Interesting Offshore Account Malpractice Opinion Denying Summary Judgment (4/1/17; 4/6/17)

In Miksic v. Boeckerman Grafstrom Mayer, LLC, 2017 U.S. Dist. LEXIS 46906 (D MN 2017), here, court opens with an short summary of the case:

The Internal Revenue Service ("IRS") assessed substantial taxes, monetary penalties, and interest against Plaintiff Boris Miksic for his failure to file U.S. tax forms during tax years 2005 to 2010, and not disclosing his interests in and income from foreign trusts, businesses, and bank accounts. Miksic filed this accounting malpractice action alleging those errors were due to negligent tax preparation by Defendants Boeckermann Graftstrom Mayer LLC, formerly known as Johnson, West & Co. P.L.C., Boeckermann Graftstrom Mayer, P.A., and Johnson West & Co. P.L.C. (collectively "Defendants"). Miksic also contends that as a result of Defendants' negligence, he changed accountants and retained legal counsel to respond to the IRS audit and to bring this action.

In the opinion, the court (i) denies the accounting firm's motion for summary judgment in major part, (ii) denies the accounting firm's attempt to exclude or limit the plaintiff's expert witness, and (iii) granted the accounting firm's summary judgment on the Form 5471 penalties that had been abated by the IRS.

I deal with only some of the issues discussed in the opinion and with certain other matters.  I sometimes refer to the accounting firm as the accounting firm or the defendant.  I sometimes refer to the plaintiff as the plaintiff or the taxpayer.  For background, I offer also the following (without exhibits):

• The plaintiff's (taxpayer's) complaint, here.
• The defendant's (accounting firm's) answer, here.
• The defendant's memo in support of motion for summary judgment, here.
• The plaintiff's (taxpayer's) response, here.
• The defendant's (accounting firm's) reply, here.
• The docket entries in the case as of 3/31/17, here.

I offer the following brief background probably known to most readers but not covered in the opinion:  In 2009, the IRS began its most recent offshore account initiative with the UBS deferred prosecution agreement and then the first round of OVDP for U.S. persons having previously unreported offshore accounts.  The U.S. and offshore press reports of this initiative in 2009 and later years were significant, which is probably an understatement.  Those practicing in this are will recall that UBS U.S. customers received letters in 2009 regarding their accounts, notifying them the account information may be turned over to the IRS or DOJ and notifying them of the IRS OVDP.  Some of the UBS account holders' information had already been supplied to DOJ and thus were ineligible for OVDP.
Now back to the opinion. I present the facts I believe relevant to this blog in chronological order rather than in the order presented in the opinion; quotes from the opinion are indented; I also strip out record references for easier readability; I also include some facts in historical order which I obtained from the other documents linked above):

Miksic is a Croatian-American entrepreneur who lives in the United States. English is not his first language. Miksic owns several American and Croatian companies, including a Minnesota-based corporation named Cortec Corporation of which he is the sole shareholder, as well as a Croatian-based company named EcoCortec. Defendants provided accounting services for both Miksic and Cortec since 1988.  

[D]uring tax years 2005 to 2010, Defendants sent Miksic an engagement letter and a questionnaire. Miksic, however, signed Defendants' engagement letter only for tax year 2006. That engagement letter states: "[y]ou have the final responsibility for the income tax returns and, therefore, you should review them carefully before you sign them." The questionnaire attached to that letter asked, "[d]id you have any foreign income or pay any foreign taxes during the year?," and "[w]ere you a grantor or transferor for a foreign trust, have an interest in or a signature or other authority over a bank account, securities account, or other financial account in a foreign country?" Miksic asserts he did not return completed questionnaires for several of the tax years at issue.  

Instead, Miksic explained that he likely gave the questionnaire to Angie McGillivray, the Chief Financial Officer of Cortec. According to Miksic, McGillivray was "fully aware of all of the financial accounts in which [he] had an interest in the 2005 through 2010 timeframe," and he provided her with tax information to give to Defendants. Defendants counter that on three separate instances, one of Defendants' tax preparers (other than Parnell and Edmunds) inquired with McGillivray about Miksic's foreign financial accounts for tax years 2006, 2008, and 2010. However, Defendants maintain, McGillivray and Miksic did not disclose Miksic's foreign accounts which should have been reported on his FBARs. 

Miksic, on the contrary, asserts that Defendants did not follow up with him regarding his blank questionnaires, that Parnell and Edmunds never asked Miksic about foreign accounts, that Defendants' tax return software defaulted to an inaccurate statement of Miksic's foreign interests, and — notwithstanding that Defendants filed an FBAR for Miksic in 2006 and indicated on Miksic's 2008 and 2009 tax returns that he had foreign accounts — Defendants failed to file FBARS in the tax years at issue succeeding 2006 Miksic also contends that Defendants knew about Miksic's ownership interest in EcoCortec — which needed to be disclosed on Miksic's Form 5471 - but that Defendants failed to file that form for tax years 2007 to 2009.n3 Lastly, Miksic argues Defendants never inquired whether he owned a foreign trust and that Miksic did not know his interest in and distributions from a Lichtenstein foundation required filing Forms 3520 and 3520A in tax years 2005 through 2008.
   n3 The IRS, however, ultimately abated the $60,000 it initially assessed in penalties for Miksic's late Form 5471 filing. 

