U.S. taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to analyze and seek advice regarding the most appropriate methods of coming into compliance with their U.S. filing and reporting obligations. Many are pursuing participation in the current IRS offshore voluntary disclosure program (the OVDP, which began in 2012 – modeled after similar programs in 2009 and 2011).
Taxpayers participating in the ongoing IRS OVDP[i] generally agree to file amended returns and file Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1), commonly referred to as the “FBAR”, for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years.
The IRS OVDP is ongoing and does not have a stated expiration date but it can be terminated by the IRS at any time either entirely or as to specific classes of taxpayers.
INCOME TAX REPORTING. Citizens and residents of the United States who have income in any one calendar year in excess of a threshold amount (“U.S. taxpayers”) are obligated to file a U.S. Individual Income Tax Return Form 1040 (“Form 1040”), for that calendar year with the IRS. Form 1040 requires U.S taxpayers to report their income from any source, regardless of whether the source of their income is inside or outside the United States.
In addition, on Schedule B of Form 1040, the filer must indicate whether “at any time during [the relevant calendar year]” the filer had “an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account.” If the U.S. taxpayer answers that question in the affirmative, then the U.S. taxpayer must indicate the name of the particular country in which the account is located.
BSA FILING REQUIREMENTS. Under the Bank Secrecy Act, U.S. taxpayers who have a financial interest in, or signature authority over, a financial account in a foreign country with an aggregate value of more than $10,000 at any time during a particular calendar year are required to file an FBAR. The FBAR for any calendar year is required to be filed on or before June 30 of the following calendar year.
In general, the FBAR requires that the U.S. taxpayer filing the form identify the financial institution with which the financial account is held, the type of account (bank, securities or other), the account number, and the maximum value of the account during the calendar year for which the FBAR is being filed.
Taxpayers comply with their U.S. filing requirements by both noting the account on their income tax return and by filing the FBAR. Civil penalties for willful failure to comply with the FBAR reporting requirements of 31 U.S.C. § 5314 can be imposed under 31 U.S.C. § 5321(a) (5). For violations involving the willful failure to report the existence of an interest in a foreign account, the maximum amount of the penalty that may be assessed under Section 5321(a) (5) is the greater of $100,000 or 50 percent of the balance in an unreported foreign account, per year, for up to six tax years.
“Willfulness” generally requires the government prove the failure to file was as a result of a “voluntary, conscious and intentional” act by the taxpayer. Taxpayers should carefully review the recent court decisions in United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) on the issue of determining “willfulness” for assertion of the more significant “willful” FBAR penalties (of up to 50% of the account balance, per year).
Although the underlying facts in Williams and McBride were not the best, the courts might not lightly view those with considerable financial resources who fail to inquire about their potential reporting requirements associated with various interests in foreign financial accounts. The IRS Internal Revenue Manual suggests that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.”
An “undeclared account” is a financial account maintained outside the United States and beneficially owned by a U.S. taxpayer, but that is not disclosed to the IRS on Schedule B of Form 1040, Form 8938 or on an FBAR, and any income generated in the account was not reported to the IRS on Form 1040.
U.S.A. vs. CARL R. ZWERNER. On June 11, 2013, the U.S. government filed a Complaint to collect multiple 50% civil FBAR penalties in the aggregate amount of $3,488,609.33 previously assessed against Carl R. Zwerner of Coral Gables, Florida for his alleged failure to timely report his financial interest in a foreign bank account, as required by 31 U.S.C. § 5314 and its implementing regulations[ii]. According to the Zwerner Complaint, from 2004 through 2007, Mr. Zwerner, a U.S. citizen, had a financial interest in an account at ABN AMRO Bank in Switzerland (hereinafter, “the Swiss bank account”).
The Zwerner Complaint alleges that the balance of the Swiss bank account from 2004-2007 was at all times greater than $10,000 and that, as such, on or before June 30 of each succeeding year, Mr. Zwerner was required to file an FBAR reporting his financial interest in the Swiss bank account. Accordingly, the government assessed penalties against Mr. Zwerner 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; and (d) 2007 – $845,527 assessed on August 10, 2011.
