US Citizen with UBS Swiss Account may Suffer Willful FBAR Penalty
The U.S. government (unfortunately) has been on a hot-streak lately with the enforcement of FBAR penalties. The IRS has been able to get Courts across the nation to issue summary judgment (or at least partial summary judgment) on the issue of FBAR penalties and willfulness.
- 1 UBS Swiss Account & Willfulness
- 2 Important Procedural Note
- 3 Magistrate Recommendation to Issue Summary Judgment
- 4 U.S. vs. Rum Case 8:17-cv-00826-MSS-AEP
- 5 U.S. Vs. Rum Complaint
- 6 The Court Recommends Granting the U.S. Summary Judgment
- 7 Court Magistrate Recommends Summary Judgment
- 8 Golding & Golding, Board Certified Tax Law Specialist
- 9 Interested in IRS Offshore Amnesty?
UBS Swiss Account & Willfulness
When the IRS issues willful penalties, and the taxpayer pays the penalty, that is essentially the end of the matter. But, if the Taxpayer does not pay the penalty, and the IRS gets the courts involved, then once the matter is reduced to judgment — the stakes are higher for the taxpayer.
Because if the IRS prevails, and the court issues judgment (or summary judgment) on willfulness against the Defendant Taxpayer, it puts the defendant in a tough spot, because now there is a judgment against the Taxpayer for willfulness — which can cause collateral damaged beyond the FBAR willful penalty.
The latest victim may be Mr. Said Rum.
Important Procedural Note
In the case of U.S. vs. Rum, a Magistrate recently issued a Report and Recommendation.
A magistrate issues a Report and Recommendation for consideration by the District Court Judge. And, unless a parties file a written objection, the parties are prevented from appealing any portion of the recommendation adopted by the district Judge.
Magistrate Recommendation to Issue Summary Judgment
The magistrate’s recommendation is for the District Court Judge to find for summary judgment in favor of the IRS.
For the reasons that follow, it is recommended that the Government’s Motion for Summary Judgment (Doc. 31) be granted and Rum’s Motion for Summary Judgment (Doc. 30) be denied.
U.S. vs. Rum Case 8:17-cv-00826-MSS-AEP
Key excerpts are taken from the Complaint, and most recent order ruling.
U.S. Vs. Rum Complaint
Unlike many other complaints against Defendants in FBAR and related foreign account cases, which can seemingly go on forever — this complaint was short — five (5) pages to be exact.
In September 1998 , Rum withdrew $1,100,000 from his account at Chase Bank in the United States and used the funds to open an account at UBS AG in Switzerland (“the UBS account” ). Rum moved his domestic funds offshore in order to protect them from the claims of creditors in litigation that was pending at the time.
From 1998 to present, Rum has been a sophisticated investor who keeps informed of financial news and Rum actively participated in managing his investments with UBS AG.
Rum communicated with UBS advisors on a regular basis and directed how his account assets were to be invest ed.
Rum personally visited UBS AG in Switzerland on several occasions after opening his account.
It is important to note that the U.S. alleges that Defendant was an “astute investor.” The reason the complaint includes this verbiage, is to set the tone that Defendant has an investment background, and was aware of FBAR reporting — and to ease the government’s burden of proving willfulness.
Rum Never had Reported Foreign Accounts
The U.S. alleges a double-whammy: unreported foreign accounts and unreported income:
Rum never filed an FBAR reporting his financial interest in the UBS account for 2007.
Rum Never Reported the Income
Rum’s assets in the UBS account in 2007 generated income from interest and other investments.
Rum did not report his income from, or financial interest in, his UBS account on the original federal income tax return he filed for 2007.
1040 Schedule B — Rum Marked that he did not have Foreign Accounts
The fact that Defendant marked “No,” on schedule B is not dispositive of willfulness, but, when coupled with the additional facts and circumstances as described below, it dioes nothing to help his cause in disputing the allegations of willfulness being hurled at him.
On Schedule B of Rum’ s tax return for 2007, Rum falsely represented that he did not have an interest in a foreign financial account.
Specifically, Rum marked ” no” on Question 7(a) of Schedule B when Rum knew that he should have marked ” yes” in answer to the question of whether he had signature authority over a foreign bank.
U.S. Alleges that Defendant’s Pattern and Practice to commit FBAR Non-Compliance
Rum’s failure to report his financial interest in the UBS account was part of a pattern and practice in which Rum marked ” no” on Question 7(a) of Schedule B for each of the originally filed return s he field from 1998 through 2009, indicating that he had no foreign account despite that he knew otherwise.
Knolwedge and Alleged Willfulness
On May 25, 2010, UBS AG advised Rum via letter that his UBS account in formation had been disclosed to the IRS.
Thereafter, Rum filed an amended 2007 Form I040 that reported interest income from the UBS account in the amount of $786, but did not report the gains his UBS account generated from investments.
U.S. Goes After Defendant for Willfulness FBAR Penalties
The IRS believed that Defendant acted willful. It is important to remember that willful does not mean the defendant acted with intent.