Although not indicated in the opinion, the complaint states in recounting what is called the Parnell Affidavit that Parnell (one of the accountants) was not aware that Miksic "had any accounts at UBS until late 2009 or early 2010 when he supplied our firm with notices he had received from UBS A.G. dated March 27, 2009 and November 24, 2009, concerning the possible existence of a foreign account."  Parnell then arranged to send the notices fot Miksic's attorney.  [JAT Note: There is no indication why Miksic did not join the OVDP in response to the letter, but it may be that he was in the early disclosures made by UBS and thus would have been denied entry into OVDP because he was already known to the IRS/DOJ.]

In March 2010, the IRS notified Cortec that its federal return had been selected for examination. As a result of that examination, the IRS notified Miksic that he failed to file various forms pertaining to his foreign interests, including (1) Form 5471 ("Information Return of a U.S. Person With Respect to Certain Foreign Corporations"),; (2) Form 3520 ("Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts"); (3) Form 3520 A ("Annual Information Return of Foreign Trust With a U.S. Owner"); and (4) Form TD F 90-22.1 ("Report of Foreign Bank and Financial Accounts") (hereinafter "FBAR") (collectively the "Delinquent Forms"). Miksic alleges that the IRS assessed substantial monetary penalties, interest, and taxes as a result of Miksic's failure to file the Delinquent Forms between tax years 2005 to 2010.2 Miksic asserts he may recover those amounts as damages, as well as costs, fees, and expenses to change accountants and retain legal counsel to respond to the IRS audit and to bring this action.

According to the complaint (Parnell affidavit), in 2013, Parnell met with IRS CI agents serving a grand jury subpoena and explained the failure to file FBARs after 2006 because the employee preparing the 2006 FBAR left the firm shortly thereafter and the "2006 FBAR had not been archived in our firm's electronic filing system and, thus, was overlooked in years after 2006."  Parnell also stated that he had never asked about foreign accounts.  This affidavit was apparently prepared incident to the grand jury investigation, apparently to ward it off.  The complaint says that the Parnell affidavit "admitted negligence."  There was a separate and similar affidavit by another accounting firm representative, Edmunds.

According to Miksic's memo in opposition to the motion for summary judgment:  "To date, the IRS has not brought criminal charges against Miksic."  (That is oddly worded, with no inference that criminal charges may be forthcoming; however, given the time that has passed since 2013, I suspect that the criminal investigation is over and there will be no charges.)

Finally,  according to a chart in Miksic's response to the motion for summary judgment (pp. 5&6), the penalties the IRS assessed are as follows:

               

Form year	FBAR Penalty	5471, 3520, 3520A Penalties
2005	152,188	38,026
2006	175,805	51,313
2007	477,448	121,394
2008	356,119	378,214
2009	135,438	20,356
2010	107,864
Total	1,404,862	609,303

Comments on the spreadsheet:

1. the penalties in the third column are not broken down.  It appears, however, the $60,000 of Form 5471 penalties were abated per footnote 3 in the opinon
2. the FBAR penalties appear to be willful penalties and were asserted for 6 years.  (See comments below)

Addendum on 4/4/17:  As noted in comment 4 below, there was some confusion in my original posting as to the date of assessment of the FBAR penalties.  The plaintiff's spreadsheet suggested October 5, 2011, but the defendants' memo says specifically that it was March 26, 2015 which seems much more likely (except that there is some question as to why years earlier than 2008 were assessed since there is a six-year statute of limitations for civil FBAR penalties, although, I suppose, the penalty could have been based on omissions from the delinquent FBARs or amended FBAR filed in 2014).  At any rate, the defendants' memo indicates (p. 17) (record citations and footnotes omitted; in the paragraph, Packman was Miksic's attorney engaged after the audit started in 2011):

On March 26, 2015, after Packman and Miksic made Miksic's FBAR filings, the IRS first assessed "willfulness" penalties. In assessing these penalties, the IRS noted that when its agents questioned Miksic about "why FBARs were not filed, Miksic stated that he did not disclose the bank accounts to his tax preparers because he was not asked about them." Even more, the IRS further found that each of the FBARs filed by Packman and Miksic did not include all the foreign bank accounts that Miksic had a financial interest in, or ownership or other authority over. Additionally, the IRS determined that Miksic knew about his FBAR filing requirements based on his earlier 2006 FBAR filing. As a result, the IRS assessed "willfulness" penalties against Miksic for not filing complete and timely FBARs for tax years 2005 through 2010. On May 26, 2015, Miksic appealed and asked for abatement of FBAR penalties. The IRS has still not decided Miksic's appeal. 

