Friday, June 14, 2013

U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (6/14/13)

In United States v. Zwerner (SD FL No. 13-cv-22082-CMA), the IRS is suing to obtain judgment on an FBAR willful penalty assessment for 4 years.  The civil Complaint is here.  Here is a cut and paste of paragraph 18:
18. Due to Zwerner’s willful failure to file FBARs reporting his financial interest in the Swiss bank account during 2004-2007, a delegate of the Secretary of the Treasury of the United States assessed penalties against him under 31 U.S.C. § 5321(a)(5) in the amount of 50% of the balance of his account at the time of the violations for each year, as follows:
(a) 2004 – $723,762, assessed on June 21, 2011.
(b) 2005 – $745,209, assessed on August 10, 2011.
(c) 2006 – $772,838, assessed on August 10, 2011.
(d) 2007 – $845,527 assessed on August 10, 2011.
Many practitioners, myself included, have operated on the assumption that the worst FBAR violation cases would draw a civil penalty not exceeding the 50% high year, which is the penalty required in the criminal cases that have been prosecuted and convicted.  Indeed, I have heard even one prominent Government official say that the delta between the then 25% OVDI in lieu of penalty and the "worst case" FBAR penalty was 25% (on similar reason would be 22 1/2% based on the 27 1/2% in lieu of penalty).

And, my mea culpa, I was just this week ragging on an IRS manager about the worst case scenario the agent provided upon our request incident to considering opt out.  The computation sent by the agent was the 50% per year for six years (the civil statute of limitations).  While speaking with the manager on another issue, I kicked in on this issue by noting that providing that information of a risk of a 6-year 50% penalty was absolutely useless information since there was no possibility that the IRS would assert that multi-year penalty and indeed, from a practical perspective, the max would be 50% high year.  I argued that she should pass on to the powers that be that the IRS should not be promulgating useless, theoretical only information and that, if they provided any information, perhaps it could be something like that, in practice, they have not asserted more than 50%.  Even the latter limited information -- if true -- would be useful to taxpayers considering opt out because they could then bracket their situations with known cases of the 50% penalty -- i.e., in simplified analysis, I am only 50% as bad (no entities, etc.) as that 50% penalized case, so my worst willful case would be 25% (the same as the OVDI in  lieu of penalty), with a possibility of less on opt out.  (This is rough and ready and needs to be fine-tuned, but that type of analysis should be taken on opt out if we can determine the high end of the spectrum.)

At any rate, here is the civil suit that the IRS may exceed a single year willful penalty -- and not just exceed but substantially exceed -- ratcheting up to 4 years.  On a static amount that should be reported on the FBAR (say $1,000,000 per year for six years), the maximum theoretical penalty would be $3,000,000, or 300%.

I don't mean to scare the community of taxpayers and practitioners.  Indeed, I suspect that there is a back story to the assertion of such an aggressive penalty that, hopefully, will come out and permit some reasonable bracketing by persons considering an opt out.

Finally, of course, there is the question of whether this aggressive assertion of the penalty will be sustained either on the facts (not yet known) or because of  Constitutional limitations.  Readers might click the link below for Excessive Fines Clause and look particularly at Steve Toscher's and Barbara Lubin's article on the issue discussed and linked at the Blog entry FBAR Penalties and Excessive Fines (Federal Tax Crimes Blog 3/5/10), here.

Addendum #1 6/14/13 7:50 PM:

I have heard some comment that this is another move to put fear into the community as a way of herding taxpayers into the OVDP 2012.  It will have the effect of doing that.  I think because of the "nuclear threat" it may have the effect of herding into the program people who should not be in OVDP 2012.  They will join because the IRS and DOJ Tax have made the nuclear threat and they are unable to asses whether they are the targets of the threat.  The reason -- the IRS and DOJ Tax are opaque about to whom the threat should really apply.  Then, the second level of threat to which this nuclear bomb is tossed is those persons considering an opt out.  I have to believe that the IRS fully intended this to both herd taxpayers into the program and keep them in the penalty structure.  (The IRS and DOJ Tax could not have missed this as the effect of their actions.)  I have no doubt that many -- perhaps most -- should opt out after they have been herded (perhaps I should say forced and extorted) in.  But I also have no doubt that many of those who don't deserve the inside the program penalty structure on all noncompliant offshore assets should not be subject to the in lieu of 27 1/2% penalty.  Yet, the IRS will extract that penalty from them because the IRS has not been forthcoming about how they will apply the FBAR penalty if they opt out.  These taxpayers do not have the information necessary to make an informed decision, at least those taxpayers who do not have counsel with "inside" information about what the IRS is doing.  Shame on the IRS and DOJ Tax for being complicit in this.  I hope they will exercise some grace at some point and offer more guidance on when it is appropriate to join the program and when it is appropriate to opt out.  Until they do that, in my view, they are disserving both these taxpayers and as a result disserving the citizens of this country.

