Saturday, September 28, 2013

Zwerner Rises to Defense Against Multiple FBAR Penalties (9/28/13)

Readers will recall that, in an unexpected development, Treasury assessed and DOJ Tax sued to collect the 50% FBAR penalty against Carl Zwerner for four years.  Up to that point, based on the information publicly available (principally from offshore account plea convictions), Treasury had only assessed a single FBAR of 50% for the highest year.  Thus, it was of considerable interest -- and angst -- to taxpayers and practitioners that Treasury would assert 4 years of FBAR penalties.  I discuss this in my prior blog on the filing of the case.  U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (Federal Tax Crimes Blog 6/14/13), here.

Zwerner has filed his answer, here, which states his side of the story, albeit in summary fashion.

Some key points from the answer:

1.  At the key time  of his reputed voluntary disclosure in 2008, Zwerner was represented by "a tax attorney, Dennis Kleinfeld, of the then reputable law firm Rothstein Rosenfeldt & Adler, P.A. (“RRA”)."  Notice the words "then reputable."  See Wikipedia entry on Scott W. Rothstein here, and paragraph 5 of the compliant quoted below.  Mr. Kleinfield's current law firm bio is here.  I understand that Mr. Kleinfeld referred Zwerner to Mark Nurik who represented Zwerner before the IRS.

2.  Here is a key allegation in the answer (pp. 3 and 4):
4. On February 10, 2009, the RRA lawyers met with IRS Criminal Investigation Division (“CID”) to go over the voluntary disclosure. On February 17, 2009, IRS CID issued a letter stating that no criminal action would take place, but the identity of the client had not been disclosed at the February 10, 2009 meeting. Nurik then advised Zwerner that his voluntary disclosure had occurred and he should file the amended returns for tax years 2004 – 2006. As instructed by his lawyers in March 2009, Zwerner immediately filed the amended tax returns and the FBARs for 2004, 2005, and 2006, and paid the tax and interest owing. 
As narrated, Zwerner's prior tax counsel did not complete the voluntary disclosure by identifying Zwerner to CI and making a full disclousure.  Instead, he told Zwerner to do a quiet disclosure by filing amended returns.  The implication and allegation is that Zwerner had no reason to question whether his tax counsel was giving good advice and that Zwerner reasonably believed and took affirmative objective steps to implement a voluntary disclosure.

3.  The immediately succeeding paragraph perhaps explains the tax attorney's failure:
5. In December of 2009, he learned for the first time that RRA was not what he had been led to believe it was. At that time, the Department of Justice filed a criminal information against Scott Rothstein alleging that RRA constituted a criminal enterprise in a Racketeering Conspiracy. Rothstein, who is now serving a fifty year sentence pleaded guilty to participating in a $1.2 billion dollar Ponzi scheme. Promptly after these events, RRA filed for reorganization under Chapter 11 of the Bankruptcy Code, and, for all intents and purposes, disbanded. Until these revelations, Zwerner believed that he was being properly represented in his voluntary disclosure and that a voluntary disclosure had in fact occurred.  
6. Zwerner had hired and relied on what he believed was a professional tax attorney from a reputable law firm. Even though Zwerner still believes that Nurik is a fine and reputable attorney, he spent a large part of his time representing Mr. Rothstein.
4. The next paragraph explains what Zwerner expected from the "voluntary disclosure."  This "voluntary disclosure occurred before the special initiatives starting in May 2009 that both offered a form of criminal "amnesty" and potential caps on the penalty.  So, even if the "voluntary disclosure" were an effective voluntary disclosure under the old rules, Zwerner would have received no assurances as to the amount, if any, of the penalty relief he might expect.
7. Zwerner’s tax returns were not under audit at the time of his voluntary disclosure. He made the disclosure voluntarily. Even though there was no special program in place to mitigate penalties at the time of his initial, traditional n1 voluntary disclosure, Zwerner made those disclosures. As part of Zwerner’s traditional  voluntary disclosure, the IRS began an audit of Zwerner’s returns in 2010. In the course of that audit, Mr. Zwerner advised the agent of his prior voluntary disclosure. It appears that the agent conducted the audit, and then asserted FBAR penalties ignoring the facts and circumstances surrounding Zwerner’s voluntary disclosure and misinterpreting his statements about them.
   n1 The term “traditional voluntary disclosure” refers to the IRS Program of Voluntary Disclosure which was supplemented by the 2009 and subsequent “Capped Penalty” Programs.
8. Zwerner intended to enter into, and believed that he had entered into, the IRS’ traditional voluntary disclosure program, before any audit of his returns began, before any criminal investigation began, to the best of his knowledge, before any third party had reported the existence of the unreported account, and even prior to the launch of the official 2009 capped penalty Voluntary Disclosure Program (“2009 VDP”). In view of his voluntary disclosure, Zwerner should not have been placed in a worse position than those thousands of taxpayers that delayed their disclosures until they received letters from UBS telling them that their names would be disclosed. UBS provided over 4,000 names to the DOJ in 2009, and even though the DOJ had those names in hand the taxpayers were allowed to subsequently enter the 2009 Voluntary Disclosure Program and pay a capped penalty of 20%.
9. While Zwerner’s traditional voluntary disclosure audit was going on, the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”) began. It specifically allowed taxpayers who had made a voluntary disclosure under the prior rules to participate in the 2011 OVDI. Zwerner, made a timely application for the new 2011 OVDI. However, the IRS refused to allow Zwerner to participate in the 2011 OVDI because he was under audit, even though the audit did not begin before he made his traditional voluntary disclosure and even though the audit was part and parcel of his traditional voluntary disclosure.  
10. The inequity of refusing Zwerner participation in the 2011 OVDI is demonstrated by the fact that IRS CID admitted to Zwerner’s representatives that they reviewed the file and were not proceeding criminally and that his case would be processed on the civil side of the 2011 OVDI.
JAT Note:  The traditional voluntary disclosure program that Zwerner claimed he reasonably believed he entered only gave potential relief from IRS recommendation for criminal prosecution and DOJ Tax's traditional reluctance to prosecute someone who enters the IRS program.  (DOJ Tax has a voluntary disclosure program that parallels the traditional IRS voluntary disclosure program but DOJ Tax caveats that it is not bound by the IRS program.  At any rate, as that program was then designed, it offered no tax, penalty or interest relief to the taxpayer.  Only with the institution of OVDP 2009 was penalty mitigation offered and then only for offshore account noncompliance.

