According to Law360,  Florida man must repatriate roughly $18.2 million held in his overseas bank accounts to pay a court judgment finding he failed to disclose his Swiss accounts to the Internal Revenue Service, a federal judge said.
 

A federal magistrate judge correctly decided that Isac Schwarzbaum must repatriate funds in his overseas accounts to satisfy the judgment for his failure to timely file his reports of foreign bank and financial accounts with the IRS, U.S. District Judge Beth Bloom said in an order dated October 25, 2021.

Judge Bloom rejected Schwarzbaum's arguments that the government's request for a repatriation order represented an improper workaround of the Federal Debt Collection Procedures Act. A repatriation order instead complies with the FDCPA, which provides rules the government must follow when collecting pre- and post-judgment debts, according to the order.

"The Government's Request That The Court Issue An
Order Directing Schwarzbaum To Bring Sufficient Funds
To The United States To Satisfy The Judgment
Is Not Misplaced," Judge Bloom Said.

The U.S. government is looking to get around federal law governing debt collections to force Isac Schwarzbaum to repatriate the cash to satisfy the judgment for his failure to timely file his reports of Foreign Bank and Financial Accounts. A repatriation order instead complies with the FDCPA, which provides rules the government must follow when collecting pre- and post-judgment debts, according to the order. 

Isac Schwarzbaum Told A Federal Court That He Shouldn't
Be Forced To Repatriate $18.2 Million Held In
Overseas Banks To Satisfy A Judgment For Failing To Report
His Swiss Bank Accounts To The Internal Revenue Service.

Moreover, the government's arguments that it can use the All Writs Act to order repatriation are misguided, according to the filing. 

The Filing Objected To Recommendations From Magistrate Judge Bruce Reinhart, Who Said June 30 That The Court
Has Personal Jurisdiction Over Schwarzbaum,
 A Dual U.S.-German Citizen, And
Can Force Him To Repatriate The Funds.

An August court judgment found that he willingly failed to report his foreign bank accounts from 2007 through 2009 and was consequently liable for the $15.7 million penalty and interest amount after the IRS supplied an incorrect $13.7 million figure. He also failed to report his foreign accounts during 2006, but that action did not constitute a willful violation, the court had found.

Schwarzbaum's debt to the U.S. now totals more than $18 million, including civil penalties, late payment penalties and pre-judgment interest, according to court filings. The federal government argued that he has more than $49 million in assets in his overseas accounts that can be used to satisfy some of his debts to the U.S.

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A district court has held in U.S. v. Hughes, (DC CA 10/13/2021) 128 AFTR 2d ¶2021-5309, that a taxpayer's failure to file an FBAR was not willful when she failed to fill out Form 1040's Schedule B, Interest and Ordinary Dividends, which asks about foreign bank accounts. For another tax year, when she did fill out Schedule B, the court found that her failure to file an FBAR was willful.

The penalty for a failing to file an FBAR depending on whether the violation was willful or non-willful. The penalty for a non-willful violation cannot exceed $10,000. (31 USC 5321(a)(5)(B)(i)). The penalty for a "willful" violation cannot exceed the greater of $100,000 or half of the balance of the account at the time of the violation. (31 USC 5321(a)(5)(C)(i))

Ms. Hughes was a bookkeeper and prepared tax returns for herself and for some family members. It was undisputed that Ms. Hughes was required to file FBARs for tax years 2010-2013.

On her 2010 and 2011 tax return which she prepared herself, she failed to fill out Schedule B and she failed to report any of the interest income. Schedule B asks, effectively, if the taxpayer has a foreign bank account and whether the taxpayer needs to file an FBAR.

For 2012 and 2013, she did fill out Schedule B, and answered "yes" to those questions and Included the foreign bank income. But she did not file FBARs. The IRS sought penalties for willful violations for all four tax years.

The District Court Found That Her Failure To File FBARs
In 2012 And 2103 Was Willful.
But Her Failure In 2010 And 2011 Was Not.

The court wrote, "with respect to her 2012 and 2013 returns, there is no doubt that Hughes saw the questions about filing an FBAR, because she answered them... In 2010 and 2011, Hughes's returns did not include Schedule B, so the certification that she 'examined this return and accompanying schedules and statements' does not encompass that schedule and its admonitions about the FBAR. The IRS has identified nothing in Hughes's 2010 or 2011 returns as actually filed that, if 'examined' as she certified, would have put her on notice of the FBAR requirement. 