In the meantime, I hope that a court -- as did the Supreme Court in Bajakajian -- reject the application of draconian penalties.  But by that point, the IRS and DOJ Tax will have put good taxpayers through hell.  They have really screwed this one up.  That is just my opinion.

And, maybe that particular taxpayer deserved something really bad and onerous to happen to him that deserves radically different treatment than many taxpayers are entitled to.  We just don't know.  And the IRS and DOJ Tax so far aren't telling.  They are just threatening.

Addendum #2 6/15/13 8:34am:

I offer a few more details from the complaint:
  1. The bank involved was ABN AMRO Bank in Switzerland (Par. 7).
  2. "On or about October 13, 2008, Zwerner filed a delinquent FBAR reporting his financial interest in the Swiss bank account during 2007, along with an amended income tax return for 2007. On or about March 27, 2009, Zwerner filed amended income tax returns and delinquent FBARs for 2004, 2005, and 2006."  (Par. 11)
  3. Zwerner used entities and the nominal holder of the account of which he was the beneficial owner.  (Par. 13.)
  4. "In a letter dated August 9, 2010, Zwerner admitted to the IRS that he was aware that he should have reported both the existence of the account and the income he  earned from it." (Par. 16.)

The admission, of course, could be pretty damning.  It is unclear why Zwerner would have made the admission.

I don't think the Complaint gives us any idea why the IRS and DOJ Tax chose to exercise such fury against Zwerner.

I don't think that the IRS' real message here is to show forcefully that it was not just noising when it said that it disfavors quiet disclosures rather than joining OVDI.  Obviously, Zwerner's profile would have made him an good candidate for the program (in its various iterations), but he appears to have effected his quiet disclosure before the first round of OVDP.  Of course, once the program was first announced (I believe around May 2009), he could have then joined the program.  There is only the slightest of hint that he may have joined (see the admission he made, which is so cryptic on this point that perhaps it is not even a slight hint).  Other than the fact of having an noncompliant foreign bank account (a fact common to the universe of taxpayers with this concern), the only bad objective fact was his use of entities to obscure his ownership.  But, that fact has been present in virtually every case prosecuted that I am aware of.  (My spreadsheet indicates that only Dr. Ahuja may not have used entities).  And yet, every single one of them, so far as I am aware, got a single FBAR 50% penalty.  So it is not evident from the Complaint why the IRS and DOJ Tax exercised their fury against Zwerner.

I hope we will learn more soon in order to put this initiative in a proper perspective so that uncounseled and counseled taxpayers facing the decisions of whether to join OVDP and whether to opt out can make better informed decision

Addendum #3 6/15/13 4:00pm:

I received from a reader some indication that Mr. Zwerner may and likely is wealthy.  For example, he is reported to have given $5M to his alma mater in 2007. This information prompted me to ask whether wealth is part of the consideration for asserting multi-year willful penalties.

Consider this example:  Assume 2 taxpayers – A and B.  Both have foreign accounts and for all years the foreign accounts were $1,000,000 (static at all time; all income swept out to keep the $1,000,000 base).  They were both tax noncompliant and FBAR willful.  Hence, if all years were included, each would be subject to a $3,000,000 penalty.  A, however, is worth $100 million; B is worth $3 million.  Should their FBAR penalties be the same?  Should the IRS consider this wealth factor in determining the FBAR penalty?  Certainly, for A, a $3,000,000 FBAR penalty is not “punishing” in any material sense and will hardly deter any type of aggressive tax conduct in the future.  (I assume that there will be little opportunity left in the offshore bank area.)  But, for B, the $3,000,000 penalty would be devastating and would punish B far more in a proportionality sense than A and would certainly be far more of a deterrent to B than A.  Would equal FBAR penalties be fair?  Would equal FBAR penalties be lawful?  In this regard, would it even be fair to limit B and A’s penalty to a single year 50% willful penalty (or should B always get a lesser willful FBAR penalty than A)?