Rather, the IRS can meets its buden of proving willfulness by proving the defendant with reckless disregard and/or willful blindness (neither of which require intent).
31 U.S.C. 5321(a)(5) provides for the imposition of civil penalties for willful failure to comply with the reporting requirements of Section 5314- i.e., when the person maintaining a foreign account fails to timely file an FBAR reporting that account despite having an obligation to do so.
For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed is 50% of the balance of the account at the time of the violation or $100,000, whichever is greater. 31 U.S.C. § 532 l(a)(5)(C)(i).
Due to Rum’s willful failure to file FBARs reporting his financial interest in the UBS account during 2007, on April 16, 2015, a delegate of the Secretary of the Treasury of the United States assessed penalties of$693,607 against him under 31 U.S.C. 5321.
Despite notice and demand for payment, Rum has failed to pay the civil penalty assessed against him Accordingly, Rum is liable to the United States in the amount of $779,636.57 as of April 1, 2017, which is comprised of the FBAR penalty, interest andpenalty for late payment under 31 U.S.C. § 3717(e)(2). Interest and other additional amounts continue to accrue as provided by law.
The Court Recommends Granting the U.S. Summary Judgment
Here are some crucial facts, which are very common in these types of swiss bank account cases:
The box checked at the top of Rum’s UBS AG account opening document shows that he owned a “numbered account” rather than a “name account” (Rum Dep., at 24; UBS Account Opening at Ex. 6, Bates UBS00044-45).
Further, the UBS bank records show that Rum elected to have his mail held at UBS, rather than sent to his U.S. address (Kerkado Decl., at ¶8).
Rum was charged a fee for UBS AG to retain his mail and all retained mail was deemed to have been duly received by him (UBS Account Opening at Ex. 6, Bates UBS0044-45).
Further, the UBS AG Change of Domicile form memorializing Rum’s change of address in 2004 provided that “[r]etained mail service remains in force” (Change of Domicile Form at Ex. 6, Bates UBS00049).
Agent Marjorie Kerkado (“Kerkado”), the IRS agent assigned to conduct Rum’s examination, declared that withholding mail helps avoid disclosure of foreign bank accounts to the IRS (Kerkado Decl., at ¶9).
3 Important Take-ways that the U.S. relies on in its quest to issue willful penalties:
- Defendant opened a “number” account instead of a “name” account (to avoid having his name attached)
- Defendant requested that UBS hold his mail (no paper statements)
- Defendant paid extra for this service
Initially, Rum was only Hit with Non-Willful FBAR Penalties
Upon an initial review by the IRS of Rum’s case, Kerkado proposed a non-willful FBAR penalty against Rum (Doc. 58, Deposition of Terry Davis (“Davis Dep.”), at 15-16).
Terry Davis, her supervisor, approved the proposal, subject to the approval of area counsel (Davis Dep., at 19).
Davis then sent it to area counsel for approval (Davis Dep., at 15-16).
Kerkado and Davis initially proposed a non-willful penalty instead of a willful penalty based on the prior inaction of New York IRS agents, who had failed to raise an FBAR penalty in Rum’s case.
The IRS Instead Issued Willful FBAR Penalties
In reviewing the facts of the case as summarized by the Magistrate, it appears the non-willful finding came as the result of the agents believing they did not have authority to issue willful penalties.
After the agents conferred with their higher-ups, they were informed that they were not prevented from issuing willful penalties.
Therefore, Rum’s case was reconsidered, and a willful penalty was proposed.
Court Magistrate Recommends Summary Judgment
The court uses a totality of the circumstance analysis to aggregate several factors together to show there is no genuine dispute of material fact.
Here are some key excerpts from the Magistrate’s recommendations:
Rum’s contention that there is a genuine issue of material fact as to willfulness is unavailing.
A taxpayer’s failure to review their tax returns for accuracy despite repeatedly signing them, along with “falsely representing under penalty of perjury” that they do not have a foreign bank account (by answering “no” to question 7(a) on Line 7a of Schedule B of a 1040 tax return) in and of itself supports a finding of “reckless disregard” to report under the FBAR. Kimble v. United States, 141 Fed. Cl. 373, 376 (2018)
Further, the record includes more evidence that, while not necessary to establish willfulness supports his finding by showing a pattern of conscious efforts to conceal and avoid learning about the FBAR reporting requirement.
For instance, Rum admitted that the only reason for opening the UBS account was to conceal the money from potential judgment creditors (Rum Dep., at 42). Rum also owned a “numbered” rather than a “name account” and elected to have his UBS mail withheld abroad.
Additionally, UBS sent bank statements to Rum for numerous years explicitly noting that those statements could assist Rum in preparing his US tax returns, and that they do not satisfy government reporting requirements in and of themselves (Income Statements USA at Exhibit 6, Bates UBS00378-44).
Rum also admitted that he disclosed the UBS account on his mortgage application to assist him financially (Kerkado Decl., at ¶12).
These circumstances, along with others, allow the Court to find that Rum meant to conceal his foreign accounts and avoid learning about the FBAR filing requirement. McBride, 908 F. Supp. 2d at 1204.
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