. Taxpayer subsequently visited the Czech Republic and opened additional accounts in her own name. The IRS started an investigation related to Taxpayer’s income tax liabilities in 2010. In 2015, the IRS assessed a willful FBAR penalty of $824,087 for tax years 2007, 2008, and 2009.

Holding: Taxpayer acted willfully after considering the totality of her questionable conduct over the course of several years. This included, but was not limited to, the steps Taxpayer took to hide the existence of her foreign accounts, as well as her deliberate decision to avoid seeking any legal or professional advice regarding the substantial proceeds from her divorce, and the requirements for saving those funds in foreign accounts, despite her history of relying on such professionals to handle her legal and financial affairs.

Facts: Taxpayer operated a business in Florida that sold medical supplies to hospitals in the Middle East. In 2002, Taxpayer opened an account at UBS and made various transfers and check requests for the account. He met with representatives and signed documents requesting that UBS destroy correspondence with him regarding the account. Between 2003 and 2006, Taxpayer’s UBS account had a high balance of $2,255,890. Taxpayer transferred most of the UBS funds to his other foreign account in Dubai, a company owned by his relatives, and another family business. In 2009, UBS informed Taxpayer that the DOJ was investigating account holders for possible tax evasion and recommended he voluntarily disclose his account information. Two months later, Taxpayer made a final fund transfer from his UBS account to the family business and closed the account. Taxpayer filed a late FBAR for 2008 reporting only $903,130. The IRS assessed a $100,000 willful FBAR penalty against Taxpayer.

Holding: by virtue of the default, Taxpayer has admitted the government’s allegations that he willfully failed to report the earnings in his Swiss bank account. The Court entered a default judgment against Taxpayer.

Facts: Taxpayers (brothers) failed to file FBARs for 2008, 2009, and 2010. As a result, the IRS assessed numerous penalties for multiple FBAR violations, many of which were flat amounts of $100,000. But for three undisclosed foreign accounts, the IRS assessed penalties of $1,108,645.41 for 2008, $599,234.54 for 2009, and $599,234.54 for 2010.

Applicable Law and Regulations: Pursuant to 31 U.S.C. § 5321(a)(5), the maximum penalty for willful violations is the greater of $100,000 or 50 percent of the balance in the relevant account. Several regulations implement the statute, and significantly, place limits on the penalties sought by the IRS. The first is 31 C.F.R. § 1010.820(g), which provides that "[f]or any willful violation [of the FBAR implementing regulations] involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account," the Secretary of the Treasury "may assess" a civil penalty of $25,000 or up to the balance in the account but no greater than $100,000. Under this scheme, although the statute (31 U.S.C. § 5321(a)(5)(C)) permits the Secretary to impose a penalty of up to 50 percent of the account balance, under 31 C.F.R.§ 1010.820(g) the Secretary of Treasury has limited the penalty to be enforced to $100,000.

Holding: the assessments were improper because the IRS only had that authority permitted under the limitations imposed by 31 C.F.R. § 1010.820(g). Therefore, the maximum penalty the IRS may assess is $100,000 per account per year.

The parties settled and the Court dismissed the case with prejudice.

Facts: From 2007 through 2010, Taxpayer owned 13 foreign financial accounts in his own name and in the names of various entities. For tax years 2007 through 2010, Taxpayer filed FBARs disclosing some but not all of his foreign bank accounts. The IRS assessed willful FBAR penalties for tax years 2007 through 2010 for $824,098.

Holding: 31 U.S.C. § 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by 31 U.S.C. § 5321(a)(5)(C). And 31 C.F.R. § 1010.820 purports to cabin that discretion by capping penalties at $100,000.

The parties filed a joint stipulation for dismissal.

Facts: The parties stipulated as follows:

• Taxpayer willfully failed to file an FBAR for tax year 2008.
• The filing due date for the 2008 FBAR was June 30, 2009.
• Taxpayer should have reported two Credit Suisse bank accounts.
• The aggregate value in the two Credit Suisse accounts was $8,529,456.
• The IRS assessed a willful penalty for the failure to file the 2008 FBAR in the amount of $4,264,728, which represents 50% of the aggregate account balance as of June 30, 2009.

Issue: The parties disagree as to the maximum amount the IRS was allowed to assess as a penalty. Taxpayer’s estate contended that the maximum penalty for failure to file an FBAR is $100,000 per account according to 31 C.F.R. § 1010.820.

