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.