Indian American Groups Push for Foreign Account Relief (7/29/11)

There are reports that major Indian American community groups are lobbying the Secretary of the Treasury to bring relief to Indian Americans caught in the vise of the tax and FBAR rules and the OVDI 2011. I link to some articles below.  The Indian American U.S. taxpayer community seems to have been hit particularly hard because of a confluence of circumstances - including, but not limited to, their industrious as recent U.S. immigrants, their willingness to save, their love of their native country and relatives in the native country, their lack of knowledge of the scope of U.S. tax filing and related FBAR filing obligation, and their general desire to play by the rules.  Many in fact innocently underpaid their U.S. tax liabilities by not reporting relatively modest Indian accounts and failing to file the FBARs, yet feel that they inappropriately being punished disproportionately to their conduct by having to pay the 25% in lieu of penalty inside OVDI 2011. Having met with a number of these and having read still others' comments on the blogs, I do think that the IRS is being a bit harsh.  Perhaps the safety valve will be the opt out, provided that it is administered reasonably to make the punishment fit the crime.

Articles:

Indian Americans seek relief from US tax rules for foreign accounts (The Times of India | U.S. Canada News 7/28/11).

Joseph Septimus, Indian-American Community Seeks Relief From Draconian FBAR Penalties (Yeshiva World 7/29/11).

Is FBAR Venue Criminal Venue for the Convenience of the Government or in No District for the Convenience of the Filer? (7/23/11)

In United States v. Bradley, ___ F.3d ___, 2011 U.S. App. LEXIS 13260 (11th Cir. 13260), a decision of considerable length (195 pages), the Court addressed inter alia, venue in a case involving an FBAR violation. In a nutshell, the FBAR form permits filing at the Detroit Service Center or any IRS office. There is no special venue provision for FBAR charges, so the general rule applies which makes venue in any district where the crime was committed. Since the filer could file in any district, does that make his or her failure to file a crime that occurred in any district, giving the Government choice of any venue? Without deciding whether that sweeping opportunity for venue choice was available to the Government at its whim, the Court sustained venue for the FBAR charges based on the district court's inquiry into the convenience of that district for trial of the charges, even though the defendant resided elsewhere. 

I have linked the opinion above, but because of its length, I am just cutting and pasting it below for readers' easier access (pp. 56-60 of the pdf slip opinion):

Count 284 alleged that Bradley III failed to disclose an interest in a foreign financial account while committing mail fraud, wire fraud, and money laundering, in violation of 31 U.S.C. §§ 5314 and 5322(b). Section 5314 authorizes the Secretary of the Treasury to require a taxpayer to keep records and file reports "when th[at] resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial institution." 31 U.S.C. § 5314(a). The Secretary has exercised that authority by requiring all persons subject to the jurisdiction of the United States to disclose whether he or she has "an interest in, or a signature or other authority over, a bank, securities or other financial account in a foreign country." 31 C.F.R. § 103.24(a). If a person owns such an account, he is obligated by 31 C.F.R. § 103.24 to file Form 90-22.1 with "the Commission of the Internal Revenue." That form instructs the person that the filing may be accomplished "by mailing this report to the Department of the Treasury . . . or by hand-carrying it to any local office of the Internal Revenue Service for forwarding to the Department of the Treasury" in Detroit, Michigan.

Read more »

FBAR Part II and III Reporting for Title Owners who Are Not Beneficial Owners (6/18/11)

I have recently encountered an issue as to how the FBAR is to be completed in the following circumstance:

W reside in Europe. H is not a U.S. Citizen; W is a U.S. citizen. H has accounts in which he has all beneficial interest under the local law of the country in which they reside. W is listed as an account owner on his accounts, but in fact that is just to give her access to the funds if something happens to H. It is designed to serve as a testamentary disposition to W in the event of H's death; it could also serve as a way for W to access the funds for H's benefit in the event of H's becoming incapacitated. W made no deposits into the accounts, made no withdrawals, and has done nothing with the accounts and is not expected or authorized, as between W and H, to do so until those events. Bottom line, the mechanism of naming W as an account owner at the bank does not give W any ownership interest in the account. It does permit the bank to take instructions from W (including withdrawals).

The question is how W must make an FBAR report? I think all of us recognize instinctively that the FBAR requirement was designed to flush out a report from W, because W certainly has signature authority over the account. I address here how W reports on the form because there has been some confusion about that. For those not interested in the details, here is the bottom line. W should report on Part III in this instance and, if W were the sole title owner (but not beneficial owner), W should report on Part II. There is some nuance behind this bottom-line, so the following discussion may be important to some.
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Imposing FBAR Civil Penalties on Foreign Financial Institutions

An anonymous poster alerted me to Lynnley Browning's article, Overseas Banks Could Face Novel Penalty From U.S. (New York Times 4/12/11). The poster suggested that I do a blog on the topic of the article -- whether the U.S. could assert the FBAR penalties against the foreign financial institutions ("FFI") in addition to or in lieu, perhaps, of the U.S. taxpayer having foreign financial accounts. I address that issue today, but caution readers that my answer is based on only limited research -- the statute and some additional research in the types of criminal liability that enablers can draw in the context of tax evasion. I plan to have an article on the latter issue in the near future, but that research informs the discussion I present here.