Addendum #4 6/18/13 8:15am:

I recommend to readers Chuck Rettig's Forbes article on the Zwerner..  Charles Rettig, DoJ Files Action to Collect Multiple 50 Percent Civil FBAR Penalties in U.S.A. vs. Zwerner (Forbes 6/17/13), here.  Excerpts:
Time will tell the extent, if any, to which the filing in Zwerner may impact others who similarly attempt to come into compliance outside the OVDP. The government will not and can not pursue such actions against everyone. Many factors likely come into play in the exercise of government discretion on which matters to pursue, or not. 
Given the complexities of the Internal Revenue Code, other relevant statutes and life in general, many of the indiscretions associated with an income tax return or FBAR are anything but willful or intentional and definitely not fraudulent in nature. It is also likely that long-term residents of the U.S. might be deemed to have a higher degree of knowledge and will be treated differently than long-term non-residents of the U.S. In each situation, the actual facts and circumstances of each matter must be carefully reviewed before anyone can determine the appropriate method of coming into compliance with the various filing and reporting requirements associated with offshore financial accounts. 
* * * * 
Zwerner may represent more than an effort to collect civil FBAR penalties. Worldwide respect for the integrity of the U.S. system of tax administration depends, at least in part, upon how the government continues to treat those who pursue some type of timely and truthful voluntary compliance with the filing and reporting requirements associated with their foreign financial accounts. A system of tax administration based in large part on voluntary compliance can not ignore the potential impact associated with the manner in which those who voluntarily comply, even if in a somewhat tardy fashion (but before any contacts by the government), are treated.

Addendum #5 7/13/13 2:00pm:

Laura Saunders, When Are Tax Penalties Excessive? (Wall Street Journal 7/12/13), here (requires subscription).  Excerpts:
In a civil lawsuit that has attracted notice among tax experts, the government wants to collect nearly $3.5 million in penalties from a taxpayer who had a secret Swiss account, although the account balance was never higher than $1.7 million. * * * * 
* * * * 
Since 2009, the Justice Department has filed more than 75 criminal cases against U.S. taxpayers involving the alleged failure to declare offshore financial accounts. In many of them, prosecutors have sought a single penalty of 50% of the account's maximum balance as punishment for willful failure to file a foreign-account report. 
"As far as I know, the government has never asked for more than one 50% penalty in offshore-account cases," says Jack Townsend, a lawyer at Townsend & Jones in Houston who tracks federal tax-crime data. 
* * * * 
Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York who has handled hundreds of offshore -account cases, said he is aware of at least one other case in which government is seeking penalties larger than the account balance. "I expect we will see more," he says. Messrs. Neiman and Skarlatos say the Zwerner case raises constitutional issues. The Eighth Amendment prohibits "excessive fines." 
* * * * 
Mr. Skarlatos said this case resembles the Zwerner case because the violation by Mr. Bajakajian involved the failure to file an information form with the government. Still, Mr. Bajakajian "didn't break any other laws, such as not paying taxes," Mr. Skarlatos adds.

Addendum on 8/17/13 at 5:08pm:

The following is good article on this subject, but it too is inconclusive as to why the IRS/DOJ chose to ramp up the penalties in Zwerner's case.  DoJ Files Action to Collect Multiple 50% Civil FBAR Penalties in U.S.A. vs. Zwerner (Tax Controversy (Civil & Criminal) Report 6/15/13), here.  This article is on a blog sponsored by the law firm of Hochman, Salkin, Rettig, Toscher & Perez, P.C, here, which has a strong team in tax controversy matters, including specifically offshore account civil and criminal matters. Readers might also want to review that firm's publications web site, here.


  1. Or perhaps this will result in a Eighth Amendment case against the Federal Government and they lose the FBAR stick through a excessive fines ruling. I keep saying this, but I am more than elated to no longer be a United States citizen. Your country has gone nuts.

  2. Jack, you said, "These taxpayers do not have the information necessary to make an
    informed decision, at least those taxpayers who do not have counsel with
    "inside" information about what the IRS is doing."

