The case of US v Schwarzbaum (decided October 26, 2021), discussed in today’s blog post, serves as a harsh reminder of how far the US government will go to collect FBAR penalties. The importance of posting about this latest development is to underscore how aggressive FBAR penalty collection efforts are now becoming. Of course, this case presents extreme facts and really appears to be one in which the taxpayer is basically saying: “I won’t pay and you can’t make me”…. to which the Internal Revenue Service (IRS) is responding, “Well then, we’ll see about that.”
For the majority of taxpayers it is fairly simple to become tax- and FBAR- compliant using one of the IRS’ “Streamlined” foreign procedures or delinquent FBAR procedures. I have years of successful experience and can help you navigate the rules.
“Willful” FBAR Penalty – Won’t Pay Up!
I have written before about the defendant, Mr. Isac Schwarzbaum, here. In a nutshell, the taxpayer’s mitigated “willful” FBAR penalties were assessed for 2006-2009, initially in the amount US$35.4 million. This amount, though mitigated, was deemed excessive, and the IRS later further mitigated the penalties, arriving at a total penalty amount of US$13.7 million. In March 2020, the IRS won its case in district court. Now, the time to pay the piper has arrived and unsurprisingly, Mr. Schwarzbaum does not want to part with his money and is still appealing the judgment. After losing his court case, Mr. Schwarzbaum sold his Florida residence and moved to Switzerland.
Assets are in Foreign Banks – Beyond Reach of the US?
Meanwhile, through discovery the US Government learned that Mr. Schwarzbaum lacked sufficient assets within the US to satisfy the debt and wants to move full steam ahead with enforcement, seeking to collect on the judgment. Since he lacks sufficient US assets, the Government wants to force Mr. Schwarzbaum to repatriate the funds from overseas (he has over US$49 million in Swiss bank accounts) in order to satisfy the FBAR penalty (currently exceeding US$18.2 million). The southern district court in Florida, after reviewing United States Magistrate Judge Bruce Reinhart’s Report and Recommendation on the government’s repatriation motion, held that the Government was entitled to the order granting the repatriation request pursuant to the Federal Debt Collection Procedures Act of 1990, 28 U.S.C. §§ 3001, et seq. (“FDCPA”).
Let’s make sure we understand this – the defendant Mr. Schwarzbaum is a US citizen (although I understand he has left the US and is now in Switzerland). Thus, while the US courts have no jurisdiction over the assets located in Switzerland, the courts still have jurisdiction over Mr. Schwarzbaum given his US citizenship. Magistrate Judge Reinhart noted that the FDCPA allows for the garnishment of a debtor’s assets to satisfy a judgment in favor of the US, but that garnishment cannot extend beyond the US to reach assets held in a foreign country, such as here, involving defendant’s foreign bank accounts. This is so because the US has no jurisdiction over those foreign assets. Jurisdiction over the person of the debtor, however, permits the court to order the debtor to repatriate the assets back to the US so that those assets are then within the US and subject to its jurisdiction and accordingly, can be garnished.
It will be very interesting to see how this turns out. What might happen if Mr. Schwarzbaum ignores the order? He may be held in contempt, the remedy for which can include imprisonment, but this would be ineffective if Mr. Schwarzbaum is not physically in the US. While the US may seek to use an extradition treaty depending on where Mr. Schwarzbaum is present, this is a long and complicated process and depending on the terms of the treaty, may not be effective. (For example, if Mr. Schwarzbaum was held to be in civil contempt for not obeying the order, this is not a criminal offense. If he was in Switzerland, the US could not use the Swiss-United States’ extradition treaty because Article 2 of the treaty requires a criminal offense for extradition).
The US may also request that Switzerland assist in enforcing the judgment since there are plenty of Mr. Schwarzbaum’s funds in various Swiss banks. This will not be an easy win for the US government and involves complicated Swiss attachment and enforcement proceedings (a succinct overview of enforcement proceedings is here).
It’s Clear …
We can all agree that the US government will continue its robust FBAR enforcement efforts. In addition, with this latest development in the Schwarzbaum case, it is clear that the Government will extend its reach for foreign assets in order to satisfy FBAR penalties. With global fiscal transparency and global tax cooperation on the horizon, the IRS may be poised for a win.
Posted November 18, 2021
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