Holding: In every version of 31 U.S.C. § 5321 that has authorized the imposition of a civil penalty for failure to file required financial reports, Congress itself has specified the maximum penalty that the Secretary of the Treasury was authorized to impose. Instead of permitting the Secretary of the Treasury to establish the maximum permissible penalty for failures to file FBARs, 31 C.F.R. § 1010.820 provided that the “maximum” penalty for a willful failure “shall be increased” to the greater of $100,000 or 50 percent of the total relevant account balances. The provision, “shall be increased,” made it mandatory that a person who willfully fails to file an FBAR be exposed to the possibility of a penalty that was increased to $100,000 or 50 percent of the aggregate balance in the unreported accounts, whichever is “greater.”

Facts: In 2013, Taxpayer was convicted of filing false income tax returns for 2007 and 2008. He was also convicted of two counts of failing to file an FBAR. Taxpayer used foreign nominee entities and opened foreign bank accounts under the entities’ names. The aggregate value of the foreign accounts was about $7,800,000 in 2007 and $3,200,000 in 2008. In 2017, the IRS assessed civil penalties in the amount of $3,800,000 million against Taxpayer for willfully failing to file his FBARs. The IRS sued Taxpayer to collect the penalties assessed.

Holding: Since the criminal standard for willfulness is more exacting than the civil standard, Taxpayer is collaterally estopped from contesting factual issues discussed at the criminal trial. (This means Taxpayer cannot argue about the facts and law since he had a full and fair opportunity to make such arguments at the previous trial regarding the same substantive issue. The Court is explaining that because it was determined that Taxpayer’s failure to file an FBAR was willful in the criminal context, which is more difficult for the U.S. government to prove, Taxpayer’s failure must also be willful in the civil context, which is easier to prove.)

Facts: Taxpayer was indicted in 2000 for omitting assets, including interests in foreign bank accounts, from her and her husband’s joint bankruptcy petition. In 2002, Taxpayer was sentenced to 36 months in custody and ordered to pay restitution of $2,4000,000. In 2013, the IRS assessed a $1,200,000 penalty against Taxpayer for failing to disclose her financial interests in a foreign account on her 2006 tax return. Taxpayer argued the penalty was unconstitutional under the Eighth Amendment, which states that the punishment must fit the crime. Taxpayer contended that a $1,200,000 penalty is unduly harsh for failing to disclose her financial interests in a foreign account.

Holding: the assessment against her was not grossly disproportional to the harm she caused because Taxpayer defrauded the government and reduced public revenues.

Facts: Between 1993 and 2000, Taxpayer deposited more than $7,000,000 into two foreign accounts opened in the name of a foreign corporation. He did not report the interest income earned or his interest in the accounts. In 2000, the government became aware of the accounts and requested that the Swiss authorities freeze his accounts. Taxpayer nevertheless completed a tax organizer for that year in which he denied he had an interest in or signature authority over a foreign bank account. He also did not disclose his interest in any accounts or file an FBAR for tax year 2000. In 2003, Taxpayer was indicted for conspiracy to defraud the IRS and criminal tax evasion. In exchange for a sentence reduction, he allocuted that he knew he was required to report his Swiss accounts during tax years 1993 through 2000, but “chose not to in order to assist in hiding [his] true income from the IRS and evade taxes[.]” In 2007, Taxpayer filed FBARs for tax years 1993 through 2000. The IRS subsequently assessed two $100,000 willful FBAR penalties against Taxpayer.

Holding: Taxpayer exhibited willful blindness by not reading line 7a of Schedule B on Form 1040 which asks about a financial interest in or signature authority over any foreign financial accounts and by not paying attention to any of the written words on his tax return. The Fourth Circuit concluded that Williams was at least reckless supporting a willful FBAR penalty.

Facts: Taxpayer sought the services of Merrill Scott and Associates (“Merrill Scott”) “that would result in avoiding or deferring the recognition of $2 million in income that Taxpayer expected to receive.” After listening to Merrill Scott employees’ explanation of their services, Taxpayer stated, “This is tax evasion.” Merrill Scott responded that its plans were legal and that Taxpayer’s “plan will be one of the cleanest.” Taxpayer stated under penalty of perjury that he read and asked questions from a pamphlet which advised readers to not hide assets in a Swiss account because U.S. taxpayers are required by law to report their financial interests in foreign bank or financial accounts. After retaining the services of Merrill Scott, Taxpayer’s business partner’s accountant sent Taxpayer a letter expressing his concerns regarding Merrill Scott and a newspaper article, which informed readers of the criminal liability of concealing foreign bank accounts. While Taxpayer read the letter and the article, approximately $2.7 million that would have otherwise been his company’s taxable income was directed to various foreign entities and was circulated between them as fictitious loans. Even after the IRS discovered Taxpayer’s complex tax evasion scheme with Merrill Scott, Taxpayer repeatedly lied to the IRS regarding his involvement with Merrill Scott.

