Here are two recent cases regarding FBAR – One, a taxpayer win and the other a taxpayer loss.
Let’s start with the good news: The taxpayer win!
The penalty for non-willful FBAR violations is generally US$10,000 per violation. The question is, what is the “violation”? The Internal Revenue Service (IRS) believes this penalty applies for the violation of not reporting each financial account for each year at issue. Thus, if the taxpayer had 10 unreported accounts for the year, there are 10 “violations” and the penalty could be US$100,000 for that tax year. So, in the eyes of the IRS, the violation involves the failure to report each account on the FBAR, rather than a failure to file the FBAR form itself for the particular year.
It looks like the courts are not buying it!
In United States v. Boyd, (March 24, 2021) the Ninth Circuit reversed the District Court holding and determined that the FBAR nonwillful penalty is per annual form and not per account that should have been reported on the Form 114. I had blogged about the Boyd case earlier, and am happy to report that the trend is growing in the courts to refuse to accept penalty calculations on a “per account” basis. The first case to side with the taxpayer on this issue was decided in June 2020 with United States v. Bittner (E.D. Texas 6/29/2020), followed in January 2021 by United States v. Zvi Kaufman (D. Conn. 1/11/2021) and then, again in March 2021 with United States. v. Giraldi (D. N.J. 3/16/21).
May the trend continue.
And now, for the taxpayer loss!
Death and the “Willful” FBAR Penalty
Should the IRS be able to assess a “willful” FBAR penalty after a taxpayer has died? Remember, dead men tell no tales. After death, a taxpayer has no opportunity to defend himself. Apparently, IRS thinks it can do so and one court has agreed. This is a very nuanced issue and a fact pattern I have not seen before. I have seen the case when a “willful” FBAR penalty was assessed prior to the taxpayer’s death, but the taxpayer died before IRS’ collection of the penalty amount. I blogged about that case, United States v. Schoenfeld (Middle District, Fla. 3:16-cv-1248-J-34PDB), dated 9/25/18 here. The Schoenfeld court held that the FBAR penalty is “remedial” and as such, survives death. Remember the FBAR penalty was assessed before Mr. Schoenfeld died; the issue was a matter of collecting the penalty from his estate.
The case of United States v. Wolin (E.D. N.Y. 9/28/2020) is different. Mr. Ziegel, had an unreported Swiss account with UBS. Mr. Ziegel died in April 2014. In May 2015, the IRS assessed a civil “willful” penalty against Mr. Ziegel’s estate in the amount of $1,435,235.00 for the willful failure of Mr. Ziegel to disclose the account on his FBAR. The fiduciary of the estate moved to dismiss the case, but the court denied the motion. The court, relying on other precedent involving fraudulent tax returns (not FBAR matters) quoted the following – “It seems impermissible for the estate of a deceased taxpayer, who during his lifetime established a pattern of conduct by which he fraudulently avoided taxes, to avoid a liability that the taxpayer himself could not have avoided if his conduct had been uncovered while he was alive.”
The Wolin court focused on the issue whether the willful FBAR penalty survives the death of the taxpayer. However, the more nuanced issue is whether a “willful” FBAR penalty can be assessed in the first place when it is assessed after a taxpayer has died and therefore has no opportunity to defend. This issue was not raised. What do you think?
Just a quick thought and my 2 cents: By way of analogy, someone gets injured by Mr. X and wants to sue Mr. X for the injury, but Mr. X dies and so, the injured party sues Mr. X’s estate instead. The estate is a replacement for the decedent and stands in his shoes, so to speak. I don’t see why the IRS cannot try to sue the estate for FBAR penalties assessed on account of the decedent’s wrongdoing prior to decedent’s death. I think the issue lies in the ability of the IRS to prove the case and establish “willfulness”. The person has died and cannot defend himself, but if the conduct was egregious, it may be possible for the IRS to prove willfulness.
It will be interesting to see how the Wolin case develops assuming it gets to trial and is not settled beforehand.
How to Fix Delinquent FBARs
The IRS has special procedures in place to correct tax filing delinquencies including delinquent FBARs. Get the right information before you correct your situation, since the choice of program can make a huge difference to ultimate penalties. In many cases, no penalties are due. If you need help – email me at firstname.lastname@example.org
Posted June 17, 2021
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