    Often the "inside" information comes from a former IRS employee being hired to work in the private sector, and this person would be able to provide useful guidelines. But I think that in the case of optouts, the process has a high degree of subjectivity and that too much depends on the individual agent, so that even for similarly situated taxpayers the results are unpredictable. I base this on what I have heard from lawyers, a TAS employee, and and IRS employee.

  3. Many probably entered OVDI with the intention of opting out. By scaring people away from opting out, the unintended consequence is that the IRS may very well scare people from entering OVDI in the first place.

  4. As I understand it, the agent's opt out recommendations must go through a committee whose function, among others, is to provide overall consistency. Each case must be decided on its own facts, but at least the committee would provide some overall consistency. It is not just the individual agent and his or her manager.

    Jack Townsend

  5. The first assessment was made on 6/21/2011 (for 2004 FBAR) and he has not paid any of the assessments, so the 2-year statute of limitations when the DOJ could sue was about to run out. There may have been attempts to settle before the lawsuit, but I don't know.

    He did have a lot of bad facts, per the complaint: "no" on Sch.B, didn't report the income on the original returns, didn't file FBAR, his accountant specifically asked him about foreign accounts and he answered no, the funds were in an entity and later tranfered to another entity. He admitted awareness of the requirements but it's not clear from the complaint whether the letter pointed to a date at which he became aware, i.e. he could have said he didn't know at the time.

    If he's quite wealthy it makes it more likely that he will fight the lawsuit and not settle out of court. Even if the DOJ gets exactly what it's asking for, I think taht the precedent wouldn't carry as much weight on someone without the same degree of wilfulness.

  6. Thanks for these comments. Some of the "bad" facts need to be contextualized. Virtually all of the opt outs who achieved good opt out results either answered the question no or, in some cases, did not answer the question at all. More context is required before that facts is bad enough to draw serious FBAR penalties. The specific Q&A between the accountant and the taxpayer summarized in the complaint could be bad depending upon the accountant's memory or, more likely, notes of the Q&A. Entity, particularly if it is a sham intended solely to hide the account, is a bad -- indeed very bad -- fact. (But to keep even the entity in context, virtually all of the criminal prosecutions have involved entities and, upon conviction, the FBAR willful penalty is agreed to be only for a single year. Your point about the letter is a very good one.

    On the wealth issue, I am going to write something about this later when I have time and have more precisely honed my thinking. However, if I were running a penalty program (or even designing one), I do think the size of the penalty relative to wealth is an important consideration. A one-year penalty for Mr. Zwerner might be nothing more than a nuisance to him. But, then, if that were the case, even a four-year penalty may a nuisance even at 4 times as much, so one would wonder why he would not just pay rather than engage in a public fight about it.

    I think this emphasizes to me that there is a lot we do not know about the IRS's and DOJ's insistence on a 4-year willful penalty at the maximum (keep in mind that willful penalties can be less than the maximum). I think there may be factors beyond those even hinted in the complaint that entered into that decision. For example, if the taxpayer were not forthcoming regarding his amended return or delinquent FBARs or tried to protect his enablers, that could cause the IRS to want to be more punitive. The FBAR penalty itself is something that is due based on the facts extant at the time of the violation and not those occurring later (e.g., by not cooperating in the audit or investigation), but those later facts could -- and I think should -- be considered in the mix for an appropriate penalty. And, wealth I think also should be considered in the mix as well.

    Jack Townsend

  7. Dr. Ahuja used no entities, funded accounts with post tax money, and even transferred funds directly from his US accounts (no subterfuge). And while his additional income was significant, it was only a very small portion of his US income.

    He was convicted of willful FBAR violation. This was for only one year (he was found not guilty for other years). However, this does not preclude facing civil FBAR violations fines for all those open years for which he was found not guilty (the government will automatically collect the civil FBAR violation for the year in which he was found guilty unless the conviction is overturned, which is unlikely).

    The point is that even without entities, courts can find a defendant guilty, even for the far higher criminal standard of proof.

    Jack -- do you know if the government has brought a civil case against Dr. Ahuja for FBAR violations for other years? Its possible that the SOL for some years has expired if the penalties were not assessed in time, but there should still be some years open for civil violations.

