US v Nadji, Post-OVDI $25M+ Willful FBAR Penalty Lawsuit 2022

Post-OVDI Lawsuit for $25M+ Willful FBAR Penalties

With the recent case of Bittner going to the Supreme Court on the specific issue of whether or not non-willful FBAR violations should be penalized per account or per form, much of the recent press has been focused on this single aspect of missed foreign account reporting. When it comes to willfulness, the IRS has been pretty steadfast in aggressively pursuing taxpayers and pushing forward against filers that they believe acted with reckless disregard or willful blindness. In the recent filing of United States of America versus Behrouz, Nadji – the United States moves for steam ahead against the taxpayer for more than $25 million in foreign account penalties stemming from alleged willful noncompliance with FBAR. As with a few other cases that were recently litigated, this also involves a taxpayer who had previously entered the Offshore Voluntary Disclosure Program (OVDP/OVDI) but did not complete the program. Let’s take a look at some of the key allegations in the complaint:

The defendant is a US Person

• • • Mr. Nadji and his family moved back to the United States and he became a naturalized U.S. citizen in 1992.

Foreign Income and Accounts

• • • In 1986, Mr. Nadji started Comar Engineering Company, Ltd., an Iranian corporation that specialized in desalinating water and other water treatment services. Mr. Nadji continued to operate Comar from the United States after becoming a U.S. citizen.

    • At formation, Mr. Nadji owned 100% of the Comar shares and served as the company’s chairman.

    • Comar operated exclusively in Iran and was very successful; it filed no United States tax returns.

    • Though Mr. Nadji grew wealthy from Comar’s success, he did not report on U.S. tax returns, or pay tax on, income from Comar. He did not do so in Iran either.

    • During 2008 Mr. Nadji had interest in and control over four foreign bank accounts; from 2009 through 2012, Mr. Nadji had interest in and control over three foreign bank accounts.

    • In 2008, Mr. Nadji held two accounts at St. Galler Kantonalbank in Switzerland (“Kantonalbank”): one as a personal account and the other on behalf of Comar. Mr. Nadji was the sole signer on both Kantonalbank accounts.

    • Mr. Nadji kept most of his money – including income from Comar – in these Swiss accounts.

    • In 2009, Mr. Nadji transferred between $28 million and $43 million from his personal account to the Comar account. He then closed his personal account.

Failure to Report Foreign Accounts

• • • Mr. Nadji set up the Kantonalbank accounts to deposit money from Comar. Even after Mr. Nadji and his family moved to the United States, Mr. Nadji continued to use these Swiss accounts to conduct his business in Iran from the United States.

    • He was actively involved in the management of the foreign accounts and authorized several substantial payments and transfers from the accounts.

    • Mr. Nadji had tax withheld from the Kantonalbank accounts but did not file returns or requests refunds for the amounts withheld.

    • He also paid a fee to Kantonalbank to have it retain all correspondence to Mr. Nadji at the bank.

    • Mr. Nadji hired a tax preparer in Colorado to prepare and file his 2006-2012 federal income tax returns.

    • Mr. Nadji did not disclose his foreign bank accounts or foreign income to the return preparer.

    • Mr. Nadji’s federal income tax returns did not disclose the foreign accounts or income.

    • Neither the tax return preparer nor Mr. Nadji filed timely FBARs for 2008, 2009, 2010, 2011, or 2012.

Participation in OVDI

• • • In 2014, Mr. Nadji entered into the 2014 Offshore Voluntary Disclosure Initiative(“OVDI”). The OVDI program offered taxpayers with unreported foreign interests and/or income an opportunity to avoid criminal prosecution and settle civil and criminal penalties.

    • As part of the OVDI process, Mr. Nadji disclosed his ownership or control over the four accounts discussed above.

    • Mr. Nadji also filed delinquent FBARs for the 2008, 2009, 2010, 2011, and 2012 calendar years on May 5, 2015, as part of OVDI.

• • • The IRS eventually removed Mr. Nadji from the OVDI program because Mr. Nadji disagreed with the final closing package.

FBAR Willful Penalty Assessment

• • • On August 27, 2020, the IRS assessed willful FBAR penalties against Mr. Nadji 

    • The IRS made the assessments stated in Paragraph 48 pursuant to 31 U.S.C. §5321(a)(5)(C), which imposes a penalty not to exceed the greater of $100,000 or 50% of the balance in the account at the time of the violation for each willful violation of the FBAR filing requirements in 31 U.S.C. § 5314.

    • On August 27, 2020, the IRS provided Mr. Nadji notice of, and demanded payment for, the FBAR penalties for 2008, 2009, 2010, 2011, and 2012.

    • Despite receiving notice and demand for payment, Mr. Nadji has not paid the outstanding FBAR penalties described in Paragraph xx.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the pension 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 that specializes exclusively in these types of offshore disclosure matters.

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