First, I start with the statute. The penalties are found in 31 USC 5321(a)(5)(A) which provides:

(5) Foreign financial agency transaction violation.
(A) Penalty authorized. The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 [31 USCS § 5314].

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More on the Simon Conviction

I previously report on United States v. Simon involving convictions for four tax perjury counts (§ 7206(1)), three FBAR counts (31 U.S.C. §§ 5314, 5322), eight mail fraud counts (§ 1341), and four financial aid fraud counts (20 U.S.C. § 1097). (For my blogs on Simon, see here.)  Because of the facts and the other counts of conviction, Simon is outside the mainstream of the criminal cases being brought in the Government's current civil and criminal juggernaut against offshore account holders.

I had not previously reported the actual sentence in Simon. The sentence is 6 years. I picked up the sentence from a recent decision denying bail pending appeal. United States v. Simon, ___ F. Supp. 2d ___, 2011 U.S. Dist. LEXIS 37001 (N.D. IN 2011). This decision did not report the various sentencing factors, hence my spreadsheet (downloadable to the right) is incomplete.

I review here the decision on bail.
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New FBAR Form and Guidance on FBAR Requirements and Form 1040 Questions

The IRS and/or FinCen have recently released the following:

1.  New FBAR form (Form TD F 90-22.1). 

2.  New FinCen FBAR regulations effective 3/28/11,  previously discussed here.

3.  Notice 2010-31 advising taxpayers:

Beginning March 28, 2011, the recently published final FBAR regulations will be effective and should be referenced, along with the revised FBAR form and instructions, when answering FFA-related questions on 2010 tax and information returns.

Sentencing Simon (Preliminary and Final)

Note to Readers:  This blog initially discussed only the opinion on Preliminary Sentencing Findings.  I have since obtained the subsequent sentencing opinion.  I accordingly ad a link to the sentencing opinion and a short discussion of it at the end of this blog.

PRELIMINARY SENTENCING OPINION 3/14/11

Only 3 defendants have been tried recently amidst the Government's juggernaut against foreign bank accounts. All were convicted. I have previously discussed here, 2 of those defendants, father and son, who were convicted and sentenced to 40 months each. I want to talk today about the other whose prosecution, technically, did not arise from that juggernaut, but who was tried for foreign bank account violations during the ongoing juggernaut. He is James A. Simon whom I have discussed before here.

Mr. Simons' prosecution apparently arose from an investigated that predated the UBS brouhaha from whence the flurry of criminal charges arose. He had a number of criminal issues beyond just failing to report and pay tax on income stashed in foreign banks and filing the required FBAR. He did not plead and was convicted of multiple counts as will be noted.
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Conviction in Foreign Account Plus Case

There is a recent opinion in United States v. Simon (ND IN No. 3:10-cr-00056) \about which I previously blogger here. The new opinion is here. The new opinion, dated 1/1/11, is short and cryptic -- assuming some familiarity with earlier rulings in the case to understanding the judge's exasperation. The new opinion rejects the defendant's post trial motion for judgment of acquittal and alternative motion for new trial. The Court's opening paragraph under Background, gives the reader an indication of how the court will rule:

A 23-count indictment was handed down in April 2010, charging Mr. Simon with filing false federal income tax returns (Counts 1-4), failing to file foreign bank account reports (FBARs)(Counts 5-8), mail fraud (Counts 9-19), and fraud involving federal financial aid (Counts 20-23). More than seventeen pretrial motions required four hearings, numerous oral rulings [Doc. Nos. 25, 33, 71 and 109], and three detailed written opinions and orders [Doc. Nos. 62, 74 and 100]. Trial began on November 2, 2010. Evidentiary objections were the rule, rather than the exception, during trial, and the court frequently had to restate earlier evidentiary rulings. Mr. Simon seemed to change his theory of defense mid-trial, requiring additional briefing.

The Government dismissed Count 5, and, after trial the jury convicted on all remaining counts except Counts 13, 14 and 16 (mail fraud counts). Not a good day for Mr. Simon.

The issue I previously blogged was the Court's rejection of the claim that the IRS's extension of time for signatories on foreign accounts to file delinquent FBARs by 6/30/11 operated to preclude prosecution for the original delinquencies which, if they occurred with the required willfulness, were criminal acts at the time. In this new opinion, the Court begins its Discussion as follows:

Mr. Simon's renewed motion for judgment of acquittal is premised on arguments previously raised, considered, and rejected.

And, the Court concluded its Discussion with the following:

The court carefully considered Mr. Simon's arguments, has given detailed reasons for rejecting them, and believes that it properly ruled on each of the issues raised. Mr. Simon hasn't presented any authority or identified any error or circumstance that would warrant reconsideration at this stage of the proceedings or a new trial.

