March 20, 2017
U.S. District Court Upholds Multiple Willful FBAR Penalties Against Taxpayer
In a case that has raised eyebrows in the tax community, a jury in the Southern District of Florida has sustained the IRS’s assessment of multiple willful FBAR penalties against an American business man and bank director.
Carl Zwerner, an 87 year-old man born in Yonkers, New York, started a company in the 1960s that bought and sold glass. He would eventually retire from this company and become the director of the First State Bank of the Florida Keys.
In the late 1960s, Zwerner set up the Bond Foundation, based in Liechtenstein, which had an account at a bank in Switzerland. The accounts were started using money that Zwerner earned from overseas clients. Zwerner instructed these clients to hold on to the money while he set up his foundation. According to Zwerner, he wanted to have “an investment vehicle in Europe.” The board members of the foundation were employees of the law firm that set it up. The Swiss bank that held the account would eventually be acquired by ABN AMRO Bank.
Over the years, Zwerner went to Europe “a couple of times a year” and took money to deposit into the account, each time in increments smaller than $10,000. Beginning in the 1990s, he would withdraw funds to use while on vacation in Europe.
In 2006, the account was transferred to a new entity called the Livella Foundation. According to Zwerner, he was advised to do this in order to hide the funds from his wife during a divorce.
From the time that the account was established until 2008, Zwerner neither reported income earned overseas nor reported the existence of the offshore account through the filing of an FBAR. He cites his lack of tax expertise and argues that he was unaware of the requirements, because the account was started with money earned overseas, additional deposits were made using U.S. income that he had already paid taxes on, and there was no FBAR requirement at the time that the account was opened.
Until 2008, Zwerner had only told his wife and children about the account. According to him, the account was “as far as I was concerned my secret account. And I didn’t mention it to anybody. Even my lawyer of 40 years.” He instructed the bank not to send him records pertaining to the account, because “it was a secret account. A private account.”
In 1985, Zwerner started using CPA Robert Bloomfield to prepare his tax returns. Each year, Bloomfield sent him a questionnaire to complete. One of the questions was, “Did you have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” Zwerner answered “No.” It also asked whether he had any foreign income during the year, and he again answered “No.”
According to Zwerner, he did not realize at the time that his answers to these questions were inaccurate. Since he did not have signature authority over the account and his financial interest was indirect, he believed that he had answered the questions honestly.
In 2008, Zwerner hired an attorney, who recommended that he make a voluntary disclosure to the IRS. The attorney met with IRS Criminal Investigations and discussed the facts related to Zwerner’s account, though it is unclear if the attorney ever disclosed his identity to the IRS, which is a prerequisite to making a voluntary disclosure. After being told that a criminal investigation would not be initiated, Zwerner filed FBARs and amended tax returns for 2001-2007. These filings would trigger an audit in 2010.
In 2009 and 2011, the IRS offered taxpayers with previously undisclosed offshore accounts the opportunity to come forward through the Offshore Voluntary Disclosure Initiative (OVDI), which allowed them to disclose their accounts and pay a civil penalty of 20% (2009) or 25% (2011), with immunity from criminal prosecution. In 2012, the program was reopened on an indefinite basis, with the penalty rate raised to 27.5%.
When Zwerner sought to join the 2011 OVDI, he was told that he was ineligible due to his ongoing audit. Eventually, the IRS determined that he had willfully failed to file FBARs for 2004-2007 and assessed a penalty of 50% of the year-end balance in the account – the maximum allowed by law – for each of the years at issue. This resulted in a total penalty amount of $3,090,000. By comparison, the amount of taxes owed for those same years totaled $80,025. A jury has upheld the assessments for 2004-2006, but held that the government failed to establish willfulness for 2007.
Zwerner is fighting the penalty, arguing that it violates the Eighth Amendment’s prohibition against excessive fines, that the penalties are unfair in light of the IRS’s treatment of other similarly situated taxpayers, and that he should not be punished for attempting to come into compliance prior to the IRS’s offering of the OVDI.
According to a March 23, 2009, memo from Linda Stiff, IRS Deputy Commissioner for Services and Enforcement, the capped single-year penalty of 20% provided by the 2009 OVDI would apply to all voluntary disclosures “that have been submitted to the IRS and are not yet resolved.” Zwerner contends that he made his voluntary disclosure in 2008 and should therefore be covered by this memorandum. The IRS argues that Zwerner’s counsel never disclosed his identity to the IRS and is treating his case as a “quiet disclosure,” which is where a taxpayer filed FBARs and amended returns without participating in the voluntary disclosure process.
Zwerner also accuses the Revenue Agent of “unrealistic aggression” and misconduct, specifically accusing him of falsely promising to reduce penalties in exchange for Zwerner signing a letter admitting that he “had [an] FBAR filing requirement and he should have reported the account.”
According to Zwerner, IRS policy has been to impose only a single-year penalty, even in cases where the taxpayer does not voluntarily disclose and is criminally convicted. In an American Bar Association Tax Section meeting on December 13, 2013, John McDougal of the IRS Office of Chief Counsel stated, “you’ re not seeing heavy-duty FBAR penalties…where the taxpayer is cooperative.” The Revenue Agent concedes that Zwerner was cooperative during the audit.
The IRS denies that the amount of the penalties violates the Excessive Fines clause of the Eighth Amendment and that Congress’s determinations about what range of fines are appropriate are entitled great deference. They cite several facts as evidence of willfulness, including Zwerner’s admission that he considered the account “my secret account” and concealed its existence even from his own attorneys and CPAs, his representation to his CPA on questionnaires that he did not have foreign accounts, and the fact that the account was held in the name of a foundation he created.
The case is concerning for taxpayers who have made or are considering making quiet disclosures, and it leaves tax professionals wondering if the IRS is adopting a more aggressive stance on FBAR penalties. While the jury has ruled on the crucial issue of willfulness, the court has reserved other issues, including the Eighth Amendment issue, for a later hearing.