CPA Should Have Known About FBARs, Asked Questions, Court Says
Many taxpayers facing audits over their foreign financial accounts say they relied on their CPA or accountant and didn’t know they had a duty to file FBAR reports. But when the taxpayer was a CPA himself, his claims of ignorance weren’t enough to persuade the Court his failure to file wasn’t willful.
Decades of Tax Returns Didn’t Prepare CPA for Personal Audit
Kenneth Kronowitz had been a professional tax preparer and accountant for over 60 years. Between 1961 and 2020, he filed hundreds of tax returns -- including his own and his clients, who were mostly individuals and small businesses. A Certified Public Accountant (CPA), Kronowitz ran a sole proprietorship preparing 30 to 40 tax returns per year until he began to wind the business down in 2008. Still, in 2019 and 2020, he filed 10 to 15 tax returns for clients, his personal trust, and his own returns.
In all that time, Kronowitz had seen hundreds of Schedule B forms, where the IRS asks taxpayers whether they have a financial interest in, or signature authority over, a financial account in a foreign country. He even filed Schedule Bs himself in 2007 and 2008, answering “no” to the foreign financial assets question. But when the IRS audited him in 2011, the government found that “no” was more accurately “I haven’t bothered to ask.”
When It Came to Foreign Investments, Accountant Just Didn’t Ask
One of Kronowitz’s clients was a real estate developer named Eli Levy. In the 1970s, Levy invited Kronowitz to invest in one or two percent of a couple of international real estate projects he was working on. Kronowitz didn’t ask many questions about the projects themselves. There was no accounting, receipt, or contract. He simply handed over a check and made a note about his capital investments on a yellow legal pad.
In 1999, those foreign property investments began to mean something. Kronowitz signed up for an offshore management company to handle his interest in an entity called Cramo Stifung/Foundation. Kronowitz was designated as the beneficial owner of Cramo’s assets, including the foreign bank account opened at the United Bank of Switzerland in 2005.
Three years later, Kronowitz’s investments had resulted in significant gains. He created a personal trust and had the management company send him his money by way of a pair of accounts in the Cayman Islands. Kronowitz reported the capital gains from those investments on his Trust’s income tax returns, but did not disclose the Cayman accounts or his beneficial interest in the UBS account on his Schedule B, nor did he file Reports of Foreign Financial Accounts (FBARs). He claimed that, despite attending 80 credit hours of continuing education every year to maintain his CPA certification, he had never heard of FBARs and thought that as long as the foreign income was reported on his tax returns and the taxes got paid, he had done all he had to do for the IRS.
Court Says CPA Should Have Known About FBAR Reporting Requirements or Asked Someone Who Did
Judge Beth Bloom of the United States District Court for the Southern District of Florida wasn’t impressed with Mr. Kronowitz’s “laissez-faire attitude” toward his foreign investments and his obligation to report them to the IRS. The Government assessed $663,771 in willful FBAR penalties for the years 2005 through 2010. When he didn’t pay, the IRS sued him. Mr. Kronowitz’s only defense was that he didn’t know about the filing requirements, so his non-filing could not be willful.
However, as this blog has discussed before, willful FBAR penalties can also be assessed based on a “reckless disregard of a known or obvious risk.” The Court said, “As such, when imposing a civil penalty for an FBAR violation, willfulness based on recklessness is established if the defendant:
- Clearly ought to have known that
- There was a grave risk that an accurate FBAR was not being filed and if
- He was in a position to find out for certain very easily.”
As a CPA and tax preparer, few had more easy access to FBAR reporting requirements than Kronowitz. He argued at trial that he had not read the instructions to Schedule B because he was a CPA and not a tax attorney. However, the Court did not find this persuasive because, as a part of the accounting industry, he could have easily asked someone with more international experience.
Taxpayers Shouldn’t Assume Their CPAs Are Getting it Right
US v Kronowitz should be a warning to any taxpayer who is simply trusting their accountant to get everything right. Not every tax preparer has experience dealing with international affairs and FBAR reporting requirements. Many, like Mr. Kronowitz, see their primary purpose as “to get clients, bill them, and collect the money, not spending the whole year reading.”
If you have more than $10,000 in foreign investments or bank accounts, you need to avoid an accountant who takes a laissez-faire attitude to the IRS reporting requirements. Be certain to work with a CPA who has experience handling foreign accounts and, if necessary, working with a tax attorney who will help ensure that CPA is guiding you properly.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding foreign financial account reporting requirements, contact Joe Viola to schedule a free consultation.
