IRS Can’t Collect FBAR Penalty from Spy’s Widow, Ninth Circuit Says

What happens to FBAR penalties when a person dies? In a case that seemed to be pulled from a spy thriller, the Ninth Circuit Court recently held that, while the IRS could collect FBAR penalties against the estate of the deceased military veteran and CIA operative, but drew the line at collecting from his “octogenarian” wife.

CIA Contacts and Middle East Kidnapping Lead Veteran to Conceal Assets

Richard Leeds served in the US Navy and Air Force in the 1950s. Afterwards, he set up NASA satellites around the world and military installations in the Middle East. Then, in November 1984, Richard’s plane was hijacked by Yemenite terrorists and he was held and questioned in Iran before eventually being released. According to his wife, this clearly traumatic event led Richard to maintain foreign accounts to have cash readily available in case he ever needed to pay a ransom in the future.

Richard opened one account at EFG Bank in Switzerland in 1980 until 2009, and opened a second account under the name Asian Group for International Studies (AGIST), which he later admitted was an alter ego. The AGIST account was closed in June 2012, after EFG advised its clients that US accounts were no longer welcome due investigations by the U.S. Department of Justice, which resulted in a non-prosecution agreement in 2015. Richard never disclosed these accounts to his wife or the IRS.

Non-Disclosure Results in $1.5 Million in Willful FBAR Penalties

As part of EFG’s non-prosecution agreement, it disclosed Richard’s name to the IRS. In 2014, Richard signed up for the now-closed Offshore Voluntary Disclosure Program (OVDP) to minimize his penalties. In June 2015 and October 2016, Richard filed late FBARs disclosing total maximum values of between $2 million and just over $3 million, peaking in 2011. He also filed amended tax returns which, for the first time disclosed the foreign accounts on his Schedule B. The additional income from the foreign accounts was significantly more than his originally disclosed income. In total, over half Richard’s total income was held in these foreign accounts.

When Richard withdrew from the OVDP, the IRS performed an examination and, in February 2020, imposed willful FBAR penalties totaling over $1.5 million. Richard died in November 2021, but the IRS did not stop its collections efforts. In August 2022, it filed a lawsuit against his widow as his estate’s personal representative, and as a potential successor-in-interest and distributee of the Estate.

Court Says Failure to File FBARs was Objectively Reckless and Willful

The United States District Court for the District of Idaho heard the case on the Government’s motion for summary disposition. Its first step was to determine whether Richard met the criteria for willfully failing to file FBARs. As this blog has discussed before, the difference between willful and non-willful FBAR penalties can be substantial, with non-willful penalties capped at $10,000 per violation, while willful penalties are $100,000 or 50% of the account balance, whichever is greater.

The Court adopted the “objective recklessness standard” outlined in United States v Hughes, saying a court can find that a taxpayer willfully failed to file an FBAR if the filer:

(1) clearly should have known there was a grave risk the filing requirement was not being met, and

(2) was positioned to very easily find out for certain.

The taxpayer engaged in reckless conduct if his actions entailed an unjustifiably high risk of harm that is either known or so obvious that it should be known. The Court said the taxpayer’s willful intent could be proved by circumstantial evidence including:

(1) ‘conduct meant to conceal or mislead sources of income other than financial information’ or

(2) ‘a conscious effort to avoid learning about reporting requirements

Here, the circumstantial evidence of Richard’s willfulness included:

• Failing to disclose his foreign accounts to his accountant
• Answering “no” to the question of whether he had foreign accounts on Schedule B of his tax return
• Using hold-mail instructions
• Using pseudonyms to sign the accounts
• Using an alter ego “sham structure” to conceal his identity
• Failing to investigate tax obligations after being told to by his accountant

The Court rejected his widow’s argument that the IRS had not shown he had actual knowledge of his filing requirements, saying objective recklessness did not require it. It found “no genuine dispute” that Richard’s failure to file FBARs was willful and said the Government was entitled to maximum penalties.

FBAR Penalties Survive Veteran’s Death

The widow in this case also argued that any FBAR penalties Richard incurred were “extinguished” when he died, arguing that they were punitive in nature. The Court indicated that “every court applying these factors” determined FBARs were “remedial for purposes of survival” and the IRS could collect the outstanding penalties from Richard’s estate.

Court Says IRS Can’t Collect From Debtor’s Widow

However, it drew the line at collecting from Richard’s widow directly. The Court applied the Eighth Amendment prohibition against excessive fines. It followed the Eleventh Circuit’s reasoning in US v Schwarzbaum, finding that FBAR penalties were “in substantial measure punitive in nature” because the penalty was calculated without respect to the financial injury to the United States, but instead based on the taxpayer’s culpability. It quoted Schwarzbaum saying “the maximum FBAR penalty is among the harshest civil penalties the government may impose” and Congress intended it “to deter.”

Finding the penalties were subject to the Eighth Amendment, the Court then measured the fine against the widow’s culpability to determine if it was “grossly disproportional”. She had no knowledge of the accounts until the IRS began its investigation, and her financial expert submitted a report indicating the fines would be financially devastating. The Court also found that the Government had been “less than clear” about whether it intended to collect from the widow directly. It prohibited the IRS from collecting Richard’s FBAR penalties from the widow personally, or against her property. Because the record was not clear about the status of Richard’s estate, that could mean most of the tax debt will go unpaid.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions regarding willful FBAR penalties, contact Joe Viola to schedule a consultation.