United States v. Schwarzbaum (FBAR Series)

United States v. Schwarzbaum, U.S. District Court, S.D. Florida | March 20, 2020 | Bloom, J. | No. 18-cv-81147-BLOOM/Reinhart

Short Summary: Government filed complaint to reduce to judgment civil penalties assessed by Internal Revenue Service (IRS) against taxpayer for willfully failing to timely file for four tax years complete and accurate Report of Foreign Bank and Financial Accounts (FBAR) forms, with respect to taxpayer’s foreign bank accounts.

Key Issue: First, whether taxpayer was willful in failing to disclose foreign bank accounts. Second, whether civil penalties assessed by IRS for willful violations were in accordance with law.

Primary Holdings:

willfulness could not be shown under constructive knowledge theory arising from signing tax returns;
taxpayer’s acts for one tax year did not show that taxpayer knowingly violated FBAR requirements;
taxpayer’s FBAR violation in one tax year was not reckless or willfully blind;
taxpayer’s FBAR violations in three tax years were reckless or willfully blind; and
civil penalties assessed by IRS for willful violations were not in accordance with law.

Key Points of Law:

In the context of a civil penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) form, willfulness 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.
In the context of a civil penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) form, willful blindness 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 pointing to such liability. Willful blindness is sufficient to prove willfulness in this context.
Taxpayer’s willfulness could not be shown under a theory that taxpayer should be charged with constructive knowledge of information in his tax returns by virtue of his having signed them under penalties of perjury; under a constructive knowledge theory, because taxpayers were required to sign their tax returns, a violation of the FBAR filing requirements could never be non-willful, yet the statute provided for non-willful civil penalties, and a constructive knowledge theory would lead to a draconian result, by precluding the consideration of other evidence presented by taxpayer.
Taxpayer’s acts, when opening Swiss bank accounts, in using account pseudonyms, and instructing banks not to invest in U.S. securities or to disclose his identity or retain his correspondence, did not show that his failure to file complete and accurate Report of Foreign Bank and Financial Accounts (FBAR) forms disclosing the accounts was knowing, so that civil penalties could be based on willfulness; taxpayer invested his money in the manner suggested by his father, he trusted Swiss bankers to effectuate his wishes, and accounts were opened in taxpayer’s name despite the account pseudonyms.
Taxpayer’s failure to consult with a U.S. tax professional did not show that his failure to file complete and accurate FBAR forms disclosing the account was knowing, so that civil penalties could be based on willfulness; taxpayer no longer had an account at bank when he received a letter suggesting that his account may require IRS reporting, taxpayer was confused by the letter, he relied on Swiss attorney’s advice that the letter did not apply to him, and he retained U.S. counsel when it became clear to him that the letter did apply.
Taxpayer’s failure to timely file a complete and accurate FBAR form for a tax year, with respect to his foreign bank accounts, was not reckless or willfully blind, as would support a civil penalty based on willfulness, where taxpayer used a certified public accountant (CPA) to prepare and file his return, a CPA had told him, incorrectly, that gifts from non-U.S. sources were not taxable unless there was a U.S. connection, and taxpayer did disclose foreign bank accounts when there was a U.S. connection, e.g., funds from the U.S. had been transferred to an account.

Taxpayer’s failure to timely file a complete and accurate FBAR forms for three tax years, with respect to his foreign bank accounts, was reckless or willfully blind, supporting civil penalties based on willfulness, though certified public accountants (CPA) had previously told him, incorrectly, that gifts from non-U.S. sources were not taxable unless there was a U.S. connection, where taxpayer prepared FBAR forms himself, he read the FBAR instructions, which did not contain language requiring a U.S. connection, and his reliance on his experience with other tax systems, for which taxation was based on residency rather than citizenship, was not reasonable because FBAR instructions were unequivocal about their application.

Civil penalties assessed by Internal Revenue Service (IRS) against taxpayer, for willfully failing to timely file for three tax years complete and accurate Report of Foreign Bank and Financial Accounts (FBAR) forms, with respect to foreign bank accounts, were not in accordance with law, as basis for being set aside under Administrative Procedure Act (APA), where base amounts for civil penalties did not use account balances at time of each year’s FBAR violation and instead used the highest aggregate balance for each account, during reporting periods, as reported by taxpayer in his Offshore Voluntary Disclosure Initiative (OVDI) penalty worksheet.

Insight:

A subsequent decision from this district court was made on May 18, 2020 as to the amount of penalties to be assessed against Schwarzbaum.[1] This decision primarily remedied the penalty calculation problems from the original case, in accordance with the rule that civil penalties for FBAR violations must be assessed by using the account balances at the time of each FBAR violation.[2] The court imposed a total of $12,907,952 against Schwarzbaum.[3] Also, the court rejected Schwarzbaum’s argument that the penalties are excessive under the Eighth Amendment, because they ruled that the language of the Bank Secrecy Act and the intent of Congress led them to conclude that FBAR penalties are not subject to the Eighth Amendment.[4] The court held that the cases Schwarzbaum attempted to connect to the case at bar were not applicable and that the FBAR penalties are meant to fulfill remedial purposes, not punitive purposes which are addressed by the Eight Amendment.[5]

[1] United States v. Isac Schwarzbaum, No. 18-cv-81147-BLOOM/Reinhart, 2020 WL 2526500, at *1 (S.D. Fla. May 18, 2020).

[2] Id.

[3] Id. at *5.

[4] Id. at *5–6.

[5] Id.