In Zwerner, the government assessed civil FBAR penalties equivalent to 50% of the highest account balance for each of tax year 2004, 2005, 2006, and 2007, aggregating $3,488,609.33 for an account that appears to have had a high balance of $1,691,054 during the relevant time period!
A Motion for Summary Judgment filed on behalf of the U.S. government is pending in the Zwerner matter. Depending on a decision regarding this Motion, the jury trial in Zwerner is scheduled to commence during the two-week trial period beginning May 19, 2014.
THE EXCESSIVE FINES CLAUSE. To many, pursuing multiple year, maximum 50% penalties following submission of amended returns and delinquent FBARs appears punitive. The Excessive Fines Clause of the Eighth Amendment and relevant Supreme Court case law support a conclusion to the effect that a civil penalty or forfeiture is unconstitutional if the penalty or forfeiture is at least in part “punishment” and such punishment is grossly disproportionate to the conduct which the penalty is designed to punish. The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality – the amount of the penalty must bear some relationship to the gravity of the offense that it is designed to punish.[iii]
U.S.A. vs. APPROXIMATELY $12,000,000 IN UNITED STATES CURRENCY[iv]. In a matter completely unrelated to Zwerner, on April 8, 2014, the U.S. government filed a Complaint seeking forfeiture of $12,234,646.79 in United States Currency (hereafter, the “Defendant Currency”). Just when many though the Zwerner matter set the civil high bar for what might possibly go wrong with respect to an undisclosed interest in a foreign financial account, along comes U.S.A. vs. Approximately $12,000,000 in United States Currency[v] displaying yet another powerful tool in the U.S. governments international enforcement arsenal.
The Defendant Currency was previously held in two accounts at a bank located in Zurich, Switzerland. These Swiss bank accounts were nominally held in the names of entities but the Complaint alleges that the assets in the accounts were, in fact, beneficially owned by U.S. citizens (the “Taxpayer”).
The forfeiture Complaint alleges that from 2003 till sometime in 2013, the Taxpayer and the Taxpayer’s father concealed the existence of the Swiss bank accounts and the income earned in these accounts (the “Undeclared Accounts”) from the IRS and that, accordingly, the Defendant Currency is therefore subject to forfeiture pursuant to Title 18, United States Code, Section 981(a)(1)(A). In February 2014, the Defendant Currency was apparently voluntarily transferred from a Swiss bank to an IRS seized asset account, located in Manhattan, New York. Perhaps the repatriation of these funds into an IRS seized asset account part of some larger overall resolution of a matter involving the Taxpayer? Perhaps not . . . time will tell.
The Complaint alleges that, Edgar Paltzer, an attorney in Switzerland who also operated as a financial intermediary, created various nominee entities under the laws of the British Virgin Islands, Lichtenstein and Panama to assist the Taxpayer and the Taxpayer’s father in ensuring that the Undeclared Accounts at the Swiss banks remained hidden from U.S. authorities.
On or about April 16, 2013, Mr. Paltzer was indicted by a federal grand jury in the Southern District of New York for conspiring to defraud the United States and the IRS, and to commit offenses against the United States – violations of Title 26, United States Code, Sections 7206(1) and 7201.
On or about August 28, 2013, Mr. Paltzer pled guilty to one count of conspiring with certain U.S. taxpayers and others to defraud the IRS of taxes due and owing and to evade file false tax returns. Many believe that Mr. Paltzer is cooperating with the U.S. authorities.
APPLICABLE FORFEITURE STATUTES. Title 18, United States Code, § 981(a)(1)(A) subjects to forfeiture “[a]ny property real or personal involved in a transaction or attempted transaction in violation of . . section 1956, 1957 . . . of this title, or any property traceable to such property.”
Title 18, United States Code, § 1956(a)(2) provides: “Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States- (A) with the intent to promote the carrying on of specified unlawful activity; [shall be guilty of money laundering].”
Title 18, United States Code, § 1956(h) provides: “Any person who conspires to commit any offense defined in this section or section 1957 shall be subject to the same penalties as those prescribed for the offense the commission of which was the object of the conspiracy.”
