FBAR Willfulness Decision is Up to the Jury, Court Says

The difference between a willful and non-willful FBAR penalty against a U.S. taxpayer can be thousands, and sometimes millions of dollars. But how can the IRS know what was going on in your head, and whether your failure to file was on purpose? A recent court decision says that an appeal of an IRS FBAR willfulness decision based on the taxpayer’s state of mind is a question only the jury can decide.

Dual Citizen Says He Didn’t Mean to Skip Inherited Accounts on His FBARs

Isac Schwartzbaum was born and raised in Germany. His parents were from Poland. He went to German school and received a German diploma before immigrating to the U.S. He eventually obtained dual citizenship when he became a naturalized U.S. citizen in 2000. His father stayed in Germany, where he owned a successful textile business and was a real estate investor. The money from those businesses helped his son Isac support himself and his family here in the U.S. Then, in 2009, Isac’s father died, and Isac inherited his father’s Swiss bank accounts. He had already been receiving gifts from these accounts, but now he had an ownership interest in them as well.

Over the years, Isac had used three CPAs to help him complete his tax returns and file the appropriate forms with the IRS. In 2006, that work had included filing a foreign bank account report (FBAR) for an account he had in Costa Rica. Isac himself filed FBARs in 2007 and 2009 for other accounts connected to the U.S. But between 2007 and 2011, no one disclosed the Swiss bank accounts or the gifts Isac had received from his father.

IRS Finds Willful FBAR Violation in Spite of Voluntary Disclosures

In 2011, Isac applied to participate in the IRS’s now-closed voluntary disclosure program. He and the IRS agreed to an amount that covered his additional tax, interest, and penalties for his unreported gift income, and he paid them. But then the IRS wanted to impose FBAR penalties as well. Isac withdrew from the voluntary disclosure program, triggering a full investigation. An IRS agent originally said a non-willful FBAR penalty was appropriate. But then, the IRS changed its mind, assessing $15,559,072 in willful FBAR penalties and interest.

Isac disputed the FBAR willfulness decision and refused to pay the penalties. Eventually the IRS filed a lawsuit to collect the assessments in federal court. Isac’s attorneys filed a Motion for Summary Disposition, asking the judge to overturn the IRS willfulness determination because Isac did not know he had to report the Swiss bank accounts his father had created.

Federal Court Says FBAR Willfulness Determination is a Question for the Jury

On August 23, 2019, the judge in the United States District Court for the Southern District of Florida issued her ruling, refusing to weigh in on Isac’s state of mind. Judge Beth Bloom wrote that an FBAR willfulness determination isn’t simply a matter of the taxpayer’s actual knowledge about the filing requirements. In a civil case for the collection of FBAR penalties, willfulness includes reckless violations of tax reporting statutes. “Recklessness” in turn, means that the taxpayer created an “unjustifiably high risk of harm that is either known or so obvious that it should be known.”

Isac said he relied on his CPAs, and that was reasonable, especially given his limited understanding of English and U.S. tax law. But the judge said that was not a decision she could make without weighing the credibility of the evidence presented. Isac and the IRS disagreed on his ability to understand his tax obligations and whether he had disclosed the Swiss bank accounts to his CPAs in the first place. The judge said those disagreements meant she couldn’t make the decision herself. Instead, the taxpayer’s state of mind would have to go to the jury, which would decide whether the IRS’s FBAR willfulness determination was correct.

Other Disputes, Including Penalty Cap Arguments, Will Have to Wait

The judge also refused to weigh in on the dispute over how the IRS issues willful FBAR penalties that has been going on around the country this year. Isac’s attorneys, like many other tax attorneys, took the position that the IRS was limited by regulations that set the cap on willful FBAR penalties at $10,000, rather than 50% of the balance of the account. But the judge said it wasn’t time to make that decision. All of the other disputes about how much Isac would be required to pay would have to wait until the jury decided if Isac’s failure to file FBARs was willful or non-willful.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding willful FBAR penalties, contact Joe Viola to schedule a free consultation.