Taxpayer’s FBAR WIN: “Willful” Penalty over $9.8 Million for Mere Signature Authority — Removed Entirely

Today’s post involving the case of Jonathan Zuhovitzky presents some important takeaways:  The IRS can get very aggressive when it comes to assessing “willful” FBAR penalties. We see this trend is on the rise. A diligent representative, however, can get the IRS to settle an FBAR matter that is favorable to the taxpayer.  It takes a smart and diligent rep and a lot of digging, but if flaws can be found in the IRS position, the case can be won!

Let’s follow up on the case of Jonathan Zuhovitzky that was settled just last month.

Background

IRS had assessed a “willful” civil penalty against Mr. Zuhovitzky, a dual citizen of the United States (through naturalization in 1999) and Israel. Mr. Zuhovitzky was a financial and investment advisor, who for the past 10 years had been resident in 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.  More detailed facts are set out in the taxpayer’s Complaint and at my earlier tax blog post here.

IRS audited the taxpayer and the case was referred to the Criminal Investigation Division (CID) of the IRS. The CID agent stated it would be closing the case since the taxpayer’s wife was not a US citizen and there was no unreported income involved; further the agent 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!

Through various levels of appeals and taxpayer’s lawsuit on the matter, the FBAR penalty with interest and various additional penalties added on top, reached the staggering total amount over US$9.8 million.  Some of his Social Security benefits were taken during this entire fiasco.  Remember, taxpayer had no beneficial interest in this UBS account. He merely had signature authority over the account through the POA given by his foreign wife.

Taxpayer Wins

Fortunately the taxpayer was very well represented, IRS settled the case (Order of Settlement) undoubtedly with fears of the so-called “hazards of litigation”. The hazards of litigation are essentially the uncertainties of the outcome of the court’s decision if the case goes to trial. When there is significant uncertainty of the result in event of litigation, the IRS is more willing to settle.  That was the case with Mr. Zuhovitzky’s matter – ultimately, the FBAR penalty was reduced to zero.  Perhaps the IRS was fearful of an Eighth Amendment claim of “unreasonable fines” – after all, a penalty of almost US$10 million seems a tad steep for an individual who held only signatory authority to another’s account! This case might have been one where the penalties for FBAR noncompliance might be viewed by the court as excessive and disproportionate to the underlying breach of law, such that  that the penalties could be unconstitutional in violation of the Eighth Amendment prohibition against unreasonable fines and penalties.

The case serves as a reminder that while the IRS is clearly taking very aggressive positions when it comes to “willful” FBAR penalties, this does not mean a taxpayer should cave in to the penalty assessment.  I, along with other tax colleagues, have seen first-hand that the IRS makes errors in its FBAR penalty assessments and has weak positions in some cases.  Penalty assessments should be reviewed by competent advisors and all of the details carefully examined to see what weaknesses lie in the government’s position, and what arguments might be made to tip the scales with the “hazards of litigation”.

Don’t let the IRS’ aggressive FBAR position wipe out your overseas accounts and even your Social Security benefits. Stop all the unproductive worrying;  contact me if you have FBAR matters that need resolution.

Posted April 15, 2021

 

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