FORFEITURE OF $12,234,646.79 TO THE UNITED STATES. As alleged in the forfeiture Complaint[vi], years ago the Taxpayer transferred funds from inside the United States to Switzerland in order to defraud the IRS of taxes due and owing relating to the funds held in Taxpayer’s undeclared accounts in Switzerland. By reason of the foregoing, the U.S. government alleges that the Defendant Currency – $12,234,646.79 – is subject to forfeiture pursuant to Title 18, United States Code, Section 981(a)(1)(A).
An order approving forfeiture of the $12,234,646.79 to the U.S. government would not preclude the ability of the government to separately and additionally pursue income taxes, penalties and interest under the Internal Revenue Code[vii] nor would it preclude assertion of FBAR penalties for the willful failure to comply with the reporting requirements of 31 U.S.C. §§ 5314 and 5321(a)(5) of up to 50 percent of the balance in the Undeclared Accounts, per year, for up to six tax years.
THE WAY FORWARD. Time will tell whether the government begins a pattern of pursuing non-compliant U.S. taxpayers using mail and wire fraud related forfeiture statutes. The perception of fairness (or unfairness) in the process can have a significant impact on the decisions of millions of other U.S. taxpayers presently contemplating whether to come into compliance with their filing and reporting requirements.
If every tax evasion case is also deemed to include a mail/wire fraud violation, taxpayers moving funds on or offshore to accomplish the evasion might well be faced with allegations that the transfer was done “with the intent to promote the carrying on of a specified unlawful activity . . .” subjecting the entire proceeds to forfeiture.[viii]
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.
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 cannot ignore the potential impact associated with the manner in which those who voluntarily comply, even if in a somewhat awkward fashion (but before any contacts by the government), are treated.
The decision whether to participate in the ongoing IRS OVDP as opposed to possibly pursuing some other method of coming into compliance must take into account all relevant facts and circumstances as well as the possibility of expansive IRS discretion to perform examinations over a lengthy period of time outside the OVDP. Long-term residents of the U.S. might be deemed to have a higher degree of knowledge and might be treated differently than long-term non-residents of the U.S.
Certainly, all taxpayers are anything but equally culpable with respect to issues relating to the filing and reporting requirements involving foreign financial accounts. Overall, IRS examinations of taxpayers outside the confines of the OVDP have progressed in a somewhat reasonable manner. The fairness in the resolution often depends on the actual facts involved. However, the government continues to assert that those who are discovered disclosing offshore accounts outside of the OVDP risk more significant civil penalties, depending on the facts and circumstances of their cases.
Those who continue to have undeclared interests in foreign financial accounts and assets should immediately consult experienced, competent professionals. In each situation, the actual facts and circumstances 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.
Only one thing is certain, waiting to come into compliance is definitely not a viable option . . . .
[ii] See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013).
[iii] The standard the Court must use to decide this question is whether the penalties are “grossly disproportional to the gravity of a defendant’s offense.” United States v. Bajakajian, 524 U.S. 321, 333 (1998).
[iv] See U.S. v. Approximately $12,000,000 in United States Currency, 14-CV-2460 (SDNY, April 8, 2014).
[vii] Title 26, United States Code
[viii] But see Department of Justice, Tax Division Directive No. 145 “RESTRAINT, SEIZURE AND FORFEITURE POLICY IN CRIMINAL TAX AND TAX-RELATED INVESTIGATIONS AND PROSECUTIONS” (January 30, 2014), Delegation of Authority, “8. . . . I hereby delegate to the United States Attorney the authority to apply to the district court for an order to restrain and/or seize personal property for forfeiture arising from a criminal tax and/or tax-related investigation or prosecution when said personal property is restrained or seized pursuant to a provision of Title 18, except that: (a) No personal property shall be seized for forfeiture in a tax and/or tax-related investigation if the personal property consists entirely of legal source income and the only criminal activity associated with the personal property is that unpaid taxes remain due and owing on the income.” and Ft. 4 “The forfeiture laws should not be used to seize and forfeit personal property such as wages, salaries, and compensation for services rendered that is lawfully earned and whose only relationship to criminal conduct is the unpaid tax due and owing on the income. Title 18 fraud statutes such as wire fraud and mail fraud cannot be used to convert a traditional Title 26 legal source income tax case into a fraud offense even if the IRS is deemed to be the victim of tax fraud.”