Friday, June 6, 2014

Zwerner Case Settles Without Decision on Excessive Fines Issue (6/6/14; Updated 6/12/14)

The Zwerner case has settled.  See the case closing document here.  I add the public settlement terms below.  The court's case closing says:  "the parties advised that they have amicably settled this matter."  (Emphasis supplied.)  I assume that the word amicably is a euphemism for the real world where the settlement is equally -- more or less -- painful to both sides, in order to strike a settlement balance.

Most immediately, it leaves several issues unresolved.

1.  The Excessive Fines / Eighth Amendment issue.

2.  The burden of proof issue -- preponderance or clear and convincing.  The judge instructed the jury to apply the preponderance standard.  Critical mass seems to be forming for preponderance, but I assume that was an issue Zwerner was prepared to assert on appeal.  I continue to think it should be clear and convincing, as the IRS itself once had.

3.  The issue of whether the trier of fact can assess the reasonableness of the IRS's exercise of discretion as to where between 0 and 50% the IRS should apply the willful penalty.  I don't think this was presented as an issue in the pretrial skirmishing and trial, but think that it should be an issue.  If the jury had been asked the further question of whether the IRS abused its discretion to assert in the aggregate an amount exceeding the account value, perhaps the jury would have given some relief.  This is not exactly the Excessive Fines issue, but has certain resonances with it.  Of course, this issue -- if it is even a proper issue -- would be one that would be decided by the jury.  The Excessive Fines issue would be decided by a judge.

Addendum 6/12/14:

The Notice of the Settlement is here.  The description of the settlement is short, so I cut and paste them:
Under the terms of the settlement, by September 2, 2014, Zwerner is to fully pay the United States the 50% FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively.
Analytically, this is a substantial concession by the Government.  It is two years of penalties where the jury awarded 3 years (in effect awarded because it found 3 years of willful failures).  Since the jury verdict was not likely to be overturned, one might infer that the substantial concession by the Government recognizes some risk with respect to the Excessive Fines issue.  That is an inference, however, and there may be other factors that caused the Government to reach this settlement.

30 comments:

  1. GlobalCapitalismJune 6, 2014 at 5:02 PM

    Very dissapointing that neither point 1. 2. or 3. were addressed so I guess money talked and DOJ offered a "discount" otherwise I do not see this to be an amicable settlement/deal for Mr. Zwerner

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  2. If the IRS can threaten the world with FATCA while honoring national origin discrimination against Americans in violation of US law, as is being done, then the IRS can also switch to residency-based taxation for the purpose of helping America to become a respected international trading partner.


    It's simply a matter of if the US wishes to rise or fall. I'd prefer for America to rise, but stateside Americans seem to prefer America's collapse.

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  3. US policy towards US expats only get's worse, as US history shows.

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  4. Basically, it boils down to the fact that the US government discovered a new means of financing another war by emptying the accounts of old dudes that didn't want anyone to know that they put their taxed savings in a bank account.

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  5. GlobalCapitalismJune 7, 2014 at 5:48 AM

    2009 OVDP
    2011 OVDI
    2012 OVDP
    A closing agreement (Form 906) are subject only to revocation if in error regarding material facts (or under duress and intimidation) but is still a binding contract between the Service and the taxpayer and I think JAT mentioned that before that this was upheld by the Supreme Court. It is another story of course if the IRS were to "voluntarily reimburse" former taxpayers through a refund because of new facts under the 2014 program.

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  6. GlobalCapitalismJune 7, 2014 at 6:00 AM

    Year
    50% Penalty
    Tax due and owing on unreported interest
    Ratio of tax to penalty


    2004
    $723,762
    $27,711
    3.8%


    2005
    $745,209
    $26,084
    3.5%


    2006
    $772,838
    $26,290
    3.4%

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  7. GlobalCapitalismJune 7, 2014 at 6:29 AM

    As I stated in my above comment I am pretty sure that the DOJ came down quite substantially from the $2.5mio figure probably even very close to the $1.5mio original max. account balance figure to reach such settlement - lets also keep in mind that Mr. Zwerners legal bills were probably in the $300K area . Now this is the american way from originally $3.3mio (DOJ) down to an estimated $1.5mio - unfortunately for the 10s of thousands of minnows that paid through the 906 settlemment agreement the excessive FBAR fines it would have been far better to have witnessed a precedent with regards to the Excessive Fines / Eighth Amendment issue. If this would have been the case the DOJ knew that 1000s of lawsuits would have arisen from that new precedent !!

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  8. GlobalCapitalismJune 7, 2014 at 6:44 AM

    Mr Koskinen if you read JATs blog please keep in mind that the median penalty paid under the 2009 OVDP by taxpayers who had the
    smallest accounts, and did not have legal representation, was nearly
    eight times the unpaid tax. It was also disproportionately greater than
    what the IRS extracted from those with the largest accounts; they paid a
    median of about three times the unpaid tax. Thus, the IRS has extracted
    the most extreme penalties from unrepresented taxpayers with small
    accounts who were voluntarily trying to correct a mistake

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  9. You make some good points, but you might be understating the discrepancy of penalty to deficient taxes..

