The Good, the Bad and the Ugly FBAR Style Part 2 or A Fistful of Dollars (that the Government Wants) by ROBERT HORWITZ
“When a man’s got money in his pocket he begins to appreciate peace.” The Man With No Name
Why start with a quote from one of Sergio Leone’s great Clint Eastwood westerns, A Fistful of Dollars. It is more peaceful to have money in your pocket, or at least close by in a domestic financial account, than offshore given how the IRS’s penchant for assessing and the courts’ penchant for upholding FBAR willful penalties. Which brings us to the district court case mentioned in my prior blog, Gentges. Mr. Gentes for a number of years held two accounts at UBS in Switzerland: account ending in 4959 and account ending in 4337. He failed to file FBARs for 2007. Almost a decade later, the IRS assessed a $679,635 willful FBAR penalty with respect to account 4959 and a $224,488 penalty with respect to account 4337.[i] In 2018 the Government sued Mr. Gentges to reduce the assessments to judgment. It filed a motion for summary judgment, which the court granted in part and denied in part.
The facts are straight forward: when opening both UBS accounts Mr. Gentges signed documents stating that (a) he was electing to have the accounts numbered, (b) he wanted all mail from UBS held, (c) he did not want any investments in U.S. securities so that information would not be disclosed to the IRS, and (d) he was aware he was liable for tax in the U.S. as a U.S. person. He claimed he signed the documents where he was directed and did not read them over carefully. He picked up his mail from the bank during his frequent visits to Switzerland. He and his wife set up a trust to which they transferred their home in the U.S. and all their U.S. bank accounts. He did not tell the attorney who set up the trusts about the Swiss accounts or seek anyone’s advice about them.
Mr. Gentges used the same CPA to prepare his returns for many years. He never disclosed his Swiss accounts to the CPA and never asked him about reporting foreign accounts. He would send his information to the CPA every year to prepare his tax returns (without any information on the Swiss accounts). The “no” box was checked on each return in response to the Schedule B question whether the taxpayer had any foreign bank accounts. Mr. Gentges signed his returns under penalties of perjury. Mr. Gentges claimed he did not disclose his Swiss accounts because, as his inheritance from his parents, they were his “European heritage,” which he did not think were relevant to his tax obligations.
In September 2008, he moved the accounts from UBS to Migros Bank in Switzerland and instructed that the mail be sent to his son’s home in Switzerland. When Migros Bank informed him it no longer would do business with U.S. citizens, he moved his account to another Swiss bank and, when that bank stopped doing business with U.S. citizens, he moved his accounts to yet another Swiss bank.
In addressing the Government’s summary judgment motion the court noted that Mr. Gentges did not dispute that in failing to file an FBAR for 2007 he violated the reporting requirements of §5314 and the regulations. The issues before the court were
- Was the violation willful and
- Was the penalty properly calculated
Citing the Third Circuit’s decision in Bedrosian, the Fourth Circuit’s decision in Horowitz, and the Federal Circuit’s decision in Norman for the proposition that in the context of the civil FBAR penalty willful includes both knowing violations and reckless ones (a proposition that Mr. Gentges conceded), the court held that for purposes of the civil FBAR penalty willful includes both knowing and reckless violations of the statute.
Mr. Gentges said he signed his return (which had the box on Schedule B checked “no”) without any significant review other than checking the summary comparing the 2007 year with the prior year. The court stated that Mr. Gentges’ signing his return without carefully reviewing it “dooms Defendant’s argument on summary judgment.” After discussing the appellate and district court cases where willfulness was found on similar facts to those in Mr. Gentges’ case, the court held:
Following the weight of authority for appellate and district court cases around the country, the Court concludes that Defendant recklessly disregarded the FBAR filing obligation by failing to carefully review his 2007 income tax return and erroneously representing that he had no financial interest in foreign accounts.
The court refused to follow the “handful of district court cases that have gone the other way” because they were either “factually distinguishable or analytically flawed.” The case that was “factually distinguishable” was United States v. Clemons (MD Fla. 2019), where the taxpayer prepared his own return using Turbo Tax, checked the box on Schedule B “yes” and claimed he did not file an FBAR because Turbo Tax did not prompt him to prepare one. According to the court, this could have been due to negligence whereas Mr. Gentges signed a return that falsely checked the “no” box.