Not a good opening or closing discussion for the defendant.

There is not a whole lot in between that I think particularly worthy of note for readers of this blog. The opinion is short so it might be worth scanning by those whose interest is piqued.  I mention the case only because the underlying scheme did involve foreign accounts and foreign entity intrigues and there were FBAR count convictions. The Government has another notch under its belt in this area. But, it is clear from this and the prior opinion that this was not a garden variety foreign account case. The facts underlying the federal financial aid fraud counts makes this case quite an outlier to the cases I have encountered involving foreign accounts. I just wonder whether, if facts had not involved federal financial aid fraud, the dispute between Mr. Simon and the IRS / DOJ Tax (which also had some other predicate intrigues) could not have been resolved short of criminal prosecution.

Another UBS Related Defendant is Charged for Offshore Accounts

The Government has charged yet another UBS related person. The story in a nutshell is that Samuel Phineas Upham, who, I am told, is the son of Sybil Nancy Upham, previously indicted (although named in Phineas' indictment as "Family Member A"), assisted Family Member A with respect to her accounts, held through entities, by actively engaging in the cover up of those accounts and the proceeds from the accounts, even after the hammer had fallen on UBS. I am told that the son goes by the name Phineas; I use Phineas in this blog entry to distinguish him from his mother.  His mother's indictment is here.  Further, Phineas assisted Family Member A in the preparation of false returns. The charges are: (1) the ubiquitous Klein conspiracy count (Count One) and (2) aiding and assisting, Section 7206(2) for three years (2005 - 2007) (Counts Two through Four). The indictment is here.

Just a few points that I noted in reviewing the indictment (some points are redundant in part to the summary in the above paragraph, and I note that these are just allegations in the complaint and have not yet been proved):

1. The co-conspirators named in Count One are (i) Family Member A and (ii) Swiss Financial Adviser A. Swiss Financial Adviser A's background and general role in the conspiracy are described in paragraph 6.b. of the indictment. My guess is that Swiss Financial Adviser A will not come into the U.S. voluntarily anytime soon.

2. The Conspiracy Count allegations elaborate efforts to cover up, even after the hammer had fallen on UBS.

3. Sham entities were used -- a Lichtenstein Foundation and a Hong Kong corporation.

4. Phineas assisted in making large cash withdrawals and transporting the cash into the United States without submitting FINCEN Form 105 (Currency Transportation). And, in one instance, he actually completed a Customs Declaration Form falsely certifying that he was not importing cash in excess of $10,000.

5. Some of the cash was deposited into a United States bank account "multiple night deposits of cash totaling approximately $20,000 were made into accounts controlled by Family Member A."

6. In response to the U.S. actions against UBS in May 2008, Phineas and Family Member A began worrying about how they could maintain their secrecy and began moving money into a Lichtenstein Bank (Lichtenstein Bank A) with the account in the name of a sham corporation in Lichtenstein. "Unlike UBS, Liechtenstein Bank A does not have offices in the United States." The amount moved aggregated $8,554,598.

7. Phineas prepared false returns for Family Member A. In one year, Family Member A submitted the return without signing it. Phineas both prepared the returns and counseled, advised, etc., Family Member A as to the returns and reporting.

8. The tax returns for the charged years did not include the income and thus did not report the tax liability and the returns falsely answered no to the Schedule B foreign financial account question.

9. Phineas was arrested. I have not tried to sift through the charged cases to see if this is a pattern for charges where the plea is not agreed to at the time of filing or only in cases where there may be some concern about the defendant fleeing the U.S.

10. There is another instance where family members were indicted -- Harry Abrahamsen and Lucille Abrahamsen Jackson.

I have updated the spreadsheet with the information I could glean from the indictment.

Here are some links to articles:
New York Times
New York Observer

Addendum:  The foregoing discussion was updated on 12/9/10 around 2:00 pm to reflect that Phineas is the son and not Family Member A and to provide a link to the indictment of the person who is apparently Family Member A.

Request to Readers:  I am told that Sybil Nancy Upham pled guilty on 11/10/2010, and agreed to some type of $5.5 MM payment which, I presume, is the FBAR penalty at 50%.  I would appreciate receiving a copy of the plea agreement and any other documents related to the plea (including the transcript) from any reader willing to share them.  Please email anything in this regard to me at jack@tjtaxlaw.com.  Please state in the email whether the documents and / or information is for my eyes only or whether, after I strip of any identification of the provider, I can post it on this blog.  Thanks.

Government Pursues FBAR Penalty in Civil Case

In United States v. McBride (D. Utah No. 2:09-cv-378-DB-BCW), the Government seeks to enforce civil penalty for failure to file FBARs for 2000 and 2001. The amount sought is the maximum under prior law ($100,000 per year). The defendant participated in an offshore scam orchestrated by Merrill Scott and Associates ("Merrill Scott"). (For more on Merrill Scott, see here and here. Suffice it to say for present purposes that it involved offshore entities and offshore banks.