    According to the GAO report on the 2009 OVDP, the lowest 10 percentile (Minnows) paid penalties of 129 times the additional taxes owed

    $13,320 was the penalty

    $103 was the additional tax owed over 5 years, 2003-2008



    So, by my calculations, that means the penalty was 129 times


    How, an Examiner, could in good conscious apply such penalties is an amazement to me, but they seem to have no moral or ethical qualms about what they are doing. They were happy to hammer the benign actor while penalizing the willful offender proportionally less. So it goes.


    Too bad Zwerner and DOJ settled, but I can understand it. DOJ doesn't like losing, and probably had some concerns along the lines of Jack's comments, and Zwerner at 87(?) probably wanted to spend his very few remaining LCUs doing something else. I do think we needed the Supremes to weigh in on these IRS practices and excessive penalties, but another opportunity lost.

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  10. Jack, thank you for keeping us posted on this.

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  11. We hope that tax payers currently in the program (under 2011 OVDI) will be able to take advantage of the program modifications.

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  12. GlobalCapitalismJune 9, 2014 at 12:44 PM

    The position of the IRS would have to be that the assessment of the penalty is part of a settlement agreement that the taxpayer and the IRS voluntarily entered into and absent fraud, etc., the taxpayer is bound by the terms of the agreement. Per Reg. Sec. 301.7121-1(c):
    A closing agreement which is approved within such time as may be stated in such agreement, or later agreed to, shall be final and conclusive, and,except upon a showing of fraud or malfeasance, or misrepresentation of a material fact—
    (1) The case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, and
    (2) In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in
    accordance therewith, shall not be annulled, modified, set aside, or disregarded.
    Courts have consistently upheld the finality of closing agreements as to the issues determined under the agreements, so even though the statement concerning the penalty has no statutory basis and the periods covered by the closing agreement are closed, the parties would in all probability be bound by the agreement.

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  13. GlobalCapitalism,


    I don't know that there is much that is beneficial value in speculating what might and might not happen in the changes the IRS will make.


    I will say that the closing agreement is meant to be final, so that neither party may disavow its terms later. However, what I am not sure of is whether a closing agreement can be changed by mutual agreement of the parties. The statute seems to require finality (see 7212), but again the problem being dealt with in the statute is one side trying to disavow an agreement for his or its unilateral advantage. I am not sure that the two parties cannot agree to some different disposition.


    In any event, let's wait and see what the proposed changes are and if and how they may be retroactively applied.


    Jack Townsend

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  14. You feel a LITTLE less sorry for him when you consider that the tax figures cited are just for 2004-2006, whereas he had unreported income from the account since the late 1960s.

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  15. GlobalCapitalismJune 11, 2014 at 7:00 AM

    Why Is The IRS Softening the Offshore Voluntary Compliance Program ?

    http://profwilliambyrnes.com/2014/06/11/why-is-the-irs-softening-the-offshore-voluntary-compliance-program/

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  16. A Notice of Settlement was filed on June 9, 2014 (document number 84 on the docket.) The settlement is for two years' penalties of 50%. I was unable to copy/paste from the court document but it's around $1,470,000 FBAR penalty, $42,000 interest since it was assessed, and $253,000 penalties on top of the above figures for a total of $1,765,000 in rough numbers (am doing the math in my head.

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  17. The settlement was around $1.5 million, just like the high balance of the account. In the unlikely scenario that he deposited a dollar (total) into the account, and was paid $1,499,999 interest, then the FBAR penalty would be 100% of income.

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  18. Few of us would have had the resources to spend the fees Mr. Zwerner must have paid fighting the IRS/DOJ.
    Few of us would have had the courage to fight a battle where the IRS wanted 200% of the highest balance, and where it ultimately settled for 100% (in rough figures.)
    Thank you Mr. Zwerner. You are my hero.

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  19. I believe that the intent behind black-boxing the optout process is twofold: 1) handling an optout is far more work than simply certifying an OVDI submission and 2) quite a few of those in OVDI would be better off opting out and the IRS is only after collecting as much money as possible and not asserting appropriate penalties.

    Also, after five years since the original OVDI, and years of the TAS (and many others) saying the same thing over and over again I am skeptical and suspicious, instead of hopeful. Past so-called relief such as the 5% penalty on inherited accounts had conditions that almost no one could meet -- the so-called "unicorn." It was a way to make it look like the IRS was doing something but there was little substance.

    Mr. Koskinen may finally do something but I will withhold judgement until I see it.

    I'll just add that 30,000 disclosures through OVDI is most likely a tiny fraction of accounts held by US persons. Those who joined OVDI are being punished, most of those who did a QD, GF may well get off scott-free.

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  20. Minor point; if unable to file taxes by April 15, you can get an automatic extension to October 15 (six months.) But as you point out the Form 114 (new FBAR) June 30 deadline is the looming deadline.

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  21. The IRS already has a foreign earned income exclusion. I have not read anywhere that it is being abused (i.e. being claimed by those not entitled to it, unlike the EIC.) So what would be the difficulty in modifying it to cover unearned income under a suitably high threshhold and not require those below that threshhold to file returns?

