2016 US Dept of Justice (DOJ) Tax Division: FBAR penalty collection cases

The US Dept of Justice (DOJ) Tax Division  recently published it annual summary highlights of civil tax matters. The publication is linked here (Updated through December 16, 2016), and contains brief summaries DOJ Tax activity (decisions, court filings, etc.).

Last year it appears that the government enforced collection of FBAR penalties has substantially increased.   Also surprising was the relatively low penalty amount for which DOJ Tax will spend significant resources to pursue penalty collection. In light of the increased penalty collection enforcement, taxpayers may wish to further explore IRS voluntary disclosure programs that may offer no or more favorable penalties.

We have provided a summary of interesting civil FBAR penalty enforcement cases below.

However, first, some legal background for the unusual FBAR penalty collection is required.  Unlike a tax or penalty assessed in the Tax Code, which is subject to broad administrative collection remedies of liens and levies, the FBAR penalty assessment is made under Title 31 and is not subject to these administrative collection remedies. Remedies available to collect the penalty would be similar to any other creditor and enforced collection would require a lawsuit in federal court. This limitation on the IRS’s ability to administratively collect the FBAR penalty should provide an inducement to the IRS to resolve FBAR penalty determinations in a manner which includes payment of the penalty. Collection on FBAR penalties is made that more difficult with respect to overseas financial accounts and assets, which generally are beyond the reach of the government. Upon assessment, the IRS makes notice and demand for payment by sending Letter 3708 to the taxpayer and power of attorney on file, and forwards collection information to the Department of Treasury’s Financial Management Services (FMS).  In summary, this all seems like a lot of work and effort by the government to collect FBAR penalties.

Recent collection case filed by US Dept of Justice Tax Division in 2016 include:

• United States v. Jeffrey P. Pomerantz (W.D. Wash.) – On May 13, 2016, we (DOJ) filed a complaint against Jeffrey P. Pomerantz seeking to reduce to judgment penalties for willful failure to file Reports of Foreign Bank and Financial Accounts (FBARs) for 2007, 2008 and 2009. The penalties amount to over $800,000. Pomerantz is a U.S. citizen residing in Vancouver, British Columbia. In 2003, Pomerantz formed a shell entity in the Turks and Caicos to manage his investments. The Turks and Caicos entity opened several Swiss bank accounts with Sal Oppenheim Bank, over which Pomerantz retained signatory authority. However, at the time the IRS initiated an exam of his tax returns in January 2010, he had not filed any FBARs for 2007, 2008 or 2009. During the course of the exam, he filed FBARs. Pomerantz has a pending case in the U.S. Tax Court contesting tax deficiencies and fraud penalties asserted for 2007, 2008, and 2009. The deficiencies and fraud penalties asserted by the IRS against Pomerantz and his wife arise in part from income deposited into, and income generated by, the late-reported and unreported foreign accounts.
• United State v. Edward S. Flume, Jr. (S.D.Tex) – On April 5, 2016, we (DOJ) filed a complaint against Edward Flume to reduce to judgment his penalty assessments for the willful failure to file Reports of Foreign Bank and Financial Accounts (FBAR) for 2007 and 2008, in the aggregate amount of $507,025. In 2005, Flume opened an account a UBS in Switzerland in the name of Wilshire Holdings Inc., to manage his retirement funds. Flume had signature authority and was the beneficial owner of the UBS account. However, when the IRS began an examination of his tax returns, Flume had not filed any FBARs for the years at issue. Flume is a U.S. citizen who resides in Mexico. On May 5, 2016, pursuant to the Federal Debt Collection Act, the Court granted the United States’ sealed request for issuance of Writs of Garnishment against six financial institutions believed to be holding funds for Flume. We served the Writs of Garnishment by certified mail in an attempt to collect the penalty assessments. On May 17, 2016, we had Edward Flume personally served with the summons, complaint and writ of garnishment package in San Antonio, Texas, while he was attending his Tax Court trial.
• United States v. Ashish Patel (C.D. Cal.) – On May 20, 2016, we filed a complaint seeking a judgment for the penalties assessed against Ashish Patel for his non-willful failure to file FBARs in 2007-2011 reporting his interest in foreign bank accounts held at Commonwealth Bank of Australia. As of November 13, 2015, the unpaid balance owed for the FBAR penalties, late payment penalties as authorized by 31 U.S.C. § 3717(e)(2) and 31 C.F.R. § 5.5(a), and interest was $55,243.53.
• United States v. Ashvin Desai (N.D. Cal.) – On June 20, 2016, we filed suit seeking a judgment against Ashvin Desai for his willful failure to file Reports of Foreign Bank and Financial Accounts (FBARs) for 2007, 2008, and 2009. During those years Desai had a financial interest in, and signatory or other authority over four accounts maintained at Hong Kong and Shanghai Banking Corporation Limited (HSBC) India. Millions of dollars flowed into these accounts. Desai failed to file FBARs for the accounts, did not report the income earned in the accounts on this Form 1040 returns for 2007-2009, and indicated on Schedule B of those returns that he did not have an interest in or signatory or other authority over a financial account in a foreign country. The IRS assessed more than $14 million in penalties under 31 U.S.C. § 5321 against Desai for willfully failing to file the FBARs. With accruals, Desai’s total debt exceeds $16 million. In October 2013, a jury found Desai guilty of three counts of failing to file an FBAR for 2007 through 2009. It also found him guilty of three counts of attempting to evade or defeat tax in violation of I.R.C. § 7201 and two counts of aiding in the preparation of false tax returns for his two adult children in violation of I.R.C.§ 7206(2).
• United States v. James C. Heard (S.D. Tex.) – On June 2, 2016, the United States filed a complaint against James Heard, a U.S. citizen residing in Greece. The complaint seeks to reduce to judgment Heard’s penalty assessments in the aggregate amount of $4,008,605 for his willful failure to file Reports of Foreign Bank and Financial Accounts (FBAR) for 2006- 2011. Heard had numerous foreign accounts, including accounts at UBS in Switzerland and Luxembourg; HSBC Premier, Geniki Bank, Pireaus Bank and Bank of Cyprus in Greece; and Schroders & Co. and Banque SA in Switzerland. Most of these accounts were in the name of Sawtooth Equities, Ltd. Sawtooth was incorporated on June 23, 2003, in Tortola, British Virgin Islands. The Tortola office of the Mossack Fonseca & Co. law firm performed the legal work in forming Sawtooth in Tortola. Mossack Fonseca was also the incorporator and registered agent for Sawtooth. Although Sawtooth was incorporated in Tortola, its Memorandum of Association and Articles of Association forbade it from actually carrying on “Business with Persons Resident in the British Virgin Islands.” Sawtooth was also not permitted to own real property in the British Virgin Islands.
• United States v. Steven Schoenfeld (M.D. Fla.). On September 29, 2016, we filed suit to reduce to judgment a penalty for Steven Schoenfeld’s willful failure to file an FBAR relating to his financial interest in an account held at UBS AG in Switzerland during the 2008 calendar year. As of August 16, 2016, the FBAR penalty, failure to pay penalty, and interest totals almost $700,000. From 1993 to 2009, Schoenfeld held a financial interest in the UBS account that was supposedly funded with the proceeds of the sale of a New York apartment. Schoenfeld failed to timely file an FBAR for this account for 2008. Schoenfeld also did not timely report the income from, or his financial interest in, the account on his federal tax returns. An August 2010 letter from Schoenfeld’s tax representative to his son, who assisted in Schoenfeld’s financial affairs, detailed Schoenfeld’s obligation to report the existence of the account and file amended returns reporting the undisclosed income from the account. The letter also confirmed that in a meeting a few days earlier Schoenfeld told the representative that he did not plan to authorize UBS to release his account information to the IRS. • United States v. Mordechai Borochov (C.D. Cal.) – On January 25, 2016, we filed a complaint to collect the non-willful FBAR penalty, interest and late payment penalties assessed against Mordechai Borochov in the amount of $39,765.75. The assessments are based on Borochov’s failure to report his interest in a UBS account in Switzerland in the years 2006 through 2009 and amount to $10,000 for each year from 2006 to 2008 and $5,000 for 2009.
• United States v. Walter Lanz (D.N.J.) – On March 28, 2016, we filed suit to collect $496,720 in FBAR penalties assessed against Lanz for his willful failure to report a bank account at UBS from 2006 through 2008. He also did not report the income earned from the account. Lanz told the IRS that he did not have a foreign bank account and signed an affidavit to that effect. After the IRS told Lanz they had information that he did have an account, he gave in and admitted he owned a UBS account. Lanz now resides in Austria.