The Government has filed motion for summary judgment. The memorandum in support of the motion is here, the complaint is here and Dennis Brager's discussion of the case is here. The Government's motion appears strong (at least if it is a fair statement of both the summary judgment evidence and the case itself); the defendant appears destined to lose even if he survives a motion for summary judgment. (Cf the Williams case discussed here.)  I thought readers of this blog might be most interested in the Government's statement of the willfully standard for the maximum FBAR penalty which is now up to 50% of the highest amount in the account for each year. The Government argues that the willfully standard in the FBAR civil penalty is not the same as willfully standard in the criminal tax statutes (interpreted in Cheek to require the intentional violation of a known legal duty). Rather, the Government argues that a lesser standard applies in civil cases and argues, protectively, that even were the Cheek standard to apply, it is met here for purposes of summary judgment. Here is the Government's discussion (pp. 18-20 of the Memorandum).

6. McBride’s failure to disclose the Accounts was willful


As it existed prior to an amendment that took effect in 2004, Section 5321(a)(5) authorized penalties against taxpayers who “willfully” violated Section 5314. “’[W]illfully’ is a ‘word of many meanings whose construction is often dependent on the context in which it appears.’” Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2004) (quoting Bryan v. United States, 524 U.S. 184, 191 (1998)). In Ratzlaf v. United States, 510 U.S. 135 (1994), while interpreting the intent required for a criminal conviction under 31 U.S.C. § 5324, the United States Supreme Court noted that the test for “willfulness” in the context of criminal violations of Section 5314 is a “’“voluntary, intentional violation of a known legal duty.”’” Ratzlaf, 510 U.S. at 142 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (quoting Cheek v. United States, 498 U.S. 192, 201 (1991))). However, the test for “willfulness” set forth in Cheek is explicitly tied to the imposition of criminal, rather than civil, penalties. See Cheek, 498 U.S. at 199-2001. Accordingly, the the test for “willfulness” set forth in Cheek, and discussed in Ratzlaf, is inapplicable to civil cases.

When the term “willful” or “willfully” has been used in a criminal statute, we have regularly read the modifier as limiting liability to knowing violations. This reading of the term, however, is tailored to the criminal law, where it is characteristically used to require a criminal intent beyond the purpose otherwise required for guilt or an additional “bad purpose,” or specific intent to violate a known legal duty created by highly technical statutes. Thus we have consistently held that a defendant cannot harbor such criminal intent unless he “acted with knowledge that his conduct was unlawful.” Civil use of the term, however, typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.

Safeco, 551 U.S. at 57, n.9 (citations and quotations omitted); see also Denbo v. United States, 988 F.2d 1029, 1034-35 (10th Cir. 1993). The civil standard for willfulness is satisfied where the individual at issue acts “voluntarily in withholding requested information, rather than accidentally or unconsciously,” Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997), or in reckless disregard of statutory duty. Safeco, 551 U.S. at 57. Here, it is beyond dispute that McBride was aware of the FBAR reporting requirement, see SOF ¶¶ 6, 24, 25, 32, and that he nevertheless affirmatively denied having an interest in any reportable foreign account in his Individual Income Tax Returns for 2000 and 2001. See SOF ¶ 26. These facts are sufficient to satisfy the civil standard for willfulness.

Even if it is assumed for the sake of argument that the criminal standard for willfulness applies, that standard is satisfied here. The criminal standard for willfulness is satisfied where the individual at issue is aware of the reporting requirement, but, for any reason, deliberately evades it. See United States v. Tatoyan, 474 F.3d 1174, 1179 (9th Cir. 2007) (evidence at trial was sufficient to support conviction for willful violation of the currency reporting requirement where defendants “knew they were required to file a report and that, for whatever reason, they deliberately evaded this requirement.”); see also Ratzlaf, 510 U.S. at 154 n.5 (Blackmun, J., dissenting) (under, inter alia, Section 5314, knowledge of the reporting requirement necessarily entails knowledge that the failure to report is illegal). Criminal willfulness may also “be proven through inference from conduct meant to conceal or mislead sources of income or other financial information.” Sturman, 951 F.2d at 1476-77; see also United States v. Dashney, 117 F.3d 1197, 1203 (10th Cir. 1997) (“[I]n the structuring context, ‘proof of concealment tends to prove knowledge of illegality.’”) (quoting United States v. Marder, 48 F.3d 564, 574 (1st Cir. 1995)). This standard is satisfied here as a matter of law. It is beyond dispute that in 2000 and 2001 McBride was aware of the FBAR reporting requirement, see SOF ¶¶ 6, 24, 25, 32, and that he nevertheless affirmatively denied having an interest in any reportable foreign account in his Individual Income Tax Returns for 2000 and 2001. See SOF ¶ 26. Moreover, McBride concealed his involvement in offshore activities from the individuals who prepared his Individual Income Tax Returns for 2000 and 2001. See SOF ¶¶ 27, 28. And when McBride was approached by the Internal Revenue Service and questioned regarding his offshore activities, he was not truthful. See SOF ¶¶ 29, 30, 31, 33. Finally, and perhaps most importantly, the entire Merrill Scott program which McBride purchased for $75,000 was primarily designed to help McBride avoid income tax by concealing the Clip Company’s true revenues in offshore shell-companies funded through kickbacks paid by the Clip Company’s manufacturer in Taiwan, while making those revenues available to McBride through, inter alia, phony loans. See SOF ¶¶ 5, 7, 9, 11, 13, 14. These undisputed facts are sufficient to demonstrate willfulness under either the civil or criminal standard.

