International Spouse Challenges $5 Million FBAR Penalty

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When international spouses live, work, and pay taxes in multiple countries, it can create difficulties knowing who needs to disclose what accounts to the IRS. One U.S. taxpayer recently filed suit against the IRS over a willful FBAR penalty of more than $5 million dollars because he didn’t disclose an account maintained by his wife living abroad.

John Doe Subpoena to UBS Discloses International Spouse’s Swiss Bank Account

The Zuhovitzkys are the epitome of an international couple. Jonathan Zuhovitzky was born in Tel Aviv, Israel in 1945. He lived in New York City and became a naturalized citizen in 1999. Then in 2010, Jonathan moved to Berlin, German.

Esther Zuhovitzky was born in Zurich, Switzerland and was raised in Tokyo, Japan. She is a dual citizen of Austria and Israel. She met Jonathan in Israel and they were married in 1969, but unlike Jonathan, she never lived in the United states. Before their marriage, in the 1960s, Esther inherited some significant money, which she placed in a bank account at the Union Bank of Switzerland (UBS) in Zurich. In 1988, Esther gave Jonathan power of attorney, giving him signatory authority over the UBS account.

Then, in 2008, as part of a move against the Swiss banking industry, the IRS issued a John Doe summons to UBS, requesting information about accounts held by unknown US taxpayers. Esther’s UBS account was included in the responses. This triggered a lengthy investigation into Zuhovitzky's financial situation, culminating in a $5 million willful FBAR penalty and the resulting federal complaint. The investigation found that:

  • Esther was the sole beneficial owner of the UBS account
  • Esther had no obligation to report or file U.S. taxes
  • Esther funded the UBS account with her inheritance
  • Jonathan held no beneficial interest in the UBS account, and was only a Power of Attorney
  • Jonathan had not deposited any unreported income into the UBS account
  • IRS criminal investigations were unable to established willfulness by Jonathan

However, even after the IRS Criminal Investigations division closed the case, the civil investigator assessed a willful FBAR penalty against Jonathan for the year 2007 in the amount of $5,123,000.00.

In 2017, the IRS began to collect on that debt by seizing part of Jonathan’s social security payments. Over the next two years, the IRS garnished $5,262.60 from his benefits. However, in the same period, the interest and penalties on the willful FBAR penalty had caused it to grow to more than $9 million. Jonathan Zuhovitzky sued to stop the garnishment, return the money, and reverse the penalty.

Powers of Attorney and FBAR Reporting Requirements

Federal regulations under the Bank Secrecy Act require U.S. citizens, permanent residents and other taxpayers to disclose money held in foreign financial accounts every year. Reports of Foreign Financial Accounts (FBARs) must be filed any time a person’s aggregate international financial holdings are more than $10,000.

When it comes to international couples, sorting out who has an interest in foreign financial accounts can be difficult. The IRS regulations require disclosure in cases where a US taxpayer is acting as an agent, including as power of attorney on behalf of another U.S. taxpayer. Spouses who are U.S. taxpayers each have a duty to make sure joint accounts get reported by filing FBARs. However, Esther was never a U.S. citizen or resident, and doesn’t pay U.S. taxes. Nor did she ever make her husband a joint beneficial owner of the account. What is not clear from the complaint filed is how the IRS determined that Jonathan had signatory authority over the account, requiring him to report his wife’s international assets.

US Taxpayer Says “Pay First, Sue Later” Violates His Constitutional Rights

In addition to his primary complaint, that he had no authority over the account and didn’t have to report it, Zuhovitzky also says that the way the IRS imposed that penalty violated his constitutional rights. According to the complaint, Zuhovitzky filed a request for an administrative appeal of his initial FBAR penalty assessment. But according to that complaint, he was never given a hearing before the Appeals department confirmed the assessment. Zuhovitzky says that the IRS’s response to his complaint -- that he should either pay the penalty and file a refund suit or wait for the IRS to assess damages and then respond -- was not enough to protect his right to an opportunity to be heard before the penalty was assessed.

These kinds of complaints often don’t tell the whole story. What will happen to Zuhovitzky’s $5 million willful FBAR penalty remains to be seen, as does the reason the IRS imposed it in the first place. What it does show, however, is that when international couples file U.S. tax returns, they should be careful to disclose all their foreign assets. Otherwise, the consequences could be exceedingly costly.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding international spouses’ obligations regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.