  8. An article in the July 12 Wall Street Journal
    mentions the Zwerner lawsuit and the excess fines (8th Amendment) issue, and quotes Jack Townsend.
    The article also mentions US vs. Bajakajian which addressed the 8th Amendment and resulted in a $20K fine, though in that case there was no tax loss, merely a failure to report a transaction.

  9. Your comment is a good one. But I think the thing to keep in mind is that Congress subjected tax violations to a different regime of punishment - criminal and civil penalties. Congress gave no indication that tax violations should be considered as enhancing the FBAR penalties.

    Let me use an example, say there was an account which had a high balance of $1,000,000 each year for 6 years on which the taxpayer earned net (in a low interest / profit environment) $30,000 per year and owed tax of $10,000 per year. So, the IRS can assess the tax and get a 20% penalty and perhaps even a 75% penalty. That would require tax of $60,000 (6 years) and even civil fraud penalty of $45,000, for a total of $105,000. Should that taxpayer be subject to 6 years of FBAR penalties because he did not pay the tax, particularly when he is being penalized to the full extent Congress provided for the tax nonpayment?

    So, I think when the proper analytics are done, Bajakajian will inform the decision as to whether the IRS overreached in this case. I think it did unless there is a back story that would indicate something further negative about the FBAR violation.

    Also, keep in mind that, in every one of these cases, the taxpayer has underpaid tax. Yet, for no reason that is readily apparent, it socks one guy with 4 years of 50% penalties, but does not do that to all the others (many others).

    Jack Townsend

  10. Jack, you said, "Should that taxpayer be subject to 6 years of FBAR penalties because he
    did not pay the tax, particularly when he is being penalized to the full
    extent Congress provided for the tax nonpayment?"

    Correct me if I misunderstood, but it seems both your quote and the procedure outlined in 4.26 of the IRM address situations in which the IRS found the tax and FBAR noncompliance on its own. I recall someplace in 4.26 it says that no FBAR penalty should be assessed if the taxes have been paid. It seems that the IRM is not making a distinction as to whether the taxes have been paid with the original returns or later through what would be considered qualified amended returns. I am thinking of the situation of many minnows who disclosed even though the IRS had no inkling of their past noncompliance, not those who had been informed that their bank was about to disclose their account information and simply joined OVDI just before the information was turned over.

  11. I don't understand your point. Let me rephrase. Are you saying that the minnows (however they would be defined) should not be subject to an FBAR penalty if they have filed amended income tax returns and thus, by the time any FBAR penalty would be imposed, they are tax compliant? How would such a rule only apply to minnow? Would that permit anyone to file amended returns and forego the OVDP process?

    Now, my point was simply that the punitive application of OVDP should be based on factors other than simply tax noncompliance. Take a situation where someone fails to pay $1,000,000 in tax in a scheme every bit as sophisticated and opaque -- indeed more sophisticated and opaque -- as an offshore account. Should that person get off lighter because he did not do it through an offshore account and thus run afoul of the FBAR filing requirement. Both should get the maximum income tax penalty that is applicable, but should the offshore account holder get a really punitive FBAR penalty? I am not arguing for no penalty. But I think the nature and extent of the FBAR violation, not the income tax violation should govern the penalty.

    Perhaps I have not thought this through as fully as I can and will think about it some more.

    Jack Townsend

  12. Jack, I wasn't really thinking about minnows, more about people who came forward on their own, unlike those who did so during the short time window after their bank notified them that it would turn over their information, but before the IRS had become privy to the information. It seems that they were the original target of OVDI. It seems to me that they (or should I say we) should be treated the same way as those filing a qualified amended return regarding domestic issues.

    The answer to FAQ 17 for the 2012 OVDI states that "The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns." Although I understand that the answer to a FAQ is not written as carefully as a law or even the IRM, the answer does not have a qualifier that there were no underreported tax liabilities on the original returns. The second requirement (not having previously been contacted) seems to be necessary in order to limit the "no penalty" to those who reported (it doesn't even say paid) their liabilities prior to being contacted.

    Finally, from a practical point of view, many (and perhaps most) of those entering OVDI had a minuscule chance of being discovered by the IRS and by choosing to impose draconian penalties on them the IRS has scared most with foreign accounts from coming into compliance.

