Category Archives: criminal tax law

 

We recently posted DC Determined That IRS Arbitrarily Calculated $1.5M FBAR Penalty, where we discussed that a California District Court in Margaret J. Jones v. U.S., case number 2:19-cv-04950, in the U.S. District Court for the Central District of California, determined that the IRS arbitrarily calculated a penalty of over $1.5 million for a woman who failed to file foreign bank account reports.

The $1.5 million was an arbitrary figure because it was based on her 2013 account balances instead of 2011,when she had less money in her accounts, Jones added. Had it been based on the latter, she would have owed about $37,000 less, she said. Jones moved for summary judgment to dismiss the penalty and on the charge she willfully failed to file.

We also recently posted DC Finds That FBAR Penalty Not Violate 8th Amendment & Imposed a Penalty of $12.9M Based Upon FMV on June 30, where we discussed that a Florida District Court in U.S. v. Isac Schwarzbaum, case number 9:18-cv-81147, in the US District Court for the Southern District of Florida, has determined that Schwarzbaum, will pay the IRS a $12.9 million penalty for failing to file reports on his foreign bank accounts, a federal court ordered after having determined that the agency erred when it calculated the penalty at $13.7 million or $800,000 more than the court determined to be correct.

 

 

According to Law360, in Margaret J. Jones v. U.S., case number 2:19-cv-04950, in the U.S. District Court for the Central District of California, the Court determined that the IRS arbitrarily calculated a penalty of over $1.5 million for a woman who failed to file foreign bank account reports, a California federal court has ruled, but she still must prove her failure to file the FBARs wasn't willful.

The IRS has accused Jones of flouting foreign bank account reporting requirements when she failed to report accounts in Canada and New Zealand in 2011 and 2012. The agency based its argument in part on the fact she had constructive knowledge of her duty because she signed her 2011 and 2012 tax returns even though they were prepared by her tax adviser.

The IRS penalized her $1.5 million based on amounts in her accounts in 2013, which was prorated so that half was assessed for 2011 and the other for 2012. The agency moved for summary judgment on the issue that Jones knowingly failed to file FBARs.

Jones countered that she did not properly file her FBARs because of a good-faith misunderstanding. The family's tax preparer had not told her about the requirement, she said, and she voluntarily filed FBARs once she learned of her error. The 2012 FBAR had been timely filed, she said.

The $1.5 million was an arbitrary figure because it was based on her 2013 account balances instead of 2011,when she had less money in her accounts, Jones added. Had it been based on the latter, she would have owed about $37,000 less, she said. Jones moved for summary judgment to dismiss the penalty and on the charge she willfully failed to file.

The court agreed with Jones that the $1.5 million penalty was arbitrary because it was based on her 2013 account balances instead of her balances in 2011, when she failed to file an FBAR. Jones had subsequently filed a 2012 FBAR, the court pointed out.

The court dismissed both parties' motions on Jones' willfulness. The fact she signed her tax returns created a case that, on the surface, she understood her duty to file an FBAR, which could be refuted, creating a genuine dispute that was appropriate for trial. The court said it would remand the amount of Jones' penalty to the IRS should it prove her willfulness.

On September 4, 2019 we posted FBAR Consent to Extend Statute Held Valid!, we discussed that In United States v. Schwarzbaum (S.D. Fla. No. 18-cv-81147) a federal district court rejected an individual's claims that FBAR penalties assessed against him should be set aside because they were assessed after the limitations period expired.

Now in U.S. v. Isac Schwarzbaum, case number 9:18-cv-81147, in the US District Court for the Southern District of Florida, the Court has determined that Schwarzbaum, will pay the IRS a $12.9 million penalty for failing to file reports on his foreign bank accounts, a federal court ordered after having determined that the agency erred when it calculated the penalty at $800,000 more.

The court concluded that the penalty assessed by the government did not conform to statutory requirements because rather than utilizing 50% of the balance in each account at the time of the violation, which was the deadline to file the FBAR or June 30 of each year, the government used the highest aggregate balance in each of the accounts for each year as reported by Taxpayer on a penalty calculation worksheet provided in connection with his OVDI disclosures.

As a result, the court concluded:

1. That the IRS used the incorrect base amounts to calculate the FBAR penalties,
2. It rejected that the IRS’s methodology in calculating the penalty was harmless error and
3. The court also concluded that an FBAR penalty does not fall within the purview of the Eighth Amendment’s excessive fines provision.

The Internal Revenue Service cannot use estimates of what was in Isac Schwarzbaum's foreign accounts to calculate his penalty, set by federal tax law at the greater of $100,000 or half the account, U.S. District Court Judge Beth Bloom said in a decision issued on May 18, 2020. It must have the actual amounts or use the $100,000 figure, she said. 

Each willful violation has a penalty of $100,000 or half the amount in a foreign account on the date of the violation, Judge Bloom said in her March opinion, citing Section 5321, Title 31 of the U.S. Code. 31 U.S.C. 5321 The IRS used the highest aggregate balance in the accounts, not the amount on June 30, she said.  
The statute at issue in this case states as follows:

[. . .]

(D) Amount.—The amount determined under this subparagraph is—

[. . .]

• (ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

The IRS was unable to independently determine the June 30 balance in several of Schwarzbaum's accounts, according to court documents. In a supplemental brief filed in April, the agency asked Judge Bloom to use its estimates, arguing they were the best information available. Otherwise, taxpayers might be encouraged to withhold balance information, the IRS said.

Judge Bloom rejected the agency's arguments in the May 18, 2020 ruling, saying it should have obtained the balance information before it assessed penalties. Using the $100,000 figure where the balances were estimated, she added half of the June 30 account balances, calculating the penalty amount at $12.9 million.

Schwarzbaum didn't dispute that he had a number of foreign bank accounts, or that he failed to timely file the reports from 2006 through 2009, according to court documents. He argued he should not be penalized for willingly failing to file because he received poor advice from a number of financial advisers and filed after discovering the error.

The IRS had argued Schwarzbaum, by signing his tax returns, implicitly reviewed them and knew he failed to file. The judge disagreed in the March opinion, pointing out that by that logic, every failure to file would be willful because every return must be signed.

Turning to each year in question in the March opinion, Judge Bloom found:

 

• Schwarzbaum did not willfully fail to file his 2006 report. He relied on an accountant to prepare it and followed the accountant's advice that no tax was due, she said.
• However, Schwarzbaum personally filed the 2007 through 2009 returns, she said, and should have known by 2007 how to properly disclose the accounts.
   

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 Sources:

Law360