Holding: even if Taxpayer was not charged with knowledge of the contents of a tax return by virtue of having signed it, the fact that Taxpayer signed a federal income tax return without having an understanding as to its contents, while simultaneously engaging in transactions with foreign entities designed to avoid or defer tax, constitutes evidence of either willful blindness or recklessness.

Facts: Taxpayer was 73 and an Italian citizen residing in the U.S. He was retired from a long career as an urban planner for the United Nations. Taxpayer had a financial interest in, and signature and other authority over, a Swiss bank account at Union Bank of Switzerland. He failed to file FBARs for the years 2006 and 2007. The value of these unreported accounts, which largely represented inheritances, for the requisite time period was $6,280,692. Taxpayer also failed to report earned income from his foreign bank accounts for the 2005 through 2007 tax years. The United States lost taxes totaling $239,012 for those years. Taxpayer pled guilty to willfully failing to file FBARs. To date, Taxpayer has paid a civil penalty fine of $3,140,346.35 and $239,012 in restitution.

Outcome: in light of Taxpayer’s cooperation, Taxpayer was sentenced to a term of three years of probation and fined $50,000.

Facts: Taxpayer was a highly successful and sophisticated educator and investor. He had a Ph.D. in economics. In 2000, Taxpayer opened a bank account under his entity’s name (“Company A”) in Switzerland. Taxpayer deposited physical shares of an online auction company. Taxpayer identified himself and a relative who was 88 years old, wheel chair-bound, and ill as the beneficiaries of the assets. In 2005, Taxpayer caused another foreign national and resident to open another Swiss bank account under the name of another tax haven entity (“Company B”). Taxpayer’s plan was to transfer funds from Company A’s account to Company B’s account, and then transfer the funds to his U.S. accounts. In 2008, Company B purchased Company A. Taxpayer expected to receive approximately $80 million from the sale. Subsequently, Taxpayer created two additional Swiss accounts: one using his U.S. passport for repatriating assets and one using his Israeli passport for concealing assets. In 2013, Taxpayer filed his first FBAR ever for tax year 2012 disclosing two Israeli bank accounts with an aggregate value of less than $20,000. The true aggregate value of Taxpayer’s foreign bank accounts was $168 million. He continued to file false returns and FBARs until 2015 when IRS Criminal Investigation subpoenaed documents from him.

Outcome: The Court sentenced Taxpayer to 7 months in prison, 1 year supervised release with special conditions (community service and authorized travel to Israel), $15,905,755.00 Restitution Order, and $250,000.00 Fine. As part of his plea agreement, Taxpayer paid a penalty of $100 million to the Treasury.

Facts: From 2005 to 2017, Taxpayer owned financial accounts held at financial institutions in Croatia, Germany, Serbia, and Switzerland. Between 2007 and 2011, Taxpayer transferred $5,817,038 in profits from his U.S. business to his foreign financial accounts. Some of the accounts were in Taxpayer’s name, however, he falsely represented to the banks that he resided in Croatia. In 2014, the IRS sent a notice to the Taxpayer advising him that he had failed to file a 2012 tax return. In 2015, Taxpayer filed Forms 1040EZ for tax year 2012, 2013, and 2014, on which he falsely claimed that he resided in Croatia and falsely reported zero income for those years. Shortly thereafter, Taxpayer received a letter from Credit Suisse informing him that his Clariden Leu (another Swiss bank) account would be closed and advising him to enter the OVDP. Taxpayer then contacted an attorney and forensic accountant to make a voluntary disclosure. Taxpayer, however, never told his attorney or forensic accountant about the foreign accounts held in Croatia, Germany, or Serbia. Taxpayer decided that the cost of entering OVDP would be too high so he chose to make a quiet disclosure instead. Between 2015 through 2017, Taxpayer filed 2007 through 2014 tax returns that did not disclose his Croatian, German, and Serbian accounts or the income they earned. The aggregate year-end high values in the undeclared accounts ranged from $6,289,274 to $333,727. In 2020, Bruer was charged with tax evasion and failure to file an FBAR. Taxpayer pled guilty to one count of tax evasion and one count of willful failure to file an FBAR.

