Wednesday, August 17, 2022

Government Files FBAR Collection Suit for FBAR Willful Penalties Aggregating $23,102,381 (Plus Interest and Costs) (8/17/22; 8/18/22)

In United States v. Nadji (D. Colo. Case No. 1:22-cv-02070), CL dkt entries here, the Government filed an FBAR collection complaint on 8/15/22. The complaint is here. The complaint requests (¶ 55, p. 8) judgment

for $23,102,381 in willful FBAR penalties, $2,631,772.60 in accrued and assessed late payment penalties, and $877,257.53 of interest, plus costs of collection, pursuant to 31 U.S.C. § 3717, as  of  August 11, 2022. The United States is entitled to recover $26,611,411.13, plus interest, penalties, and costs accruing from August 11, 2022.

According to the complaint:

1. The amounts are significant.

2. Nadji was born in Iran in 1944. While educated in part in the U.S., he “moved back to the United States and became a naturalized U.S. citizen in 1992.”

3. Nadji was wealthy, deriving his wealth from an Iranian engineering company he owned 100%. Nadji paid no tax on income from the company, either in the U.S. or Iran.

4. He had interests in four foreign bank accounts from 2009 to 2012.  

5. During those years, his U.S. returns were prepared by a tax preparer in Colorado. However, he did not disclose his foreign accounts to the tax preparer.

6. In 2014, he entered the 2014 OVDI, disclosing the four accounts and filing delinquent FBARS for 2008-2012. The complaint has a table listing the amounts Nadji reported on the FBARS for the high balances in each account for the years and aggregating the high balances for each year. 

7. The IRS removed Nadji from OVDI because he disagreed with the final closing package. I infer that his disagreement was, at least in part, with the OVDI penalty amount (which I think was 27.5% for the high year in the covered period). I presume further that he filed delinquent income tax returns and paid the resulting taxes, penalties and interest.

8. Based on the amounts reported in the FBARs, the IRS calculated the willful penalties for each year. According to my calculations, the IRS calculated the penalty amount for each year based on the method described in IRM (06-24-2021), Penalty for Willful FBAR Violations – Calculation, here. I think that is not materially different from the corresponding prior IRM provision when Nadji’s penalty was assessed on 8/27/20.

9. I think this calculation was the same as the one that the courts in Schwarzbaum declared arbitrary and capricious because each year’s penalty is based on the statutory reference point of high balance on the reference date (the FBAR reporting date). See 31 U.S.C. 5321(a)(5)(C) & (D), here; and the principal blog entry 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (Federal Tax Crimes Blog 1/26/22), here. The statute says the penalty base to which the 50 percent applies is “the balance in the account at the time of the violation,” rather than the high amounts during the open willful years. I just note that for readers interested in that issue. 

10. Readers should note that, where more than one year is subject to the willful penalties,  the IRS calculation methodology always produces FBAR penalties for each penalty year less than the 50% maximum penalty, at least when there is no significant variation between the high amounts for each year and the amount on the reporting date; where, however, the allocation could produce an amount in excess of the maximum for the amount on the reporting date, the excess is re-allocated to other years where there is room for a penalty that does not exceed the statutory maximum for the years; in Nadji, apparently, there was no year where there was an excess.

11. Added 8/18/22 4:00 pm:  The IRM methodology for allocating the FBAR penalty amount determined on the single year high amount (subject to limitations based on the amount permitted under the statute for each year) will result in a penalty never exceeding the amount of the penalty permitted for each year based on the amount in the account on the reporting date.  In other words, the methodology will never be more than permitted by the statute for each year and will often, even usually, be less than that.  The statute permits a less than maximum penalty in each willful open year, thus the IRS allocation methodology will often, even usually, be less than the IRS could assert in each year or in the aggregate for all years.  I just don't know how that produces an abuse of the discretion conferred to the agency (the IRS by delegation from FinCEN).

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