Other UBS Account Holders are Charged

The Boston Globe reports here that two other UBS account holders were charged in separate cases.  The individuals are Peter Schober and Gregory Rudolph.  According to the article, in each case, the charge is for a single count of failure to file the FBAR presumably for a single year (maximum sentence of 5 years).  The charging documents apparenlty assert that they avoided tax in the amounts of $77,871 and $25,507 respectively.  I will do a supplemental posting to this blog with more details when I get them.

USAO Press Release

Practitioner Experience with No Answers to the FBAR Question on Form 1040

Daniel Gottfried posted an article titled Proving Willfulness in FBAR Reporting – Checking “No” Ain’t Apropos. The article is reprinted also in Tax Notes at Tax Notes, Sept. 27, 2010, p. 1394; 128 Tax Notes 1394 (Sept. 27, 2010) and in Tax Notes at 2010 TNT 188-14.

The article presents the results of a survey of practitioners who assist U.S. taxpayer clients in making voluntary disclosures of foreign bank accounts as they relate to the U.S. income and estate tax obligations and the FBAR filing requirements.

The article relies upon considerable anecdotal experience of the survey participants to conclude that answering no to the FBAR question on Schedule B of the 1040 (or failing to answer it) is not persuasive evidence that the taxpayer knew of his or her obligation to file the FBAR. The truly draconian FBAR penalties require that the taxpayer know of the legal duty to file the FBAR and intend to fail to file the FBAR. That standard is practically the same as the willfulness standard for the commonly charged tax crimes, although the burden of proof would be lesser in a civil penalty case than in a criminal case and, as a consequence, there may be some relaxation of the articulation of the standard.

The difficulty of making an FBAR civil penalty case is shown in the recent case of United States v. Williams, Civil Action No. 1:09-cv-437 (E.D. Va., Sept. 1, 2010), which I blogged here. Williams indicates that the Government will have to place on strong evidence for the taxpayer's specific knowledge of the obligation and intent to fail to file. Williams certainly suggests that an even stronger case would be required for the criminal FBAR penalty.

Gottfried's survey and article and the Williams case suggest that taxpayers in the voluntary disclosure program should at least consider the opportunity to opt out and take their lumps under the standard FBAR civil penalty regime which, if consistently applied, may produce FBAR penalties less than the prescribed penalty under the voluntary disclosure program. Of course, when the income tax penalties are considered on an opt out, the taxpayer may have some difficulty avoiding the 20% accuracy related penalty because the IRS will consider most of them to be at least negligent. But it is doubtful that the Government would be able to establish civil fraud in many of these cases, so the income tax civil penalty should be a push at worst from the perspective of taxpayers having the facts that would motivate them to opt out of the settlement program civil penalty regime.

State of the Offshore Voluntary Disclosure Initiative

Readers interested in the state of the IRS's Offshore Voluntary Disclosure Initiative (OVDI) may be interested in the following publication: Mark E. Matthews and Scott D. Michel, IRS’s Voluntary Disclosure Program for Offshore Accounts: A Critical Assessment After One Year, 181 DTR J-1 (9/21/10).   The article may be reviewed or downloaded here. The authors, both prominent practitioners in this area of the law, provide a good summary of the history of voluntary disclosure and the implementation of the current OVDI, with emphasis on the program through the first stage cutoff for taxpayers entering the program by 10/15/09.

Yet Another UBS Client Bites the Dust

On September 21, 2010, Jules Robbins, an 84 year old retired watch distributor, was sentenced to one year probation for hiding his Swiss accounts that held, at their peak, almost $42MM. From the USAO SDNY Press Release:

In 2000, ROBBINS used the services of a U.S.-educated Swiss attorney to set up a sham Hong Kong corporation which was listed as the holder of his account and to serve as the nominal head of the corporation. In fact, UBS internal documents specified that ROBBINS wanted to be "100% in charge" of investment decisions concerning his UBS accounts. ROBBINS also took numerous steps to conceal his interest in these accounts from the IRS, including having his Swiss attorney receive all of the correspondence relating to the account at his law firm in Switzerland. As of December 31, 2007, ROBBINS' UBS accounts collectively contained almost $42 million.

ROBBINS, 84, of Jericho, New York, pled guilty on April 15, 2010, to five counts of subscribing to false federal income tax returns. As part of his plea agreement with the Government, ROBBINS paid a civil FBAR penalty of $20,833,345, an amount equal to 50 percent of the highest value of his UBS accounts as of December 31 for the years in which he failed to file FBARs.

