Government FBAR Willful Penalty Collection Suit and Issuance of Letters Rogatory (8/30/18)

In United States v. Katholos (W.D. N.Y. 17-cv-00531), docket entries here, the Government is suing Katholos for the FBAR willful penalty which remains unpaid (including penalties, statutory additions, interest and late payment penalties) of $4,474,320.29.  The complaint is here; the answer is here.

According to the complaint:

• "As a result of the [UBS] John Doe summons, the United States received information regarding Ms. Katholos' Foreign Bank Account." (Complaint paragraph 7)
• The facts alleged in the complaint seem to be a common fact pattern; the facts are different but the pattern is similar.  Several entities were established.
• The complaint lists a number of transfers from UBS to other financial institutions.  (Complaint par. 25.)
• The Government demands a jury. (See last paragraph.)

The answer has the following affirmative defenses:

• Katholos did not act willfully.  Among the allegations in support of this defense:

50. The Complaint’s case for willfulness appears to rest on three major factual allegations, all of which are either incorrect or misleading. First, the Government alleges that Marika was on “inquiry notice” about FBAR reporting because of a 2007 federal income tax return. At the time of the filing of the Complaint, however, the Government possessed information demonstrating that Marika did not sign the 2007 federal income tax return that allegedly put her on “inquiry notice” regarding her FBAR obligations. Further demonstrating that she did not review this return, the 2007 return filed for Marika contains numerous, obvious errors: Marika’s name is misspelled and her address is incorrectly given in Elma, New York. 

51. Marika’s history of filing U.S. returns since her move to Greece in 1994 demonstrates that she was not fully aware of the relevant U.S. tax rules for reporting income overseas. Prior to 2009, federal tax returns were filed for Marika to report her interests in family assets that generated income in the U.S., such as annuities or rental income from real estate. When there was no U.S. income in a particular year, returns generally were not filed. In many or most cases prior to early 2009, Marika did not see or sign federal tax returns filed for her. 

52. Second, the Internal Revenue Service’s (“IRS’s”) interview with Marika’s return preparer Charles Koelemeyer, conducted more than four years after the relevant events, only demonstrates that he knew of FBAR reporting requirements well after the time period at issue. It does not demonstrate that he ever advised Marika about these requirements—or even that he ever spoke to her directly about taxes or U.S. reporting—prior to January 2009. Instead, once Marika learned of the relevant U.S. reporting requirements, she attempted to make a voluntary disclosure to the IRS in February 2009, months before the start of the formal Offshore Voluntary Disclosure Program. Marika’s effort was rejected as untimely because, on information and belief, UBS had
delivered her name to the IRS within one week prior to her disclosure. 

53. Finally, the Government alleges that Swiss bankers took actions, including signing forms, to conceal the relevant accounts from U.S. authorities. These are simply not allegations that Marika acted willfully: the allegations describe actions taken by Swiss bankers, not by her and her family. Instead, the long history of Marika and her family in Greece demonstrates that the UBS accounts were not set up for a U.S. tax-avoidance purpose. Marika moved to Greece in 1994, shortly after college, and has been a homemaker and caretaker of her children since that time. Marika’s father Theodore Katholos (now deceased) (“Mr. Katholos”) immigrated to the U.S. in the mid-1960s with a second-grade education in Greece, and became successful in the painting and contracting business in Buffalo, New York through hard work and determination, not through formal schooling. Mr. Katholos was largely unable to read or write in English. He was very successful in business, particularly given his background, but he lacked sophistication and training in tax matters. In the 1980s, Mr. Katholos seriously considered emigrating back to Greece, and so did Marika. When Mr. Katholos retired in 1997, he had intended to move back to Greece permanently.

• The FBAR penalty is procedurally defective for not following or possibly not following IRM requirements.

60. * * *  Based on the incomplete correspondence and notices that Marika and her counsel have received, it appears that the IRS may not have followed its own procedures in making the assessment of the FBAR penalty. As referenced above, the notices and reports that Marika received contain little to no reasoning supporting a willful FBAR penalty, also rendering the assessment procedurally defective. Because the IRS did not validly assess the FBAR penalty before the expiration of the relevant statute of limitations, the Government cannot reduce this penalty to judgment.

• The Penalty is barred by the relevant statute of limitations.

62. There is no grant of statutory authority for extension of this statutory deadline. In the Complaint, paragraph 38, the Government alleges that the FBAR penalty for 2007 was  assessed against Marika on June 15, 2015, after the expiration of the six-year statute of limitations. Accordingly, the Government is barred from collecting the FBAR penalty against Marika for the 2007 tax year because the assessment was made after the expiration of the relevant statute of limitations under 31 U.S.C. § 5321(b)(1).

[JAT Note: I presume she must have executed a consent to extend at some stage because of the way this is worded and the defendant is arguing that the consent was not valid because there is no statutory authority for the consent; true enough, but the Government position is that standard waiver principles apply and that its FBAR consent should do the trick.]

• Excessive Fine under the Eighth Amendment.

There is no assertion of the limitation sustained in Colliot and Wadhan, but this complain was filed in August 2017.

The only interesting development that I saw was the court's issuance of letters Rogatory (see Dkt Entries 25, here, and 26, here).  Readers who are not familiar with letters rogatory might want to review those letters.  They are quite long (22 pages each) and have a lot of case specific information (including the nature of the claims and defenses and the facts related to them).