5. Zwerner then accuses the agent of errors, aggression,bias and just short of war crimes in asserting the multiple penalties.  Among the less allegations made are the following:
17. The agent in this case alleges that the FBAR penalty should apply because Zwerner “refused to join the Voluntary Disclosure Program because he was scared he may be subject to criminal penalty.” This statement is palpably and demonstrably untrue. In fact, the opposite occurred. Zwerner sought legal advice and made a voluntary disclosure before the 2009 VDP even began. Further, Zwerner entered the 2011 OVDI as explained above
18. The agent in this case alleges that the FBAR penalty should apply because taxpayer’s questionnaire or “organizer” submitted to his paid preparer showed Zwerner’s denial of having any offshore income and bank accounts. However, one of the questions in the organizer referred to by the agent was not even answered by Zwerner. The other question that the agent is referring to relates to ownership in a foreign account which could easily have been misinterpreted because this case involves an account that was not in the name of Zwerner.
6.  Zwerner claims that with respect to the income tax civil fraud penalty:
23. The fraud penalty was abated in the U.S. Tax Court for 2006 and at IRS Appeals for 2004 and 2005. The IRS did not even assert the fraud penalty for 2007.
JAT Note:  I am surprised that, if the IRS believes it cannot or should not prevail on civil fraud for income tax purposes it can prove willfulness for FBAR purposes.  In this regard, however, note that, for purposes of proving civil fraud, the IRS must prove some portion of the deficiency is due to fraud and moreover must prove fraud by clear and convincing evidence.  The cases appear to hold that the Government must prove willfulness -- the FBAR counterpart to civil fraud (or criminal fraud for that matter) only by a preponderance of the evidence.

7.  And there is more:
29. In this case, Zwerner is not willful or a “bad actor.” Zwerner has not engaged in criminal conduct, he does not have prior FBAR penalty assessments and he has fully cooperated with the IRS. 
30. In fact, Zwerner had the intention to come forward, did come forward of his own volition and made sure that all of his tax filings were corrected. He voluntarily filed amended returns and FBARs and paid all tax owed. Zwerner believed he had made a voluntary disclosure in reliance upon the advice of his tax lawyer. Furthermore, Zwerner timely entered the 2011 OVDI. As supported by the Advocate’s position, Zwerner is not a “bad actor” and should not be subject to willful FBAR penalties. 
8.  Prayer for Relief:.  From all this melange of allegations (including some I did not quote or advert to), Zwerner claims a plethora of equitable and legal defenses and demands a jury trial  I wonder whether a jury trial is a good thing unless he hopes it will be populated by tea party jurors.

Also see Chuck Rettig, Zwerner Answers DoJ Efforts To Collect Multiple 50 Percent Civil FBAR Penalties (Forbes 9/26/13), here.


  1. Jack YOU still suck but ZWERNER - YOU rock !

  2. Good job with the post!! thank you for the informative share!

  3. good question GC and I would agree with you on that he has a few good facts on his side. I think he would get his monster FBAR penalty reduced significantly .

  4. Jack, you said "I focus here on Chuck's discussion of Zwerner's answer." I don't know who Chuck is or where his discussion might be found.

  5. On August 9, 2013 the judge ordered mediation. The mediation conference is to take place with Samuel C. Ullman on Jan. 28, 2014 in Ft. Lauderdale, Fla. and the parties are to submit a report within seven days of the mediation conference. (I got this info from the public court record and have no inside knowledge of the case.) I am disappointed that there likely won't be new developments soon. Also, Mr. Ullman specializes in tax matters. In spite of the IRS being involved, FBAR compliance is a banking law, not a tax code law.

  6. My only concern is that I believe that DOJ Tax would have picked a carefully selected case in which they thought all the facts, considered in context, might justify the 4 FBAR willful penalties. So, I think there are still some facts and considerations that we don't know. Not that I think the penalty will be affirmed; just that DOJ would not pick an obvious loser in its first case to assert multiple FBAR penalties and that conceptually on a static amount would mean an FBAR penalty of 200%.

  7. Sorry, I had initially prepared a summary of Chuck Rettig's article on the subject but then decided to pull the answer and essentially do my own blog rather than just respond to Chuck's article. So, I have taken out that reference, but I do cite Chuck's article at the end of the blog.

    Chuck's article is here:

    Jack Townsend

  8. Yes you would think so but I have my doubts now.
    Imo. I think mediation will already provide a settlement and it will be sealed which means we will not know any details. I still think that Zwerners chances are > 50% to win a jury trial and have his multiple FBAR penalties reduced significantly.


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