Outcome: Taxpayer was sentenced to 24 months, two years supervised release, and was required to pay $2,7789,538 in restitution.

Facts: In 1989, when Taxpayer was living in the Bahamas, he created a Bahamian corporation and opened an account at a Bahamian bank under its name. He then transferred the funds into an investment account with a Bahamian branch of a Swiss bank under the same Bahamian corporation. Taxpayer moved back to the U.S. in 1990. In 2003, the Swiss bank ceased its Bahamian operations so Taxpayer’s account moved to Switzerland. On his self-prepared 2003 tax return, Taxpayer left the question on Schedule B regarding foreign accounts blank. On a 2007 and 2008 tax organizer, he said he had no interest or signature authority over any foreign accounts. Taxpayer believed since the foreign account was in the name of an entity, he did not need to report it on his personal return. At all relevant times, the balance in the account exceeded $300,000 to was less than $550,000. In 2010, Taxpayer learned about and entered the OVDP. He amended six years of tax returns and filed delinquent FBARs for 2003 through 2008. He also timely filed an FBAR for 2009. In 2011, the IRS assessed a $10,000 non-willful FBAR penalty for 2005 through 2008 for a total of $40,000. Taxpayer argued he had reasonable cause for the failure.

Holding: Taxpayer did not have reasonable cause for his failure to file FBARs prior to 2009. No fact finder could conclude that ignoring the question on Schedule B of his 2003 tax return was an exercise of ordinary business care or prudence. That he did not inquire further into his legal obligations is evidence that he did not have reasonable cause for his FBAR violations, not that he was too old to know better.

Facts: Taxpayers were involved in the real estate business. In 1986, Taxpayers immigrated to Canada after purchasing a ranch in British Columbia. During the same year, Taxpayers opened a bank account in Canada at the Canadian Imperial Bank of Commerce. Taxpayers still continued to purchase and sell real estate in the U.S. At the end of 2006, the Taxpayers account had a balance of $4,000,000. At the end of 2007, the account had a balance of $3,500,000. At the end of 2008, it had a balance of $3,850,000. And in 2009, the account had a balance of at least $1,870,000. On their Forms 1040, Taxpayers’ accountants checked the “no” box on Schedule B, Part III. Taxpayers hired Canadian accountants to handle their Canadian tax returns and U.S. accountants to handle their U.S. tax returns. Taxpayers never explicitly told their accountants about their Canadian bank account. Taxpayers thought their U.S. accountants knew about their Canadian bank account because their annual financial statements provided to the accountants contained references to a Canadian bank account. In addition, the U.S. accountants were required to send Taxpayers’ U.S. tax information to Canadian accountants each year so that those accountants could file the Taxpayers’ Canadian tax returns. In 2012, the IRS assessed penalties against Taxpayers for their failure to file FBARs for 2006 through 2009 in the amount of $80,000. Taxpayers filed suit after their request for abatement was denied.

Holding: Taxpayers did not have reasonable cause for their failure to file FBARs. The mere fact that the Taxpayers’ returns were prepared by tax professionals did not excuse their failure to file FBARs. IRS regulations specify that in determining reasonable cause, “the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability.” 26 C.F.R. § 1.6664-4(b)(1). In addition, ordinary business care and prudence would require that the Taxpayers personally read and review their completed tax returns carefully.

Facts: In 2007, Taxpayer inherited four foreign bank accounts from her late mother. The account balances ranged from $765,532 to $1,462,817 between 2008 to 2011. Taxpayer did not file FBARs for 2008 through 2011. In 2013, Taxpayer applied to participate in the OVDP. Pursuant to the OVDP, Taxpayer filed delinquent FBARs. Taxpayer was nonetheless removed from the OVDP for undisclosed reasons. In 2015, she agreed to extend the IRS’ deadline to assess FBAR penalties for 2008 and 2009. In 2016, the IRS assessed non-willful FBAR penalties of $10,000 for each of the ten foreign accounts that Taxpayer owned and failed to disclose from 2008 to 2011, totaling $100,000. When Taxpayer did not pay, the IRS moved to reduce the FBAR penalties to judgment.

Holding: Court granted IRS’ motion for default judgment based on the Eitel factors. Taxpayer was required to file an FBAR for 2008 through 2011 disclosing her interests in foreign bank accounts. The $10,000 penalty per account is prescribed by the statute.

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