I have been keeping readers up to date with the current controversy surrounding imposition of an FBAR penalty for “willful” violations – is it limited to a $100,000 cap or can the penalty, if greater, be assessed at 50% of the value of the unreported account? More detailed background on this issue is available at my blog post here. We have seen that the Internal Revenue Service (IRS) has been hitting the FBAR penalty jackpot recently. The cases are gaining momentum to support the imposition of “willful” FBAR penalties well above the $100,000 cap. The 50% penalty looks like it’s a goldmine “go” for the IRS, and the agency appears to be consistently winning.
With this background, the next question: How aggressive can the IRS get when it comes to assessing “willful” FBAR penalties? Today’s post involving the case of Jonathan Zuhovitzky will present the perfect example!
The facts are set out in the Complaint filed June 26, 2020 in the Southern District of New York, objecting to the imposition of a “willful” civil penalty assessed by the IRS. By way of background, the taxpayer was a dual citizen of the United States and Israel. He became a naturalized US citizen in 1999. Mr. Zuhovitzky was a financial and investment advisor and for the past 10 years had been residing in Berlin, Germany. His wife was an Austrian and Israeli citizen; she had never been either a US citizen or resident. During the 1960s the wife had opened a bank account with UBS in Switzerland, funding it with money she had inherited from a non-US person. Beginning in 1988 the taxpayer held a power of attorney (POA) for his wife’s account.
IRS Agent Ignores Criminal Investigation Division!
Mr. Zuhovitzky became involved in this dispute with the IRS when UBS mistakenly sent information to the IRS about his wife’s account. The documentation received by the IRS from UBS clearly identified the non-resident alien wife as the sole beneficial owner of the account and clearly identified her as a citizen of Austria and Israel. Other documentation unequivocally stated that the taxpayer was not a beneficial owner of the account and that he held only a POA over the account. IRS commenced an audit of the taxpayer’s returns and referred his case to the Criminal Investigation Division (CID) of the IRS. CID informed the IRS revenue agent that it would be closing the case without pursuing it further since the taxpayer’s wife was not a US citizen and there was no unreported income involved. The CID agent also stated it was unable to adequately establish “willfulness” for the failure to file an FBAR reporting this account over which Mr. Zuhovitzky had only a POA. Despite these findings the IRS agent assessed a willful FBAR penalty against the taxpayer in an amount over US$5.1 million!
Mr. Zuhovitzky timely filed an appeal with the appeals division of the IRS. However, Appeals sustained the determination of a willful failure to file the FBAR. Appeals also informed the taxpayer that his only options for challenging the FBAR penalty were to either pay it and file a refund claim or, wait until the government filed suit in District Court to collect the penalty at which time, he could challenge the assessment. Taxpayer was later advised by the US Department of Treasury that it would withhold up to 15% of his monthly Social Security benefit payments on account of his debt owed to the IRS. Mr. Zuhovitzky’s Social Security benefits were garnished for several years. He was advised by the Bureau of the Fiscal Service that his proposed penalty now stood greater than US$9 million! Talk about sticker shock!
Taxpayer’s lawsuit seeks repayment of the moneys garnished from his Social Security funds; he also seeks a judgment declaring that all debts claimed to be owed by him to the IRS concerning the FBAR action be declared completely null and void; he is also requesting certain compensatory, statutory and punitive damages, as well as various costs.
Perhaps the best takeaway is this: If you are not a US citizen, it’s essential that you don’t marry one! If you have married one, get some professional advice about what it will mean to have a POA and consider possible workarounds.
Another important takeaway: Mr. Zuhovitzky’s case makes it abundantly clear that the IRS is becoming more and more aggressive in what it considers “willful” behavior when it comes to FBAR filings. Let’s hope the court will draw the line and stop the IRS from taking its FBAR crusade to what appears to have become a belligerent and vicious level, at least here. An earlier case with the same taxpayer was settled with the IRS. Perhaps this is a case of sour grapes. In any event, sadly, this is not the first time we have seen the IRS ignore the facts and paint its own version of “willfulness”.
Don’t let the IRS’ aggressive FBAR position wipe out your overseas accounts and even your Social Security benefits. Stop all the unproductive worrying and contact me if you have FBAR matters that need resolution.
Posted: August 27, 2020
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