According to news reports, Robbins' attorney argued in support of a light sentence that Robbins, the octogenarian, was in fragile health and the FBAR penalty is 80% of his net worth (meaning that his remaining 20% would be about $5MM. From the Bloomberg report, Robbins apologized and "asked the judge for mercy, breaking down several times as he told Holwell of the 'shame, aggravation and sleepless nights during the past many months.'"

Government Fails to Prove Willfulness in FBAR Civil Case

In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.

The opinion is relatively short, so I won't rehash the opinion. Some significant facts from the case are:

1. "Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period."

2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)

3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.

4. Williams failed to file the FBAR by June 30, 2001.

5. Williams' lawyers and accountants had advised him of the requirement to file the FBAR.

6. The Government had not proved that Williams willfully failed to file the 2000 FBAR.

7. "On October 15, 2002, Williams disclosed the accounts by filing his income tax return for the tax year 2001."

8. On February 2003, Williams disclosed the accounts pursuant to an earlier version of the offshore voluntary account program (the OVCI program).

9. "On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000." (Apparently, Williams' attempt at voluntary disclosure did not work, presumably because the disclosure was not timely.)

10. "On January 18, 2007, Williams filed the TDF 90-22.1 form for all years going back to 1993, including tax year 2000."

The key legal holdings are:

1. The legal review standard is de novo, in which the Government must prove willfulness -- in this context the intent to violate a known legal duty.

2. The maximum penalty for the willful violation then was $100,000.

3. The court found on the facts presented that the Government had not proved that the defendant knew the legal duty in question. The Court reasoned:

In this case, the Government has failed to prove a "willful" violation. The Court finds that the Government's case does not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account. n5  Further, the Government fails to differentiate tax evasion from failing to check the box admitting the existence of a foreign bank account.
n5. It is worth noting that Congress has since amended 31 U.S.C. § 5321 to allow the government to assess a civil penalty for FBAR violations regardless of whether the violation is willful. See 31 U.S.C. § 5321(a)(5), as amended by P.L. 108-357. Further, the statute now provides a "reasonable cause" exception. See 31 U.S.C. § 5321(a)(5)(B)(ii). While the issue of Williams' liability under the statute as amended is not before the Court, the Court notes that Congress found it necessary to expand the coverage of § 5321 to address a class of conduct falling short of the "willful" standard solely accounted for under the old statute. Clearly, simply failing to file a Form TDF 90.22.1 was insufficient to subject an individual to liability for a civil penalty under the old statute.

4. The court was not persuaded, on these facts, that Williams' no answer to the foreign account question on his 2000 1040 Schedule B gave his the requirement knowledge of the legal duty.

5. Moreover, since the accounts were surely known by all, including the U.S. by June 30, 2001, it would make no sense for Williams not to disclose them by filing the FBAR.

6. Williams was not estopped by his evasion guilty plea.

The Government argues that Williams' guilty plea should estop him from arguing that he did not willfully violate § 5314 for the tax year 2000. However, the evidence introduced at trial established that the scope of the facts established by Williams' 2003 guilty plea are not as broad as the Government suggests, and there remains a factual incongruence between those facts necessary to his guilty plea to tax evasion and those establishing a willful violation of § 5314. That Williams intentionally failed to report income in an effort to evade income taxes is a separate matter from whether Williams specifically failed to comply with disclosure requirements contained in § 5314 applicable to the ALQI accounts for the year 2000. As Williams put it in his testimony at trial, "I was prosecuted for failing to disclose income. To the best of my knowledge I wasn't prosecuted for failing to check that box." Tr. at 34.

I think the case illustrates the difficulty the Government will meet in establishing willfulness for the truly draconian FBAR penalty (in its present iteration).  Perhaps this will encourage at least some taxpayers in the current voluntary disclosure initiative to opt out and be subject to the normal FBAR penalty regime.  Assuming that the Government cannot meet the high standard (as illustrated by this case), the penalty costs could be a whole lot less than the program requires.

The Giffen Plea -- The Cost of Justice

James H. Giffen, the target of an extensive FCPA investigation and indictment (including two superseders), recently resolved at least criminal woes -- at least some of them -- through a plea agreement. I write on that plea agreement because the plea is to a tax count and it raises some interesting issues. The plea agreement and the information with the count of conviction pursuant to the plea are here and here. First I will just provide a summary of the plea agreement and then raise the issues that interest me.

Giffen pleads to the one information count charging "willfully failing to supply information regarding foreign bank accounts, in violation of Title 26, United States Code, Section 7203" for the year 1996. The reference is to the foreign account question on Schedule B of the 1996 return. Section 7203 is a misdemeanor with a maximum incarceration period of one year and, according to the plea agreement, a maximum fine of $25,000. Giffen waives the statute of limitations for the charge to which he pleads. That statute of limitations expired normally six years after the date he filed the return (approximately March 27, 1997, according to the information).
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Excessive Fines -- Forfeiture and FBAR Penalties

On July 7, the Second Circuit rendered a significant forfeiture decision (United States v. Castello, 611 F.3d 116 (2d Cir. 2010)), that bears upon the previous discussion of whether the FBAR penalty (maximum of 50% of the highest amount in the account per year, but in practice only, at most, 50% of the highest amount in a single year). (See prior blog discussion here.) In Castello, the defendant ran a check-cashing business through which he cashed more than $600 million in checks over the period of the indictment. Castello failed to file the required CTRs for checks exceeding $10,000. See 31 U.S.C. § 5313(a) and 31 C.F.R. § 103.22(b).

