Crackdown on the offshore accounts continues to be one of the top priority issues for the IRS. In the last few years, the DOJ and the IRS have taken aggressive positions in imposing and collecting huge penalties for taxpayers’ failure to report their foreign accounts and file FBARs.
Two recent cases are good examples of the government’s attempts to impose the maximum available penalties and how difficult it is for the taxpayers to fight them. The FBAR penalty issue continues to be highly contested, with mixed results.
Willful $5.1 Million Penalty Assessed Against the Taxpayer with Signature Authority Only
The first case, filed in the Southern District of New York, deals with the assessment of a “willful” FBAR penalty against the taxpayer who only held a Power of Attorney for his wife’s account. The IRS assessed a $5.1 million penalty against Jonathan Zuhovitzky, a dual U.S. and Israeli citizen, who had been residing in Berlin, Germany since 2010. Mr. Zuhovitzky was born in Israel and became a naturalized citizen in 1999. He’s been married to his wife, Esther, since 1969. Mrs. Zuhovitzky is a citizen of Israel and Austria, and had never been a US citizen or resident.
According to the complaint, the bank account at issue was opened by Mrs. Zuhovitzky in 1960s at UBS in Zurich, while she was residing in Switzerland and was funded with the money she had inherited from non-US sources. The taxpayer, Mr. Zuhovitzky was added to the account as Power of Attorney in 1988. In 2008, the IRS and the DOJ began its crackdown on UBS, which resulted in the UBS disclosing of accounts held by U.S. taxpayers. Mrs. Zuhovitzky’s account was also disclosed to the DOJ and the complaint alleges that it was done wrongfully because the wife was not a U.S. resident or citizen. In 2011, the IRS initiated an audit of the taxpayers’ 2008 tax return, which later was expanded to the 2006 and 2007 tax years as well. The IRS agent in charge of the case made a referral to the IRS Criminal Investigation Division (CI), however, the CI did not pursue the case because it was unable to adequately establish “willfulness” on Mr. Zuhovitzky’s part. Despite the finding of the IRS-CI, the auditor proposed and assessed a civil willful FBAR penalty against the taxpayer in the amount of $5,123,000.
The taxpayer filed an appeal of the IRS examiner’s determination, but the IRS Appeals Office sustained the determination of the willful FBAR penalty. After that, the IRS garnished Mr. Zuhovitzky’s Social Security Benefits, withholding 15% of his monthly payments, on account of his debt owed to the IRS. With additional accrued penalties and interest, the debt to the IRS reached more than $9 million! Mr. Zukhovitzky filed a complaint, seeking a refund of the money garnished from his Social Security benefits, as well as the reversal of the FBAR penalty.
While we must not jump to any conclusion based only the facts alleged by the taxpayer in his complaint, and before seeing any additional facts alleged by the IRS, this case should be very concerning for any U.S. taxpayer who has any link to a foreign bank account. It appears that the IRS will not be shy to impose the maximum possible penalty under certain circumstances.
Taxpayer Wins Against Highest Non-Willful FBAR Penalties Assessed by IRS
The second case provides more optimism for the taxpayers. The United States District Court for the Easter District of Texas ruled that non-willful FBAR penalties should apply “per FBAR” rather than per account.
The case is United States v. Bittner. Alexandru Bittner is a dual Romanian and U.S. citizen. Before emigrating to the United States 1982, Mr. Bittner earned a Master of Science in Engineering from Politechnica University of Bucharest. After moving to the United States, the taxpayer worked as a dishwasher and plumber and earned his master plumbing certificate in California. Mr. Bittner became a naturalized American citizen in 1987 or 1988.
After living in the United States for eight years, Mr. Bittner moved back to Romania in 1990 and lived there until 2011. He did not renounce his American citizenship. While living in Romania, Mr. Bittner generated a considerable stream of income through a variety of businesses and investments and opened a number of foreign bank accounts. From 1990 to 2011, Mr. Bittner generated over $70 million in total income through his various foreign businesses and investment ventures. During those years, Mr. Bittner kept at least some of that income in a number of foreign financial accounts. Mr. Bittner did not file FBARs until May 2011.
If a U.S. person fails to file an FBAR, the IRS may impose a civil penalty on such person. 31 U.S.C. § 5321(a)(5)(A). The amount of the penalty depends on whether the conduct at issue is willful or non-willful. If the failure to file is non-willful, “the amount of any civil penalty imposed . . . . shall not exceed $10,000.” 31 U.S.C. § 5321(a)(5)(B)(i). In the Bittner case, the IRS determined that the taxpayer had total of 272 bank accounts during the tax years 2007-2011, subject to FBAR, and assessed the total penalty of $2,720,000 (i.e. $10,000 times 272 accounts). At the time of the court’s decision, the government reduced its penalty assessment to $1,770,00 for 177 accounts.
The government brought the lawsuit to reduce the penalties to judgment. The taxpayer disputed the amount of the penalty and argued that the non-willful civil penalty of $10,000 should apply per annual FBAR report, not per account maintained, as determined by the government. The court sided with the taxpayer. In analyzing the statute, the court concluded that the penalty for a “violation” within the meaning of §5321(a)(5)(A) relates to the FBAR for, rather than to each individual account maintained. Thus, the maximum non-willful penalty is $10,000 per FBAR, not $10,000 per account.
The Bittner decision represents a major victory for the taxpayers, especially, in light of the prior contrary decision reached by the U.S. District Court in California in the case of United States v. Boyd. The court in Boyd concluded that the non-willful penalty applied on a per account basis. This case is now on appeal with the Ninth Circuit.
Government’s pursuit of the criminal and civil penalties in FBAR cases remains a hot topic. Taxpayers with previously undisclosed accounts, or those who want to ensure their compliance with the FBAR requirements, should seek professional advice. Former IRS attorneys at Holtz, Slavett & Drabkin have significant experience in successfully representing clients with FBAR issues. To schedule a consultation, please call us at (310) 550-6200.