• United States v. Marion K. Baroni (E.D. La.) – On April 12, 2016, we filed a complaint against Marion K. Baroni seeking to reduce to judgment penalties for willful failure to file Report of Foreign Bank and Financial Accounts (FBARs) for 2007 and 2008. The penalties amount to over $1.5 million. Baroni inherited foreign bank accounts totaling more than $3 million from her father in 1993. She used these funds to open an account that same year with Swiss Bank Corporation, which later merged with UBS. Baroni made trips almost every year to Switzerland to manage her account. Notwithstanding this, she failed to file FBARs, failed to disclose her foreign accounts on Schedule B of her Forms 1040 for 2007 and 2008, and failed prior to 2011 to report amounts earned in those accounts on her tax returns. She executed UBS documents indicating that she wanted to avoid disclosure of her identity to the IRS, resulting in her freezing new investments in U.S. securities as of November 2000. Baroni also instructed UBS to hold all mail from the account to make sure there was no paper trail entering the United States. In 2008, two weeks after an order was entered granting the United States leave to serve a John Doe summons on UBS, Baroni ordered UBS to liquidate her account and transfer the funds to LB (Swiss) Private Bank Ltd. Then, shortly after the announcement was made in 2010 that the Swiss government was turning over records of 4,000 account holders, Baroni transferred title to the family home to a Belize corporation owned solely by her, but did not register the corporation with the Louisiana Secretary of State. She then moved to Panama.
• United States v. Jung Joo Park, individually and as trustee of the Que Te Park Declaration of Trust and as the de facto representative of the Estate of Que Te Park, et al. (N.D. Ill.). On November 21, 2016, we filed suit to collect a $3,500,000 FBAR penalty assessed against Que Te Park, who died in 2012 in South Korea. Named as defendants were the decedent’s surviving spouse, who lives in Korea; John Doe, as administrator of the decedent’s estate; and decedent’s three adult children, who live in Illinois and who may have acquired assets either of the decedent or of a revocable trust that became irrevocable when the decedent died.

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