Castello was indicted and tried for

conspiracy to launder money (18 U.S.C. § 1956(h)); failure to file CTRs (31 U.S.C. § 5313(a)); unlawfully structuring financial transactions (31 U.S.C. § 5324); conspiracy to impair, impede, obstruct, and defeat the Internal Revenue Service (18 U.S.C. § 371); tax evasion (26 U.S.C. § 7201); and obstruction of justice (18 U.S.C. § 1512).

He was convicted only of the failure to file CTRs.

The issue on this appeal was the amount of forfeiture, if any. The statute required that "The court in imposing sentence for any violation of section 5313 shall order the defendant to forfeit all property, real or personal, involved in the offense and any property traceable thereto." 31 U.S.C. § 5317(c)(1)(A). The Government sought to forfeit $9,341,051.81, consisting of (i) 4% of the amount of checks in excess of $10,000 for which no CTRs were filed, (ii) $;2,671,872.50 in his wife's account, and (iii) the equity in a family home. On this appeal, the parties did not dispute that the statute required the amount of forfeiture sought by the Government, so the Court moved to whether forfeiture in that amount violated the Excessive Fines Clause. In essence, on this second round appeal, the Second Circuit affirmed the full forfeiture.

The backdrop for consideration is United States v. Bajakajian, 524 U.S. 321 (1998), the essence of which the Second Circuit summarized:

Putting § 5317(c)(1)(A) and Bajakajian together: The proper amount of forfeiture following a § 5313(a) conviction is the total forfeitable amount required by the statute, discounted by whatever amount is necessary to render the total amount not "grossly disproportional" to the offense of conviction. Four factors, distilled from Bajakajian, guide our analysis:

[1] the essence of the crime of the defendant and its relation to other criminal activity, [2] whether the defendant fit[s] into the class of persons for whom the statute was principally designed, [3] the maximum sentence and fine that could have been imposed, and [4] the nature of the harm caused by the defendant's conduct.

(For the wikipedia summary of Bajakajian, see here.)  Applying these factors, after further discussing Bajakajian, the Court concluded that the forfeiture requested by the Government in Castello was constitutional.

I encourage readers of the blog to read the both the Bajakajian and Castello opinions and shall not try to further summarize either here. Suffice it to say that, if put on a spectrum, where Bajakajian is at one end (the end of light forfeiture tolerance under Excessive Fines Clause) and Castello (and some of the cases cited in Castello) at the other end, FBAR violations are clearly in between, although drifting toward the Bajakajian side. Bajakajian involved no illegal activity other than failure to file the report, so a light forfeiture was compelled. So too, in the current FBAR environment, where there is no other illegal activity (to wit, in this context, no unreported and untaxed income), then there is no penalty under the IRS voluntary disclosure program and even at best a light penalty under audit guidelines. So, where there is a failure to report and pay tax on the income, the FBAR violation is clearly not at the Bajakajian end of the spectrum. On the other hand, it is also not at the Castello end either, for Castello's failure to file CTRs effectively hid the likelihood of multiple illegal incidents of the type that the CTR requirements were designed to flush out.

As Castello suggests, fine tuning the location on the spectrum (including either end) requires detailed analysis of the facts and circumstances of a particular case. But, focusing on what the Government has done in the FBAR area, it appears that the maximum fine it is obtaining in the plea deals to date is 50% of the highest amount in a single year in a context of multi-year violations and failure to report income. I don't think Bajakajian or Castello on their face suggest that these fines violate the Excessive Fines Clause.

Addendum #1:

As I reflected on this further, perhaps a better way of comparing the FBAR situation to Castello at least in legal income situations (a la Bajakajian) is to look at the tax that the taxpayer failed to pay from the offshore accounts.  After all, at least in legal income situations, the only purpose of the FBAR filing requirement is to flush out the tax that might otherwise go untaxed.  So, perhaps, the amount of the tax should set the upper limit on the fine.  Thus, in the Zaltsberg case I discussed yesterday (see here), the "claimed" tax loss was $60,000 but the FBAR penalty is $1.3 million.  (See also my discussion of the claimed amount of the tax loss.)

There are other ways of looking at it as well.  I invite readers of this blog to weigh in on the issue.

