The issue of FBAR penalties often is raised in our practice by prospective clients who consider entering into the Offshore Voluntary Disclosure Program (OVDP). One of the questions is whether the IRS can realistically go after the penalty, which is more than 27.5% of the highest account balance, offered in the OVDP.
In the much publicized case of USA v. Carl R. Zwerner, the U.S. government was seeking multiple civil penalties for violation of FBAR rules. Mr. Zwerner, who is now 87 years old, sought to come into compliance with his Swiss bank account via a “quiet disclosure”, amending his income tax returns and filing delinquent FBARs. After auditing his returns, the IRS assessed 50% penalties (based on the value of the undisclosed Swiss account) for the tax years 2004, 2005, 2006 and 2007, in the total amount of $3,488,609.33. The highest balance in the Swiss account during the tax years at issue was $1,691,054.
In June of 2013, the U.S. filed a law suit in the U.S. District Court for the Southern District of Florida [United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013)], seeking to collect on the assessed multiple 50% FBAR penalties. Mr. Zwerner filed an Answer, arguing that multiple 50% FBAR penalties did not apply. On May 28, 2014, after a trial, the jury returned a verdict finding Mr. Zwerner “willful” and thus liable for an FBAR penalty equivalent to 50% of the high balance in his foreign financial account for each of the tax years 2004, 2005 and 2006 years, as previously assessed by the government. Thus, the upheld penalties equaled to $2,241,809 on an offshore bank account that had a high balance of $1,691,054, or 150% of the account balance. Interestingly enough, the jury determined that Mr. Zwerner was not “willful” as to the tax year 2007.
This jury decision represents a significant victory for the government in their efforts to fight offshore tax evasion and undisclosed foreign accounts. It definitely discourages “quiet disclosures” and encourages strong consideration of the formal Offshore Voluntary Disclosure Program. There’s still one legal issue to resolve, however. Many tax practitioners believe that the U.S. government pursuing multiple year, maximum penalties is punitive and may violate the Excessive Fines Clause of the Eighth Amendment. The argument is that a civil penalty or forfeiture is unconstitutional under the Excessive Fines Clause if the penalty or forfeiture is at least in part “punishment” and such punishment is grossly disproportionate to the conduct which the penalty is designed to punish. The question is whether a 150% penalty is grossly disproportionate to the conduct of an elderly taxpayer who tried to come clean by amending his tax returns. This question remains open for now. On June 6, 2014, the judge in Zwerner will hear arguments on whether the penalties violate the constitutional prohibition against excessive fines. This decision will be extremely important for those taxpayer who consider their options with respect to previously undisclosed foreign bank accounts.