• How about the fact that she intentionally excluded the income from her Form 1040 and she swore that the rest of the return was correct? 
• How more intentional can you get than to have a tax return preparer, who knows that the schedule B is required based on the amount of dividend or interest income earned that year, who intentionally leaves out the schedule B?

The court continued, "The circumstances of Hughes's 2010 and 2011 tax returns differ from 2012 and 2013. 

Unlike those later years, there is no indication that Hughes reviewed Schedule B, with its instructions regarding the FBAR requirement, in preparing her 2010 and 2011 returns or any time before she did so. 

• Very narrow reading of the facts, which completely ignores that she was the tax return preparer who knew a Schedule B, as well as FBAR was required to be filed.

In the absence of any evidence that Hughes was aware of the FBAR filing requirement when she completed her returns for those years, or that she was presented with any information that should have put her on notice of that requirement, the IRS has not met its burden to show that her failure to file FBARs in those years was anything more than negligent."  

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The extension of the statute of limitations for failure to report Subpart F income applies to a taxpayer's entire return, not just the Subpart F-related items, the IRS said in an Office of Chief Counsel memorandum released on October 22, 2021.

In memorandum 202142009, the Internal Revenue Service said that when the statute of limitations is extended to six years under Internal Revenue Code Section 6501(e)(1)(C) for failure to report Subpart F income, the extension applies to the entire return. 

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According to Law360, Cryptocurrency has become a primary focus for the Internal Revenue Service's Criminal Investigation division because the technology offers a convenient means to hide assets and income as well as facilitate other types of criminal activities, an agency official said.

The CI division is leading the way when it comes to tracing cryptocurrency and identifying criminal activity that's related to emerging cryptocurrency markets, said Ryan L. Korner, the special agent in charge of the CI division's Los Angeles field office. Korner spoke late Thursday during a virtual conference hosted by the University of California, Los Angeles Extension.

"It's One Of Our Top Priorities," He Said.
"We're Really Looking At Cryptocurrency From Several Different Perspectives, Obviously No. 1 Being Tax Crimes."

The IRS has been cracking down on cryptocurrency traders to increase tax compliance, as demonstrated in 2019 by the agency sending 10,000 letters warning cryptocurrency users to properly report and pay taxes on these transactions. A notice from 2014 requires cryptocurrency to be reported the same way as any other gain or loss on the sale or exchange of property, and additional guidance issued in 2019 did not change that position.

When examining cases involving virtual currency, Korner said the division is looking into a taxpayer's intent to hide assets or income using cryptocurrency or whether there is some sort of legitimate purpose for their cryptocurrency holdings, such as investment. 

The CI Division Is Skilled At Evaluating The Difference Between A Misunderstanding Of The Law And
A Willful Intent To
Evade Taxes, He Said.

"CI doesn't have the resources to waste in investigating innocent taxpayers," Korner said. "So we're doing a lot of work to make sure on the front end [that] when we initiate an investigation, we're looking at someone who actually has criminal culpability." Him him him him him

• In fiscal year 2021 as of Aug. 31, CI had more than 150 "Cyber Cases" in inventory and about 90 of those were directly related to cryptocurrency, Korner said. 
• Of the 230 cases in the pipeline in which prosecution recommendations have been made to the U.S. Department of Justice, approximately 80 cases were directly related to cryptocurrency, he said.

"We [also] had over $3.5 billion in seizures stemming from virtual currency investigations in FY 21, and that's about 90% of our total seizures for the year," he said. "So you can see we have got a lot of activity in this virtual currency space."

CI has become good at tracing cryptocurrency through its use of data analytics, which continues to be one of the primary weapons to combat tax fraud, Korner said.

The IRS has deployed a system by Palantir Technologies Inc. that enables personnel in every agency unit to cull vast quantities of data from both internal and external sources in a single, unified research platform. The agency announced a seven-year, $99 million deal with Palantir, which is based in Palo Alto, California, in September 2018.

Palantir continues to be the IRS' No. 1 choice in the field and the government continues to add new cryptocurrency-related data sets to the Palantir database, Korner said. In addition, the IRS is using information from cryptocurrency exchanges to gather that data through cyber crime units, he said.

One way data analytics is being used is to identify non-filers who have significant virtual currency activity by comparing received data with tax filings, Korner said. CI also identifies people who have purchased significant assets such as gold and real estate that are beyond their afforded means using cryptocurrency, he said.

But data analytics is not the only tool that's used and hasn't replaced boots-on-the-ground case development and investigative work, Korner said. CI continues to focus on developing informants in the virtual currency industry and continues to collaborate with federal, state and international law partners to identify other trends for tax noncompliance in the cryptocurrency space, he said.

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