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  22. GlobalCapitalismJune 11, 2014 at 4:55 PM

    I have to pad myself on the back :-) .... boy was my hunch spot on !
    I should go and work for the other side...haha

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  23. GlobalCapitalismJune 11, 2014 at 5:11 PM

    ....Thank you Mr. Zwerner. You are my hero...... I second that and have to be patient for another case that addresses the Excessive Fines / Eighth Amendment issue !!

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  24. With due respect, I have nothing for or against Mr. Zwerner. I wish him the best. But, in my imagination of hero, he is not one. That says nothing bad about him. It simply is that hero is an exceptional category of human being. Abraham Lincoln is a hero. I haven't seen anything about Mr. Zwerner that meets that mark.

    Indeed, we do have to keep in mind that, on the facts presented, Mr. Zwerner was a tax cheat, wholly apart from the FBAR issue.

    Jack Townsend

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  25. The 5% penalty mitigation is indeed not just a "unicorn" but a two headed one in that it is very rare. I do know of one instance where the 5% was enforced but that case involved only one inherited account.
    Other than that, any deviation from any of the 4 conditions in FAQ52 ( 2011 OVDI) is grounds for rejection. Further, per our attorney, the IRS seem to have an unwritten yardstick " Was the taxpayer aware of the account?" Though awareness is not a factor in any FAQ stated anywhere. Mr Anonymous's posts seem to always be on the mark, so I agree, after SIX years ( 2009 to 2014) I'm skeptical. It's does'nt seem that the IRS cares what TAS says at all
    It would take something like the Tea party furor to have an effect on the IRS,


    1) Short of Congressional action (as if that is even an option) what will get the IRS to do the right thing?
    2) When is this new IRS policy expected to be announced ?


    Subjecting citizens to unreasonable penalties mainly because they are not US born is not a sustainable strategy.


    30K people in OVDI is absurdly low compared to 7M people with Overseas accounts


    I know of multiple QDs- not one has been questioned by the IRS, even after 3 years

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  26. GlobalCapitalismJune 12, 2014 at 2:24 AM

    Punishing a single taxpayer far beyond what is meted out to others undermines the consistency that the IRS claims to desire in its administration of this area. "Pour encourager les autres" was clearly the reason Mr. Zerner was picked as a target. This has been the Service's and DOJ's civil and criminal prosecution strategies for as long as I can remember. Pick somebody who has been a very bad boy, make an example of him, then apply the "terrorem" to everybody else. There are only about 2600-2700 criminal tax prosecutions a year, they clearly don't have the resources to do many more, so this is the strategy they pretty much have to follow. He is my Hero standing up to the "Beast" and imo. leaving this case behind him not as the looser.

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  27. On the QDs ... given the workload the IRS has just with OVDI it is unlikely that the IRS will be able to do much about most of them. On the other hand, given the glacial pace at which the IRS moves, not having been questioned for 3 years does not necessarily mean the QD will never be questioned; keep in mind the 6 year FBAR SOL.

    ReplyDelete
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  29. How often are tax accountants convicted of tax crimes? I feel like it would be easier for them to commit the crimes over any other citizen. I've thought about taking my taxes to an accountant just to see if I'm missing anything. http://www.jwesocpa.com/client_services.html

    ReplyDelete
  30. Swiss Bank
    Accounts. Nov. 2014.

    Is your monies safe
    in these accounts ---- definitely NOT.

    Would you get your
    money back if every body decided to withdraw all their accounts –
    NO WAY.

    Economic Experts
    say that there would only enough money to repay 50% of their clients.

    Are you going to be
    in the 50% --- that loose your money.-- Get it out NOW.

    2012 -- - June.
    -- Published in Anglo INFO .Geneva.--- USA Trust Fund Investors were
    sent false and fraudulent documents by Pictet Bank.Switzerland. in
    order to collect large fees. ( Like MADOFF) ---Even after the SEC in
    the USA uncovered the fraud Pictet continued to charge fees and drain
    whatever was left in these accounts. Estimated that $90,000,000
    million lost in this Pictet Ponzi scheme.

    2012 - - - July.
    -- De – Spiegel. -- states – Pictet Bank uses a letterbox
    company in

    Panama
    and a tax loophole involving investments in London to gain

    German
    millionaires as clients.



    2012
    - - - August ---- German Opposition Leader accuses Swiss Banks of
    "organised crime."

    All
    the fines that crooked Swiss banks have incurred in the last few
    years exceeds £75.Billion.

    It
    is also calculated that the secrecy " agreements" with
    regards to tax evation by their clients will cost the banks another
    £450 Billion.( paid out of your monies.)

    The
    banks are panicking --- the are quickly restructuring their banks
    ---- from partnerships --

    to
    " LIMITED COMPANIES." ----- this will probably mean that
    in the future --- they could

    pay
    you only 10% of your monies " if you are one of the lucky ones"
    ---- and it be legal.

    Google
    ---- The Crimes of ---- Pictet & Cie Bank.

    ReplyDelete

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