Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part I)

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King Pyrrhus of Epirus, sustained staggering losses in defeating the Romans in Southern Italy in the years 280-275BC; so says the origin of the phrase “Pyrrhic Victory”.

Many USCs and LPRs residing overseas will undoubtedly read the Zwerner decision as a Pyrrhic Victory for the government; explained in a follow-on post later in the week.  See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.

Route of Pyrrhus of Epirus

The government was  on its face, very “successful” in the Zwerner case in convincing a jury they should render a verdict for 3 years of FBAR 50% willfulness penalties (150% of the account balance in total).  The government tried to assert 4 years of willfulness penalties, which would have been 200% of the account balance; all under a civil penalty provision in the statute, that looks like a criminal penalty on its face and via its outcome.

The key facts of Zwerner are these:

  • He was 87 years old when the FBAR civil claims were litigated;
  • He was living in the U.S. and had studied at Robinson College of Business at George State University – and was a major philanthropist to GSU, where he pledged $5M to build a Business and Law Complex Auditorium in 2007 and previously funded the Carl R. Zwerner Chair in Family Owned Business;
  • He had apparently had a Swiss bank account opened in the 1960s (prior to the adoption of the BSA law that created FBAR reporting – which was passed in 1970), that he had not reported on his U.S. income tax return;
  • The accounts were in the names of two different foundations Mr. Zwerner created;
  • He had hired legal counsel to assist him with professional advice prior to the IRS publishing their initial “offshore voluntary disclosure” program/initiative;
  • He apparently filled out the tax organized provided by his accountant, every year, and answered “no” to questions about having an interest in foreign financial accounts;
  • The penalty amount apparently sustained by the jury has been reported as “. . . $2,241,809 on an offshore account that had an apparent high balance of $1,691,054. . .
  • His legal counsel had apparently contacted the IRS Criminal Investigation Division (“CI”) about his voluntary disclosure on February 10, 2009, without providing his name;
  • The CI then issued a letter on February 17, 2009, stating that ” . . . based upon the information provided a criminal investigation will not be initiated at this time. . . ”  (see letter from IRS with this date reflected as Exhibit 4 in the ) – ;IRS ZwerNer OVD letter John Doe
  • The IRS did not announce the first offshore voluntary disclosure program until afterwards on March 26, 2009; and
  • Mr. Zwerner then filed amended tax returns for the years 2004, 2005 and 2006 along with late filed FBARs.

A highly regarded criminal tax law firm in Beverly Hills, California, Hochman, Salkin et al, provided the following conclusion in their analysis of the Zwerner case:

This is a significant win for the government in their efforts to encourage certain US persons having undisclosed interests in foreign financial accounts to come into compliance with the applicable filing and reporting requirements . . .

Along the same lines, the Department of Justice issued a press release on May 28, 2014, with the following highlights:

JURY FINDS MIAMI MAN OWES CIVIL PENALTIES FOR FAILING TO REPORT SWISS BANK ACCOUNT

WASHINGTON – Today, a jury in Miami found Carl R. Zwerner responsible for civil penalties for willfully failing to file required Reports of Foreign Bank and Financial Accounts (FBARs) for tax years 2004 through 2006 with respect to a secret Swiss bank account he controlled. According to evidence introduced at trial, the balance of the bank account during each of the years at issue exceeded $1.4 million, and the jury found Zwerner should be liable for penalties for 2004 through 2006. Zwerner faces a maximum 50 percent penalty of the balance in his unreported bank account for each of the three years . . .

“As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high,” said Assistant Attorney General Kathryn Keneally for the Justice Department’s Tax Division. “Those who still think they can hide their assets offshore need to rethink their strategy.”  . . .

The evidence at trial showed that Zwerner opened an account in Switzerland in the 1960s, which he maintained in the name of two different foundations he created. Zwerner was able to use the proceeds of the account whenever he wanted and used it for personal expenses, including European vacations . . .

Herein lies some key inconsistencies in the approach of the government.  Will it be a significant victory, considering the impact it may have on USCs and LPRs residing overseas?

What will be the affect to USCs and LPRs residing overseas?  A follow-up post will discuss.

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