  13. Anonymous:

    I will try to answer your question about FAQ 17. For readers easy reference, the FAQs are here:

    I think the context is important. The question to which the answer is given is: "I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts owned by my employer. May I come forward under this new program to correct this?" The question does not limit itself to the original return, but it does suggest that the taxable income was properly reported BEFORE the taxpayer discovered the requirement to file FBARs. Most of the time that would have been on the original return, but conceivably it could be an amended return filed before learning of the problem. The question does not implicate an amended return filed AFTER the taxpayer learns of the requirement to file FBARs. I don't think the question -- and hence the answer -- was intended to mean that taxpayers could fix the problem after clearly knowing about the FBAR delinquency by (i) filing amended returns which, of course, would qualify as QARs and (ii) then filing delinquent FBARs. Taxpayers, of course, can file QARs to avoid the accuracy related penalty (but not the civil fraud penalty) and file delinquent FBARs subject to such penalties as the IRS determines.

    Now, let's turn to the answer for more nuance. It is true that the FAQ is not specific as to the point I think you are raising -- i.e., whether a taxpayer, after learning of the IRS initiative, can or should be able to fix the problem by filing amended returns and delinquent FBARs, without any penalties. Since it is not specific, I suppose the IRS can choose its preferred interpretation and, in the context of the question, it is not obligated even under the FAQ to give complete penalty relief.

    I am certain in any event that the IRS interprets its program to deny penalty relief to persons who try to fix the problem with amended returns and delinquent FBARs without joining the program. Those persons are subject to the normal audit regimes -- which should produce no additional income tax beyond the tax reported on the amended returns and no accuracy related penalty on the original underreporting but which could produce (i) civil fraud penalties on the original income tax reporting (not protected by QAR) and the range of FBAR civil penalties. And, further, of course for those not joining the program for any reason, there is still the risk of criminal prosecution.

    I hope this addresses your concern.

    Jack Townsend

  14. In civil suits between private parties, sometimes the parties settle after the suit is filed and the amount of the settlement is not made public. Is it different since one of the parties is the US government, or is there certainty that the court will decide?

    And how long (very roughly) would it normally take for the court to decide?

  15. In the Bajakajian decision, one of the factors mentioned is that although he was attempting to transport over $300K in cash without declaring it, he was not engaged in tax evasion, money laundering, etc. This was one of the differences with other cases such as US v. Six Negotiable Checks in Various Denominations (389 F Supp 2d 813) in which the attempt to transport negotiable checks without declaring them appeared to be part of a scheme to evade taxes. The court also said that Mr. B's failure to file a report only resulted in the loss of information to the government.

    It seems that the question of how much harm is done by providing FBAR information late (anywhere from a couple of months after the June 30 deadline to years after the deadline in the case of OVDI participants.) In light of your comments Jack that "Congress gave no indication that tax violations should be considered in enhancing the FBAR penalties" just how strong an argument can the DOJ mount that failure to file the FBAR justifies such draconian penalties? In both the Bajakajian and "Six Negotiable Checks" cases the parties were caught by the government. In OVDI (or even quiet disclosure) the government has no inkling of the taxpayer's misconduct and the taxpayer is paying back taxes and associated interest/penalties. So the harm to the government comes from the fact that an FBAR form was filed years late.

    What could the government have done with a timely filed FBAR? It seems that FBAR filings are NOT used to check that any income from the accounts has been properly reported on tax returns. Instead, the information flow is that if the IRS is examining the taxpayer under Title 26 (the IRS code) it can query the Treasury for FBAR filings, according to an interview with a former IRS attorney (Bill Yates) in this interview:

    He states that it is for this reason that Form 8938 was created.

    "FBAR reporting is required pursuant Title 31, the Bank Secrecy Act.
    Because of this, IRS could not initiate an audit of a taxpayer based
    solely on an FBAR filing. The taxpayer being examined had to have an
    underlying Title 26 issue. Only with a Title 26 issue could IRS use
    account information found on an FBAR in furtherance of an audit or exam
    of the taxpayer. Hence, Congress gave IRS section 6038D, Title 26 of the
    Internal Revenue Code. In short, Congress gave IRS its own FBAR."

    Given these facts, I wonder how much use the FBAR really is to the government, how much harm is caused by someone filing an FBAR years after the deadline (particularly when this is done before the Treasury has any inkling that an FBAR should have been filed) and therefore how much of a penalty is really proportionate to the failure to file.

