Govt. Wins Summary Judgment Motion for FBAR Willful Penalty

Court Grants Summary Judgment in Willful FBAR Penalty Case

In recent months, there have been multiple willful FBAR cases that have made their way through the District Court and appellate circuits throughout the country on the issues of reckless disregard and repatriation of funds. Recently, in the case of U.S. v Harrington, the court ruled in favor of the government and granted summary judgment on the issue of a willful Foreign Bank Account Reporting liability. There is another aspect to this case involving the payment of liabilities for the outstanding penalties, but the focus of this article is on why the court granted summary judgment on the issue of willfulness for an FBAR liability case. Let’s take a brief look at what the court provided in their ruling:

Procedural Matter

• • • “This matter is presently before the Court on the Government’s Motion for Summary Judgment (Motion). See Dkt. 74. Monica, who is represented by counsel, filed her Response to the Motion (Dkt. 81), and the Government filed its Reply (Dkt. 91). George filed his Response pro se6 (Dkt. 87), and the Government filed a Reply (Dkt. 93).”

Summary Judgment Standard

• • • “Summary judgment is appropriate only if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Henderson v. Inter-Chem Coal Co., Inc., 41 F.3d 567, 569 (10th Cir. 1994). “[A] ‘judge’s function’ at summary judgment is not ‘to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.’” Tolan v. Cotton, 572 U.S. 650, 656 (2014) (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 249 (1986)).”

Undisputed Material Facts

• • • “George travelled to Switzerland in late 2006 and early 2007 to meet multiple times with Catherine De Berti, an employee of UBS. Id. at ¶17. They discussed transferring funds then-held by Reed and Malta to a Lichtenstein entity known as a stiftung, which George agreed to do. Id. at ¶¶18, 19. Following this, George and Monica executed bylaws creating the Ruth Schröder Stiftung (Stiftung).10 Id. at ¶20. George and Monica were the primary beneficiaries of the Stiftung. Id. at ¶21.

    • The Stiftung then opened an account at UBS in Switzerland with funds transferred from the Reed and Malta accounts. Id. at ¶22-25. The account opening documents directed that all correspondence be directed to Globaco AG in Switzerland. Id. at ¶28. George did not receive correspondence about the account nor did he request to be an authorized signatory for the account. Id. at ¶29. But he nevertheless believed the assets (or at least a portion of them) in the Stiftung’s UBS account belonged to him. Id. at ¶27.1

    • Meanwhile, in 2012, the IRS began reexamining George for tax years 2007 through 2010. Facts, ¶64. During the examination, George filed amended FBARs for 2008, 2009, and 2010, and for the first time filed an FBAR for 2007. Id. at ¶66. Monica and George also submitted amended federal income tax returns for 2007 through 2010. Id. at ¶68. George acknowledged that he first learned of FBAR reporting requirements in the early 2000s.14 Id. at ¶39. Prior to the IRS reexamination, George had timely filed

    • FBARs covering 2005, 2008, 2009, and 2010. Id. at ¶40. But these FBARs disclosed George’s interest in accounts at Bank of New Zealand only; the FBARs did not report any interest in the Stiftung’s UBS account or the ValorLife insurance policies. Id. at ¶¶42-43. George prepared his and Monica’s joint federal income tax returns for 2007 through 2010. Id. at ¶44. Each of those returns asked, “At any time during [the tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” Id. at ¶45.

    • Although George and Monica responded, “Yes,” to that question, they left the location of the account(s) blank (except for the 2008 tax return, for which they identified “New Zealand”). Id. at ¶¶46-47. They did not identify the Stiftung’s UBS account or the ValorLife insurance policies on those tax returns. Id. at ¶48. The jurat above the signature lines on the tax returns attested under penalty of perjury that the returns were accurate. Id. at 49. The IRS assessed civil FBAR penalties against George for 2007 through 2010 on October 27, 2017. Id. at ¶70. The penalties were the result of the IRS’s determination that George had willfully failed to report his financial interests in the Stiftung’s UBS account and the ValorLife insurance policies, which George disputed (Dkt. 87, p.11, ¶69) and Monica disputed only as to the IRS’s willfulness determination. Dkt. 81, p.5, ¶69. The United States then filed this case to enforce the IRS’s imposition of FBAR penalties.

    • Concurrently with the IRS’s investigation and assessment of FBAR penalties, the IRS also determined that George had failed to report $791,661 in foreign investments for 2005 through 2010 and assessed civil fraud penalties. The IRS sought to enforce those penalties in Harrington I.15 See Harrington v. Comm’r of Internal Revenue, 2021 WL 3140384, at *1-2 (T.C. 2021), aff’d 2022 WL 17333080 (10th Cir. Nov. 30, 2022). The Harrington I court found, among other things, the following: • George had the control necessary over the Stiftung’s UBS account and the ValorLife insurance policies to determine that he had underreported his income. Id. at *19. Indeed, the Harrington I court found that, to the extent that “there were restrictions on [George’s] ability to make routine withdrawals, we find that he willingly divested himself of that power in order to conceal his offshore assets.” Id. at *20. • He argued the court should ignore his amended income tax returns, which the court rejected. Id. at *27

    • He had given “implausible and inconsistent explanations about his income and assets.” Id. at *33-34. • He had knowingly concealed his assets “[a]s evidenced by his timely filing of FBARs reporting (very modest) balances in New Zealand banks, petitioner knew of his obligation to file FBARs reporting foreign financial accounts. But before the IRS audit he had never filed an FBAR disclosing any of his holdings in the Cayman Islands, Switzerland, or Leichtenstein.” Id. at *36. • He made false statements about his supposed lack of control over the accounts. Id. at *38-39 (George “plainly had (and knew that he had) control over the offshore accounts, as evidenced (among other things) by his repeated directions that funds be rolled over from one investment vehicle to the next.”).”

Willfulness Standard

• • • “Whether Such Failure Was Willful The Court further finds that George’s failure to file timely and accurate FBARS concerning the Stiftung’s UNS account and ValorLife policies was willful. George and Monica each attempt to incorporate a subjective element to willfulness in the FBAR context. See Dkt. 81, p.16; Dkt. 81-1, ¶6. But neither offers any legal support for their interpretation. The Court rejects their effort. See Norman v. United States, 942 F.3d 1111, 1115 (Fed. Cir. 2019) (rejecting similar argument).”

Court’s Ruling

• • • Applying this standard, the undisputed material facts show that George’s failure to file FBARs was willful. George first learned of FBAR reporting requirements in the early 2000s. Facts, ¶39. He timely filed FBARs for 2005, 2008, 2009, and 2010 that disclosed his interest in his accounts at Bank of New Zealand only, and not the Stiftung’s UBS account or the ValorLife policies. Id. at ¶40-43. But, based on his past filings, George was clearly aware of FBARs and that they required disclosure of foreign accounts over which he had an interest or other authority and where the balance of the accounts exceeded $10,000.

Summary Judgment Granted

• • • For the reasons shared above, the Motion for Summary Judgment is GRANTED IN PART and TAKEN UNDER ADVISEMENT IN PART. It is GRANTED as to Counts 1 and 2 and judgment shall enter in favor of the Government, and against Defendants (as applicable) on Counts 1 and 2. It is TAKEN UNDER ADVISEMENT as to Count 3.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.