Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part II)
Will the IRS and Justice Department end up with a “Pyrrhic Victory” for USCs and LPRs residing overseas who have not (probably never – in many cases) filed FBARs? This is a follow-on post to an earlier post of this week. See, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part I), Posted, June 11, 2014.
Mr. Zwerner did not disclose his account for many decades and had both untaxed and pre-taxed income in that account. He kept this Swiss account secret from the government and even his own lawyer of 40 years. He only had told his wife. He also answered “no” to his CPA regarding having any foreign accounts. These were all bad facts for him in his case.
He always lived in the U.S., born and raised, but also had international business operations from the glass industry in which he was a leader.
The apparent success of the government, raises the question of whether such “success” at trial will backfire with how USCs and LPRs residing overseas will handle their U.S. tax and FBAR affairs. How will USCs and LPRs residing overseas respond and understand the impact of the Zwerner decision?
Will it be a significant victory (or a Pyrrhic Victory), considering the impact it may have on USCs and LPRs residing overseas?
First, the taxpayer did come forward and disclose the unreported foreign accounts, and received a letter from the IRS CI issued a letter on February 17, 2009, stating that ” . . . based upon the information provided a criminal investigation will not be initiated at this time. . . ” Nevertheless, the government pursued 50% civil willfulness penalty assessments for multiple years (4 years). The Tax Division of the Justice Department pursued this case through trial, incurring the time and costs of government resources, arguing Mr. Zwerner owed a total of $3,630,119.29 (on an account with a maximum value during the years at issue of apparently no more than US$1.69M) in their Motion for Summary Judgement. 
See Paragraph 57 of the government’s Motion for Summary Judgement:
The jury verdict found that based upon a “preponderance” of the evidence, the taxpayer did not qualify for the 2009 offshore voluntary disclosure program. Importantly, this OVD program was not announced until after Mr. Zwerner had taken steps to disclose and report his foreign accounts under a specific letter his lawyer had received by IRS CI. It appears that Mr. Zwerner was following the rules of the program that existed at the time he came forward.
Second, why was Mr. Zwerner not criminally prosecuted for tax evasion? Was it because he had a letter from the IRS CI that they would not criminally prosecute him? Was it because the government wanted to assess multiple FBAR penalties, in lieu of a criminal prosecution against an 87 year old man? Did the government want to demonstrate they would extract more financial pain from a civil action, prosecuted under a “preponderance of the evidence” standard, instead of a criminal action that would be harder to convict under a “beyond a reasonable doubt” standard?
Third, why has the government insisted on pursuing a civil penalty that was more than the entire asset value of the account(s)? Is the government’s view that the more onerous the penalties, the greater likelihood of compliance for others with unreported accounts? Is there an incentive on the part of the government to collect large FBAR penalties and forgo the costs and time of a criminal case, potential sentencing and prison time?
Fourth, why did the government reach a settlement with Mr. Zwerner, just days after what was apparently a huge victory for the government? Does the government think these FBAR penalties will be overturned or found to be unconstitutional by an Appeals Court? This is probably the most interesting legal question, because if the law is ultimately found to be unconstitutional, it would change the dynamic and approach of taxpayers and the government.
Fifth, will the government pursue a similar strategy (e.g., multiple year 50% willfulness penalties) against USCs and LPRs who reside outside the U.S.? Will this be their approach instead of considering any type of criminal prosecution to extract more financial pain from a civil action, prosecuted under a “preponderance of the evidence” standard, instead of a criminal action that would be harder to convict under a “beyond a reasonable doubt” standard?
Sixth, will the government not pursue USCs and LPRs living overseas who do not report their accounts? Will they selectively enforce the law (e.g., treating U.S. resident individuals different from non-U.S. resident USCs and LPRs)?
Unfortunately, the message for many USCs and LPRs residing overseas who have not filed U.S. income tax returns or FBARs for many years or for many decades, is a very mixed message. If the government will pursue a 200% FBAR penalty against an 87-year-old man, who was a philanthropic leader and ultimately fully disclosed his account through what he believed as the OVD program that existed at the time he participated; why will they not similarly pursue such FBAR penalties against USCs and LPRs living outside the U.S.?
This mixed message will also extend to USCs and LPRs residing overseas, when they consider the recent spotlight shown on USCs and their bank accounts in their home countries by the Senate Permanent Subcommittee on Investigations. In those reports, focused extensively on Swiss accounts opened by these ind See, Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.;
For these reasons, the Zwerner decision may well be a Pyrrhic Victory for the government, IF USCs and LPRs overseas consider such an approach excessive and unreasonable, to the point, they feel more comfortable in receding into the shadows and not filing FBARs. Hopefully, this will not be the effect and end result; but again, it appears the focus of the government has neglected to consider the unique circumstances of millions of USCs and LPRs residing outside the U.S.
Incidentally, when Mr. Zwerner originally opened his Swiss accounts in the 1960s, there was no “Bank Secrecy Act” – otherwise known as the “Currency and Foreign Transactions Reporting Act” which was passed in 1970. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
Zwerner is yet another important chapter of a multi-prong approach of the U.S. government in identifying assets located outside the U.S.
The question remains: “What will be the takeaway to the ordinary USC and LPR population residing overseas?” Will they think that by filing FBARs, they will simply run the risk of the government assessing multiple year 50% willfulness penalties? Will they feel even greater fear of trying to come into compliance under the U.S. tax and FBAR laws – and try to comply at all costs? Or instead, will they take steps to stay in the shadows and not report (a Pyrrhic Victory for the government)?