Tax Court in Brief | Estate of Clemons v. Comm’r | Dangers of FBAR, Accuracy-Related Penalties, and Foreign Assets

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The Tax Court in Brief – September 12th – September 16th, 2022

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Tax Litigation:  The Week of September 12th, 2022, through September 16th, 2022

Estate of Clemons v. Comm’r, T.C. Memo. 2022-95| September 16, 2022 | Buch, J. | Dkt. No. 25029-16

Opinion

Short Summary:  Brett Clemons (Clemons) was a successful computer programmer and owned various computer programming businesses.  In 2001, he opened a Swiss bank “numbered” account.  However, he hid the transfer and existence of the foreign account from his then-wife because he intended to divorce her.  When opening his foreign account, he acknowledged his U.S. tax liability in opening documents and requested that the Swiss bank account hold his mail.  After the bank account was opened, he used it to deposit significant funds and to make investments overseas.

Clemons prepared and filed his own income tax returns.  For 2003 through 2007, he did not report all of his earnings from his computer programming business, and he did not report investment gains from his investments overseas.  He also did not disclose foreign accounts on Schedule B of his returns, nor did he file FBARs each year.

In October 2008, Clemons was advised of a United States investigation into the Swiss bank.  When Clemons was informed of a “new business model” the bank intended to use, he directed the Swiss bank to liquidate his investment portfolio, depositing those funds into another Swiss bank account.  On his 2008 Schedule B, he reported that he held foreign financial accounts, although he did not disclose the Swiss bank account.  Clemons did not file a 2008 FBAR.

For his 2009 tax year, Clemons reported on Schedule B that he held a foreign financial account in the Netherlands, but he did not disclose the Swiss bank account.  Similar to all of his prior tax years, he did not file a 2009 FBAR.

During the examination of his 2003 through 2009 tax years, Clemons provided false testimony to the IRS and submitted false FBARs.  The IRS later issued a notice of deficiency to Clemons for his 2003 through 2009 tax years.  In the notice of deficiency, the IRS sought to impose fraud penalties with respect to Clemons’ filings for his 2003 through 2009 tax years.  The notice of deficiency further determined that Clemons had omitted substantial amounts of gross income for those tax years.  After filing his petition and after trial, Clemons passed away, and his estate was replaced as the true party in interest.

Key Issues

Primary Holdings:

Key Points of Law:

Insight: The Estate of Clemons decision shows the dangers of not filing FBARs and other information returns with the IRS on a timely basis.  Indeed, in cases such as these, the IRS often points to the non-filing as evidence that the taxpayer was attempting to conceal the foreign assets from the IRS, which can support a finding of fraud penalties.  Taxpayers who have not timely filed FBARs or other information returns (e.g., Forms 8938, 3520, etc.) should consult with tax professionals to regain compliance and mitigate the risks of a fraud finding.