  16. Your comment is very thoughtful. I wish I had answers to the important question you raise of whether the punishment -- or the threat of punishment -- fits the crime.

    Jack Townsend

  17. On the court docket for the Zwerner case, there is a "Notice of Mediator Selection" and "Order Scheduling Mediation" both dated August 9, 2013. I don't know what this means. Will there not be a trial? Will the results not be public?

  18. Mediation has been popular for some time now. Mediation, unlike arbitration, does not impose a result but essentially tries to get the parties to settle by injecting a fresh, experienced, impartial person into the settlement process. Given the levels of review within the IRS and then DOJ Tax, I suspect that the taxpayer has already been presented the IRS's best offer and is not likely to be improved in any way. That is just a suspicion. I have no knowledge that such an offer was made or that it can't be materially improved (from the taxpayer's perspective).

    Now, whether, if there is a settlement (whether through mediation or otherwise), the results will become public is a different issue. Some settlements are achieved by dismissing the complaint with no public filing. Other settlements (such as in the Tax Court and in refund cases) will have a public judgment that states the results of the settlement (at least the bottom-line results the details of which should be discernible in Zwerner if stated by year). I don't know how it will be done in the Zwerner case if a settlement is achieved.

    Jack Townsend

  19. Jack, thanks for the reply.

    What I was hoping would come from Zwerner is a court case that says that when the facts are such-and-such, then such and such a penalty has been upheld by a court.

    It would really bother me if the results don't become public since this
    means the DOJ could sue for a large amount then settle for
    substantially less and thus continue to dissuade people from opting out
    because the results remain secret and there is no court precedent.

  20. Update: After mediation was ordered on Aug. 9, Mr. Zwerner filed an answer to the complaint on August 12. I have no inside information on the case but am only commenting on the answer, which is a public document.

    The facts appear not as bad as they seemed in the original complaint:

    In October 2008 he filed his 2007 return (I presume, under extension) and properly reported the foreign accounts on Sched B, the interest income, and filed an FBAR for 2007 at that time (of course Oct. 2008 is after the 6/30/2008 deadline.) He contends that the FBAR penalty should not apply since the income and account were properly reported on the timely 2007 return.

    His disclosure began in 10/2008, before the first OVDI even existed. He is being treated worse than the UBS customers who got a 20% penalty even though their data was about to be disclosed. If he had chisen to delay his disclosure he would have been subject to 20,25 or 27.5% maximum, not 200%.

    Even in criminal cases the government has capped the penalty at 50%.

    The legal firm he used initially was, to put it mildly, not what it seemed.

    After he initiated his disclosure he was audited and treated as if he had not already disclosed the accounts.

    The answer to the complaint states that Aug 9, 2010 letter was dictated by the IRS to Zwerner and, at most, it says that he knew of FBAR as of the date of that letter but NOT that he knew of FBAR previously.

    He was asked about foreign accounts on a tax organizer but he did not answer one of the questions and he states one of the questions was unclear, since the account was not in his name but that of a foundation.

    The use of a foundation was suggested by the bank to Mr. Z.

    (Like most of us!) his accounts consisted of legal source income, and he has no history of criminal or Bank Secrecy Act convictions or FBAR assessments.

    He mentions the recommendations in TAS public pronouncements.

    He raises an 8th Amendment defense, citing Bajakajian.

    He is represented by Edward A. Marod and Martin R Press of Gunster Yoakley & Stewart PA in Florida.

    (My comments:) Mr. Zwerner's answer addrsses many of the issues that have been addressed through past comments on this post. I am happy that someone with the resources to fight excessive penalties is doing so. Also, many have commented that the facts must be really bad for the government to seek a 200% willful penalty, but this does not appear to be the case.

  21. Anonymous,

    Thank you so much for your diligence and insight on this matter. I have not had time to digest it and will pull the pleading tomorrow. But, in the meantime, you have given us a lot of information to consider.

    Jack Townsend

  22. The original complaint is at

  23. I wonder whether Mr. Zwerner's attorneys have contacted the TAS. I would imagine the TAS is aware of this lawsuit, but do not know 1)whether TAS must wait to be contacted and 2) whether TAS can intervene in the mediation once the lawsuit has been filed.


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