JAT Comments (Note that I have made substantial additions and changes as of 4/4/17 11am EST):

1.  Income tax penalties are, oddly I thought, not part of the claim for damages.  Since the IRS found willfulness for 6 years on the FBARs, one inference would be that it would assert the civil fraud penalty or at least the accuracy related penalty.  (I have not found that the assertion of willfulness for FBAR penalty purposes is always accompanied with an assertion of the civil fraud penalty for income tax purposes.)  So, I wondered what, if  anything happened to the income tax side discussion of which is omitted from the papers I reviewed.  I found the following Tax Court stipulated decision, here, that indicates that income taxes were determined but no penalties (not even the accuracy related penalty which apparently was the only penalty asserted).  (Addendum 4/6/17:  it is not clear that the early years would have been open absent fraud, so it is possible that the settlement was that the Court would determine the tax amounts which will permit the IRS to assess those amounts with interest (with, for any otherwise closed year, would imply fraud) and the IRS would forego any of the penalties.  I have settled cases where the IRS gave up the penalties in order to get the tax for an otherwise closed year, which meant that neither side felt it they had a clear winner on the fraud issue.)

2.  The assertion of 6 years FBAR willful penalty is notable.  I don't recall that I have seen a 6 year FBAR penalty assertion.  The civil FBAR penalty statute of limitations is 6 years and, usually, one or two years will pass during which the taxpayer will be in compliance for the recent years, so that 4 or fewer years will be open on the FBAR penalties.

3.  Readers will recall that, in May 2015, the IRS announced penalty guidance that generally limits the willful FBAR penalty to a single amount of 50% of this high amount in the accounts during the period of the open statute of limitations.  See New IRS FBAR Penalty Guidance (Federal Tax Crimes Blog 5/29/15; 6/1/15; 6/10/16), here.  Before that date, as I understand it the IRS had asserted multi-year penalties, most prominently in the Zwerner case.  I collect at the end of this blog various earlier key blog entries on that aspect of the Zwerner case.  As I understand it from the defendants' memo (see quote above), the IRS may be considering a post-assessment appeal of the FBAR willful penalty.  If that is correct, the case might be settled for a single 50% FBAR penalty.  On the other hand, according to defendants' memo (p. 37), the delinquent and amended FBARs filed by Miksic in April 2014, long after prominent offshore account counsel had taken over, omitted some foreign accounts.

4.  The IRS would have the burden of proving the FBAR willful penalties and would have had to file suit 2 years from the date of their assessment.   I had initially posted that the FBAR assessment date was October 5, 2011 based on my understanding of a chart in plaintiff's memo (p. 5).  However, a commenter (Counsel1) indicated that the assessments were made on March 26, 2015.  (See defendants' memo p. 17.)  In any event, there is no indication that such a suit was filed (I just checked Pacer for the district of Minnesota).  (I suppose that while appeals office consideration is pending, Miksic might have given a consent to extend that two-year statute of limitations.)

5.  Note that Miksic did file a timely FBAR for 2006.  The presence of an FBAR penalty for 2006 suggests that he omitted certain accounts (perhaps the UBS?) and that the IRS determined that omission was willful.  By analogy to the income tax crimes area, the willful omission in a return is a felony (under either 7201 or 7206(1)) whereas willful failure to file is a penalty; one can infer that a person simply not filing the FBAR could more easily avoid a finding of willfulness than could a person who files and omits material accounts.  And, the fact that he did file the noncompliant 2006 FBAR showed willfulness for that year and, by extrapolation, for years after 2006.

6.  Miksic apparently either failed to file FBARs or filed noncompliant FBARs even after receiving the notice from UBS in 2009.  I infer that because he had FBAR willful penalties for 2009 and 2010, which were due and, if filed, presumably filed on or before June 30, 2010 and June 30, 2011, with the latter date just 4 months from the date the IRS began its willful investigation and after Miksic already has an attorney on the matter.  I would have thought the attorney would have been orchestrating and ensuring compliance from the time he was brought on, which was least by the time the accountant sent the UBS notices to Miksic's attorney in late 2009 or early 2010.  That Miksic would have remained FBAR noncompliant after that date seems to be truly incredible and probably contributed to the IRS's decision to impose six years of FBAR willful penalties.  And, it is not readily apparent to me how Miksic can blame his accountants for the 2009 and 2010 FBAR penalties when he must have personally known of his obligation to file.

7.  [JAT Comment omitted because of information considered subsequently.]

8.  This case is a good object lesson here for preparers.  I do not prepare these forms (income tax, FBAR or any other) for clients.  But, I think that a good practice would be for the preparer to insist upon a fully completed Organizer.  I know that is often difficult, but it is probably a good checklist item for preparers and red-flags should go up if there is not a good reason that the organizer is not returned fully completed.

Key Zwerner case blog entries on multi-year FBAR willful penalties (in reverse chronological order):

• Zwerner Case Settles Without Decision on Excessive Fines Issue (Federal Tax Crimes Blog 6/6/14; Updated 6/12/14), here.
• Zwerner Jury Verdict -- FBAR Willfulness for 3 Years (Federal Tax Crimes Blog 5/29/14), here.
• Zwerner Rises to Defense Against Multiple FBAR Penalties (Federal Tax Crimes Blog 9/28/13), here.
• U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (Federal Tax Crimes Blog 6/14/13), here.