United States v. Horowitz (FBAR Series)

United States v. Horowitz, U.S. District Court, D. Maryland | January 18, 2019 | Grimm, J. | No. PWG-16-1997

Short Summary: United States commenced civil action against married taxpayers to recover civil penalties for willful failure to file Foreign Bank Account Report (FBAR). Parties filed cross motions for summary judgment.

Key Issue: First, whether the regulation that set the maximum penalty for FBAR violations was valid. Second, whether defendants willfully violated FBAR reporting requirements for 2007 and 2008.

Primary Holdings:

Regulation which set maximum penalty at $100,000 was invalid and unenforceable;
genuine issue of material fact existed as to whether IRS reversed penalty assessment, precluding summary judgment on statute of limitations defense;
wife had no obligation to submit FBAR for year 2008; and
taxpayers willfully failed to file FBAR for year 2007.

Key Points of Law:

Regulation which set maximum penalty for willful failure to file Foreign Bank Account Report (FBAR) at $100,000 was invalid and unenforceable, in light of amendment to controlling statute mandating that maximum penalties for FBAR violations be set to greater of $100,000 or 50% of account balance.
Taxpayer did not have financial interest in or authority over husband’s Swiss bank account in year 2008, and thus taxpayer had no obligation to report any such interest or authority to IRS; husband was sole account holder, and although husband putatively granted taxpayer power of attorney, taxpayer did not sign signature specimen box on bank form as required to exercise power of attorney.
Taxpayers willfully failed to file Foreign Bank Account Report (FBAR) for year 2007 notifying IRS of interest in Swiss bank account, warranting heightened civil penalty; regardless of whether taxpayers had actual knowledge of FBAR requirement, taxpayers signed their tax returns, thereby affirming knowledge of reporting requirements including FBAR requirement to report overseas bank accounts.
Willfulness of a taxpayer’s failure to file a Foreign Bank Account Report (FBAR), warranting heightened civil penalties, may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information, and it can be inferred from a conscious effort to avoid learning about reporting requirements. Willful blindness as to tax reporting requirements may be inferred where a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability.

Insight:

The most unique aspect of this case is the issue of imputed liability on a spouse that does not actively deal in the couple’s finances but has knowledge of foreign bank accounts that were not reported. In 2008, Susan Horowitz did not jointly own the foreign bank account with her husband.[1] Under 31 C.F.R. § 1010.350, the issue was whether Susan had any financial interest in or signatory authority over the account.[2] If so, she would also be liable for any penalties assessed against the Horowtizes for 2008.[3] The government argued that, although the account was not in her name, the fact that Peter intended to add her name to the account and Susan’s designation as a power of attorney is sufficient to demonstrate that she had a financial interest in and authority over the account.[4] The court rejected this argument and found that even if both parties intended that Susan have a financial interest in the account, she never had such an interest during 2008 because her name was never actually added to it and never provided a signatory specimen in 2008, so she had neither a financial interest nor authority over the account at issue.[5]

With regard to Susan Horowitz’s liability for 2007, she and her husband owned the account jointly, and her liability was more clear.[6] Even though Susan never participated in filing tax returns and her husband handles all of the tax issues for them, the court found that both Mr. and Mrs. had recklessly disregarded their obligation to file a timely FBAR form.[7] The strongest evidence for their recklessness was conversations they had with friends regarding tax liability for foreign bank accounts and the constructive knowledge they had from signing their tax returns that included the directions for FBAR reporting.[8]

[1] United States v. Horowitz, 361 F. Supp. 3d 511, 522 (D. Md. 2019) (mem. op.).

[2] Id. at 522–523.

[3] Id.

[4] Id. at 523.

[5] Id.

[6] Id. at 525.

[7] Id.

[8] Id. at 528, 529.