FBAR Penalties for USCs and LPRs Residing Overseas – Can the Taxpayer have no knowledge of the law and still be liable for the willfulness penalty? See government memorandum.
FBAR Penalties for USCs and LPRs Residing Overseas.
Can the Taxpayer have no knowledge of the law and still be liable for the willfulness penalty? The government says yes, in its memorandum of law filed in the Zwerner case.
The importance of the Zwerner case to USCs and LPRs living overseas, cannot be overestimated in my view. It’s a case where the USC, Mr. Zwerner, was cooperative with the IRS during their examination. This is a fact that both the government and the taxpayer acknowledged during the trial to enforce the collection and determination of the government of the 200% FBAR penalties.
Most troubling about this case, is the allegation that the IRS agent handling the case caused Mr. Zwerner to file and prepare a letter that expressly was an admission of his liability under Title 31. As part of the “undisputed facts”, the IRS agent actually drafted the letter for Mr. Zwerner. See the Motion of Mr. Zwerner in reply to the government’s Motion for Summary Judgment. In that case, Mr. Zwerner testified that the IRS agent had misled him.
Presumably, this letter would have been highly convincing evidence to the jury who heard the FBAR penalty case.
There is a cautionary tale in this case for USCs and LPRs residing overseas who have not filed FBARs. Communications to the government, how they are managed, what is said and what approach is taken, should be carefully considered in each case.
Next, another perplexing aspect of this case is that the government continues to persist in its argument that a mere preponderance of the evidence is the proof standard required. That will be left for another post and another discussion.
Finally, maybe the most troubling for USCs and LPRs who live outside the U.S., is the government’s assertion that an individual can be liable for the willfulness penalty, for “willfully failing to file a FBAR” – ” . . . even if the person does not actually know of the FBAR reporting requirements.” See, page 4 of the government’s motion for Summary Judgment in the Zwerner case. This is a position they have argued consistently in at least three different cases.
This leaves USCs and LPRs living overseas wondering, will the U.S. government assess willfulness penalties against me for having income and accounts in my home country during all of the years I have lived in “Country X” (particularly since I may have had no knowledge of the FBAR reporting requirements)? Under what circumstances am I at risk for such a claim by the government?
Another later post will explain how the government can collect the FBAR assessed penalties under the law and the problematic issues for them in collecting the amounts in a foreign country.
June 17, 2014 at 1:55 am
Mr. Martin:
Although I appreciate your thorough analysis of the Zwerner case, you are NOT, in my opinion, considering the most important distinction between Mr. Zwerner and Americans abroad. The important distinction is that Americans abroad live abroad.
Why does this matter in determining willfulness? A number of reasons that include:
1. Most Americans abroad don’t even know they have to file U.S. tax returns, let alone FBARs.
2. The “offshore accounts” of Americans abroad are NOT offshore to them.
3. Americans abroad are required to have offshore accounts to live their lives, homeland Americans are not.
4. Americans abroad are NOT hiding their “offshore accounts” from anybody. In fact, they are used for income that is transparent, “after tax” and fully disclosed to their governments of residence.
As you are well aware, this was not an issue until the IRS discovered FBAR in 2009,. Furthermore, my recollection is that Publication 54 did not mention FBAR in (at least) the years 2003 to 2008.
In addition, it seems to me that the Government is free to argue that “willfulness” (in the sense of “the intentional disregard of a known legal duty” may not be required to assert the willfullness penalty for FBAR. That doesn’t mean that a court would necessarily agree. In Williams, I believe the court ruled that “willful blindness” may constitute the required mental state for willfullness. That is a far cry from saying that no particular mental state is required. Furthermore, it is very difficult to argue that Americans abroad who didn’t even know they had to file U.S. taxes could somehow be “willfully blind” to the FBAR requirement.
So, again I appreciate your great research and discussion of this important topic (and thank you for it). But, I think this is a huge stretch to apply this to the situation of some “poor American” attempting to make ends meet outside the U.S.
Although, I agree that Americans abroad need to deal with their U.S. tax issues, they have enough to worry about with just the tax. There is no need to suggest that they could be found guilty of a willful violation of the FBAR rules.
Thanks again for an interesting post.