The court found two cases “analytically flawed”: United States v. Flume (SD Tex. 2018) and United States v. de Forrest, 463 Fed. Supp. 3d 1150 (Nev. 2020). It rejected the Flume court’s determination that the “constructive knowledge” theory undermines the distinction between willful and non-willful and termed its refusal to adopt the “constructive knowledge” theory as a “dodge” since courts had frequently held that a person who signs a tax return is deemed to have constructive knowledge of its contents. The de Forrest case denied the Government’s summary judgement motion but did not distinguish or address the cases “holding that a taxpayer’s submission of an erroneous tax return he or she signed is per se evidence of reckless disregard toward the FBAR obligation.”
Despite the court’s holding that a person acts willfully for purposes of the FBAR civil penalty by signing a return that erroneously answers “no” to the question whether the taxpayer has an offshore account, the court went on to discuss other evidence that Mr. Gentges acted willfully: his failure to disclose his foreign accounts to his long-time CPA or consult with him about whether he had to report the accounts to the IRS; his use of numbered accounts and mail holds; and the amounts in the accounts were not so small or insignificant as to be overlooked.
If failing to carefully review every line on a tax return is reckless and consequently willful, the discussion of other evidence is irrelevant. But then, I have never bought in to the idea that signing a return with the “no” box checked creates an irrebuttable presumption that the taxpayer acted with reckless disregard, thus making the failure to file an FBAR willful. To me, this is more a dodge than the holding of the Flume court. I believe the correct approach is that of the district court in Jones v. United States (CD Cal. 2020), where the district court denied summary judgment, finding that signing an erroneous return creates a rebuttable presumption that the taxpayer knew the contents of the return but that “Ultimately, willfulness is a finding of fact and the fact that Mrs. Jones signed her return under penalty of perjury is prima facie evidence that she had constructive knowledge of the FBAR requirements. Such evidence creates a genuine dispute of material fact as to whether she engaged in a willful violation.” While the Gentges opinion relies on the Jones case regarding the penalty calculation, for some reason it ignores the Jones’ holding on willfulness.
Which gets us to the second issue: computation of the penalty. Mr. Gentges did not challenge the calculation of the $679,365 penalty for account 4959 since it was based on the amount in the account on June 30, 2008.[ii] He did challenge calculation of the $224,448 penalty for account 4337 since it was based on the account balance as of December 2007 since the IRS did not have information on the account balance as of June 30, 2008.
The court noted that the amount of the penalty is reviewed under the Administrative Procedure Act’s “arbitrary and capricious” standard. Relying on United States v. Schwartzbaum (SD Fla 2020) and Jones, the court held that where the IRS makes an FBAR willful penalty assessment using an incorrect account balance it acts arbitrarily and capriciously. It therefore remanded the case to the IRS with respect to the penalty calculation for the 4737 account. End result: summary judgement in favor of the Government on the penalty for account 4959 and on the issue of willfulness on account 4337, but summary judgment denied on the amount of the willful penalty for account 4337. This raises some interesting questions: (a) if the amount in the account on June 30, 2008, was more than on December 31, 2007, can the IRS assess a larger penalty? (b) if the account was closed by June 30, 2008, what penalty can the IRS assess? (c) if the IRS abates and reassesses, would Mr. Gentges have a statute of limitations defense or will the institution of the collection action be deemed to have tolled the statute of limitations?
Robert S. Horwitz is a Principal at Hochman Salkin Toscher & Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.
[i] While the court’s opinion does not discuss the reason for the delay in assessing the penalties, I assume that Mr. Gentges was accepted into the OVDP program, agreed to waive the statute of limitations to assess the FBAR penalty, and then withdrew or was removed from the program.
[ii] Under 31 U.S.C. §5321(a)(5)(D)(ii), the 50% willful penalty is based on the amount in the account at the time of the violations, which is the due date of the FBAR. During the year in issue, FBARs were due on June 30 of the year immediately succeeding the year for which the report was made.