Court Says Holocaust Survivor’s Willful FBAR Violation Determination is Up to the Jury

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What makes an error on a tax return or a missing form willful, rather than just negligent? Is signing a tax return enough to assume the taxpayer read and approved every line? A recent decision out of the United States District Court for the Southern District of New York says there must be something more. Whether there was enough to support the IRS’s willful FBAR violation determination against a hundred-year-old Holocaust survivor was a question for the jury to decide.

Holocaust Recovery Account Leads to $9 Million Willful FBAR Violation Penalty

Walter Schik was thirteen years old with only an elementary-level education when he was separated from his family in Austria during World War II and sent to a Hungarian concentration camp. Mr. Schik’s family died in the concentration camps, but he survived. At the end of the war, he was liberated in Hungary and brought to the United States in 1947 as a Holocaust survivor.

Ten years later, Mr Schik became a U.S. citizen and opened a bank account at UBS AG in Switzerland. The account was to collect money “recovered from the Holocaust” from relatives that died in the concentration camps. The money had no connection to the United States.

Mr. Schik didn’t actively maintain the accounts. Instead, he hired a Swiss money manager, David Beck, and later his son, Josef Beck, to do that for him. The Becks spoke to Mr. Schik a few times per year, and sent Mr. Schik “stack[s] of forms” to sign. Among those forms were authorizations to open two accounts, one in the name of Tikva Consulting S.A., a financial consulting entity in Panama. Mr. Schik signed papers stating he was the “beneficial owner” and “attorney” for those accounts, and he was an “authorized signatory” even though the Becks continued to manage the money.

In 2007, Mr. Schik had two accounts at UBS holding $1,594,398 and $15,649,573 respectively. His taxes that year were prepared by his accountant, who used software that, among other things, auto-filled his Schedule B, indicating that Mr. Schik had no foreign financial accounts. The accountant never asked Mr. Schik to complete a tax preparation questionnaire, or required him to carefully review the tax return or Schedule B. Instead, Mr Schik “looked generally at his 2007 tax return before signing it.”

After Josef Beck was indicted for conspiracy to commit tax fraud, Mr. Schik tried to participate in the IRS’s now-closed voluntary disclosure program. Unfortunately, the IRS rejected his disclosure “due to timeliness and/or completeness.” After Schik filed a late FBAR for 2007 disclosing the accounts, the IRS assessed willful FBAR violation penalties totalling $8,822,806. When Mr. Schik, now 100 years old, did not pay the penalties, the IRS sued to recover payment.

Court Says Willful FBAR Violations Must Mean More than Negligence

The IRS asked the District Court to enter a summary judgment against Mr. Schik, which can only be granted when no jury could find in favor of the taxpayer. The Court said that it was up to the IRS to prove:

  1. Mr. Schik was a United States citizen
  2. Mr. Schik had an interest in, or authority over a foreign financial account
  3. The account had a balance exceeding $10,000 during the reporting period
  4. Mr. Schik willfully failed to disclose the account and file an FBAR

The only question for the Court in this case was whether Mr. Schik’s failure to file the 2007 FBAR on time was willful.

The Court acknowledged that in civil tax cases, willfulness includes “not only knowing violations of a standard, but reckless ones as well.” It emphasized that the government does not have to prove “an individual’s bad purpose or evil motive” for that taxpayer to have willfully violated the FBAR reporting statute. However, the Court was not willing to to say a jury couldn’t excuse Mr. Schik’s mistake:

When Congress included penalties for “willful violations” of [the FBAR statute], it explicitly delineated between failures to report that are and are not willful. Willfulness, therefore, must mean something more than mere negligence. The Government’s suggested reading of the word – that willfulness should be found categorically even when an unsophisticated taxpayer did not know of an obligation to report and relied on a tax preparer – would abrogate that distinction.

The Court reviewed significant evidence to indicate that Mr. Schik’s failure to file was not willful:

  • He did not actively manage the Holocaust safety net accounts
  • He did not know he was required to disclose the funds
  • His tax preparer never told him about the requirement
  • He relied on his tax preparer to prepare and submit his 2007 tax returns
  • The tax preparer’s software auto-filled the Schedule B tax return

It noted that on at least one occasion, another Court has excused a taxpayer for not reading the FBAR instructions when the taxpayer relied on a tax preparer to properly complete and file a tax return. As a result, the Court decided that it would be up to the jury to decide whether Mr. Schik acted willfully in failing to file his FBAR return, or merely negligently.

US v Schik reaches a different conclusion than other court cases reviewing willful FBAR violation penalties. In other Courts, failure to carefully review a Schedule B was enough to result in a summary judgment for willful FBAR violation penalties. This shows that anytime a tax lawsuit is filed, the outcome will depend on the judge, the jury, and a tax attorney’s ability to argue for an accurate interpretation of the law that properly distinguishes between willful and negligent failures to file.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you are facing willful FBAR violation penalties after you relied on an accountant’s advice, contact Joe Viola to schedule a free consultation.

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