Addendum #2:

The bare facts of Zaltsberg do, I think, create a potential Excessive Fines Issue (which, of course, Zaltsberg may have negotiated away in his plea agreement (assuming you can negotiate away such a constitutional issue)).  But, going beyond Zaltsberg, I was working with a related issue today in trying to help a U.S. taxpayer decide whether to get into the post 10/15 voluntary disclosure program.  I am going to use illustrative facts (not the exact facts I am dealing with but illustrative and every a fancy variation of the facts).  Assume that a U.S. taxpayer, Joe Shmoe has a foreign corporation conducting an active trade or business in a foreign country (FC).  The business is such that the margins are thin, but it is all about volume and careful cash flow management.  The cash flow management results in the foreign bank account having very high balances (but most of it is float between the receipt of revenue and the outflow for costs of conducting the business).  The voluntary disclosure program prior to 10/15 required a 20% in lieu of FBAR penalty and post 10/15 requires God know what (perhaps, say 35% to split the baby between 10/15 and the 50% penalty being demanded in the criminal cases to date, of which Zaltsberg is illustrative).  So, for purposes of analysis, some good lawyers might just say that Joe Schmoe might want to model the economic cost of disclosure by assuming a 35% in lieu of FBAR penalty.  But, Joe Schmoe says that 35% of the highest balance for the highest year actually exceeds his profits over all the years (assume also that he entered the business in 2003).  On this basis, Joe Schmoe is getting a worse result than did Castello and he really did not avoid payment of that much tax (let's say his 35% penalty is $1 million and his tax avoided is just $50,000, all on wholly legal income).  Is that fair?  Is it excessive in the Bajakajian sense?  Should the Government only apply the in lieu of FBAR penalty to the real equity in the foreign bank account, not the gross amounts?  I hope that the readers can scope out a lot of variations on this theme that raise the same issue in greater or lesser degrees.  But, the fear among practitioners is that the IRS has a one size fits all, with no thought of nuance even when Excessive Fines concerns are present.

Foreign Financial Information - New Provisions

The Foreign Account Tax Compliance Act ("FATCA") provisions of the recently enacted Hiring Incentives to Restore Employment Act ("HIRE Act") contains several provisions related to foreign financial asset disclosures to be made on income tax returns. New § 6038D) imposes a tax return disclosure requirement for an interest in a "specified foreign financial asset." Reportable “specified foreign financial assets” are depository or custodial accounts at foreign financial institutions and, to the extent not held in an account at a financial institution, (1) stocks or securities issued by foreign persons, (2) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (3) any interest in a foreign entity.

Key related provisions are:

1. Failure to comply with this provision can subject the entire return to an open statute of limitations until 3 years from the date the information is provided to the IRS.  § 6501(c)(8), as amended.  Moreover, failure to report income in excess of $5,000 attributable to foreign financial assets subjects the return to a 6 year statute of limitations.  § 6501(e)(1)(A)(ii).  Note in applying these two special statute of limitations rules, it is important to distinguish between the reporting of the information about the foreign financial assets and including the income attributable to the foreign financial assets in gross income.

2. Failure to comply can subject the taxpayer to significant penalties just for the failure to comply, regardless of whether additional tax is due. The penalty is $10,000, with an escalating penalty of $10,000 for each 30 days that the information is not provided after notice from the IRS.  § 6038D(d).

3. If the failure to comply results in an understatement of tax, there is a new 40-percent penalty on any understatement attributable to an undisclosed foreign financial asset. (This penalty applies not only to the new foreign financial assets disclosures under § 6038D, but also disclosures required under §§ 6038, 6038A, new 6038D, 6046A, and 6048.)  § 6662(b)(7) and (j).

For more information, I link to the pertinent portions of my Tax Procedure text. For a good discussion of the open statute of limitations issue, KPMG has a good discussion here.

DOJ Tax International Roadshow on Foreign Financial Accounts

The international press report that the DOJ Tax Team -- Kevin Downing et al. -- are on the road to keep the press coverage rolling on the need for U.S. taxpayers with foreign financial accounts to come forward before the Government knocks on the door (or catches them bringing cash into the country).

So the press reports go, the U.S. will have thousands of new cases involving banks other than UBS from banks and other governments.  And, the voluntary disclosure program has provided leads to many other potential targets, including enablers.


For coverage see:
The Business Times
China Daily

More Offshore Account Charges -- Of HSBC (Reputedly) and Recorded Conversations

On April 14, 2010, the Government filed a criminal complaint in the Southern District of Florida against Mauricio Cohen Assor and Leon Cohen Levy, father and son. They are real estate developers who were either legal residents or permanent legal residents at all times and thus were subject to U.S. income tax and FBAR reporting just as other citizens and residents. The complaint itself is a bare bones Klein tax conspiracy charge. The attached affidavit of the IRS CI Special Agent agent contains the torrent of words and claims the add fluff to a conspiracy charge. There is the now expected allegations of offshore accounts and offshore entities. The bank, reputed to be HSBC rather than UBS, was involved both through New York offices and Swiss offices. The affidavit sets forth some conversations which were recorded, presumably, by the bank. This is pretty or ugly stuff, depending on perspective. We have seen in the UBS matter handwritten notes of phone calls and meetings that are ugly. Recordings are of the same genre, but do tend to nail exactly what was said rather than leaving it to the vagaries of hand written notes.