Posted by: evanjdavis | June 28, 2017

DAVID SLAYS AN FBAR GOLIATH: PRO SE TAXPAYER WINS MOTION TO DISMISS DOJ’S COMPLAINT by Evan J. Davis

A dual-national (U.S. and Canadian) citizen who lives in Canada found a warm reception in federal district court in Seattle, in the person of Judge James Robart. In the process, taxpayer Jeffrey Pomerantz demonstrated that the Department of Justice can’t rely on assumptions and innuendo to show that a taxpayer willfully failed to file IRS forms disclosing foreign bank accounts.

Many but not all taxpayers know that, if they have foreign bank accounts that together contain more than $10,000, then they have to: (1) check the “yes” box in response to the foreign-accounts question on their tax return; and (2) file the Treasury Department’s foreign bank account reporting form (“FBAR form”).

The Department of Justice (“DOJ”) filed a civil complaint in federal district court in Seattle to collect civil FBAR penalties for Pomerantz’s supposedly willful failure to file an FBAR form.  The difference between willful and non-willful FBAR penalties can be massive: willful violations usually result in a penalty of 50% of the highest balance in the unreported accounts; non-willful violations are penalized at up to $10,000 per occurrence.

In its complaint, the government alleged that Pomerantz had set up a shell company in the Turks and Caicos, failed to report interest on his Forms 1040 from Canadian and Swiss bank accounts that held more than $ 1 million, and failed to file FBAR forms for the same accounts. To make matters worse, Pomerantz would not agree to service of the complaint by mail and refused to disclose his home address to the DOJ lawyer, leading Judge Robart to authorize DOJ to serve Pomerantz by international mail.  Looking like you are dodging service tends to annoy judges, which is particularly bad when the judge is later called on to rule on your motion to dismiss.

Pomerantz represented himself, and argued in his motion to dismiss that DOJ made a handful of false allegations and had failed to allege enough facts in its complaint to show that his failure to file an FBAR form was willful instead of merely inadvertent. The government argued, in response, that Pomerantz’s course of conduct – setting up a Turks and Caicos company, opening bank accounts in that company’s name, and not reporting his foreign interest income on his tax return – was, according to case law, sufficient to assume Pomerantz’s related failure to file an FBAR was willful instead of a mistake.

Judge Robert didn’t buy the government’s argument. Instead, the judge dissected the government’s allegations and found they didn’t support the government’s conclusions.  In particular, Judge Robart noted that the Canadian bank accounts were in Pomerantz’s own name, not the Turks and Caicos company, and the accounts pre-dated the company, so his setting up the company wasn’t evidence that Pomerantz was trying to hide his pre-existing accounts.  Judge Robert also rejected the government’s vague “willful blindness” argument – that acts such as checking the foreign-accounts box “no” on a tax return is sufficient to show the taxpayer knew or deliberately avoided knowing about FBAR filing – by pointing out the government didn’t allege Pomerantz checked the box “no” or alleged any similar facts.  The fact that Pomerantz failed to report his income is a far cry from his having checked “no” on a tax form, and Judge Robart recognized this distinction and found for Pomerantz on this point as well.   The judge granted the motion to dismiss the FBAR penalties for the Canadian accounts, a major win for Pomerantz.

The decision wasn’t all good news for Pomerantz, at least for now. Judge Robart did agree with the government that it was permissible to assume, giving the government the benefit of the doubt in a motion to dismiss, that Pomerantz’s setting up Swiss accounts in the name of the Turks and Caicos shell company was evidence that Pomerantz intended to evade the FBAR filing requirement. (However, Pomerantz’s motion to dismiss suggests the government may have difficulty proving it was a shell company.)  The judge denied the motion to dismiss the FBAR penalty on the Swiss account.

In sum, the judge wanted to dismiss just the FBAR penalty associated with the Canadian accounts and allow the Swiss accounts penalty to proceed. However, because the FBAR penalty assessed did not distinguish between the Canadian and Swiss accounts, the judge dismissed the entire case and invited the government to re-assess the FBAR penalty related just to the Swiss accounts and come back another day.

Having just learned from a government attorney that the IRS appears to be sending more civil FBAR penalty collection cases to DOJ to file suits against the taxpayers, this case will be useful to remind both DOJ and judges that merely having a foreign account isn’t sufficient proof of willful failure to file an FBAR. The government can’t rely on innuendo and logical leaps to make its case, and it’s worth fighting back when they try to do so.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).


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