District Court decision upholds imposition of willful FBAR penalty

Mar 06, 2019

In United States v. Horowitz, No. 16-1997 (D. Md. 2019), the district court ruled on various issues regarding the FinCEN Form 114, Report of Foreign Bank and Foreign Accounts (FBAR). This is just one of several court cases in the past year that has focused on the distinction between willful and non-willful violations in the assessment of penalties for failure to file an FBAR. The court held that taxpayer’s failure to report their foreign accounts was willful where they checked “no” in response to question on their return regarding whether they had a foreign account. This response combined with their failure to consult with their accountants regarding the accounts constituted willfulness for purposes of the FBAR penalty. The court also addressed what constitutes a “financial interest” in a reportable account. This case and others serve as a reminder that foreign interests need to be reported in order for taxpayers to avoid high penalties.

U.S. persons that have a financial interest in, or signature authority over, a financial account in a foreign country must report the account to the IRS annually on an FBAR. Civil penalties may be imposed on any person who fails to annually report an FBAR. There is a six-year statute of limitations for assessing civil penalties for FBAR violation, and the period begins to run on the date the FBAR is due. Completed FBARs must be filed on or before the April 15 due date of each calendar year with respect to foreign financial accounts maintained during the previous calendar year. However, under current FinCEN guidance an automatic six-month extension is granted to all filers not meeting the April 15 deadline. Therefore, the due date is effectively October 15 of each calendar year. For calendar years 2015 and prior, the due date was June 30. The maximum amount of the penalty for failure to file depends on whether the violation was willful or non-willful. A non-willful failure to file can result in a penalty of up to $10,000 U.S. dollars for each failure. However, in situations where the failure is willful, the maximum penalty is increased to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Furthermore, there is no longer a $100,000 cap on willful violations. Since “willfulness” is not defined by the code or the regulations, it has largely been left to the courts to define.

About the case

In January 2019, the U.S. District Court for the District of Maryland decided the Horowitz case, which was brought by the government to collect FBAR penalties from a husband and wife, Peter and Susan Horowitz. The court held that the Horowitzes willfully failed to report FBARs and upheld the penalties assessed by the IRS of $247,030 each against both Mr. and Mrs. Horowitz for 2007, and $247,030 against Mr. Horowitz for 2008.

The Horowitzes, who are U.S. citizens, lived in Saudi Arabia for most years between 1984 and 2001. They opened a Swiss bank account in 1988 at the Union Bank of Switzerland (UBS). The Horowitzes returned to the U.S. in 2001. In 2008, when the balance of the UBS account was $2 million, Mr. Horowitz decided to close the account and opened a joint account at another Swiss bank, Finter. Mr. Horowitz transferred the funds to the new account, but Mrs. Horowitz was not present and Finter would not allow her to be listed on the account without being present. Mr. Horowitz then designated Mrs. Horowitz as an individual with “an unlimited power of attorney” on the “list of authorized signatories and powers of attorney for natural persons.” However, the power of attorney was not effective because Mrs. Horowitz was not there to sign the form. As a result, the account was opened in Mr. Horowitz’s name only. In 2009, the Horowitzes traveled to Switzerland and Mrs. Horowitz was added as a joint owner of the account. Between 2008 when account was opened, and 2009 when Mrs. Horowitz was added to account, no additional deposits were made.

Mr. Horowitz communicated with their accountant who prepared their tax returns each year. Mr. Horowitz never mentioned either of the Swiss accounts, and both the Horowitzes signed their 2007 and 2008 returns without answering “yes” to the question on the return about whether they had money in an overseas account or filing a Form TD F 90-22.1 (FBAR) to disclose their interest in a foreign bank account.

Mr. Horowitz did not disclose the existence of the UBS or Finter accounts to the IRS until 2010. In 2010, the Horowitzes amended their forms 1040 and filed delinquent FBARs for each of the years from 2003 through 2008 under the Offshore Voluntary Disclosure Program. In 2014, IRS assessed a penalty of $247,030 separately against both the husband and wife for nondisclosure of the 2007 UBS account, as well as a penalty of $247,030 separately against both the husband and wife for nondisclosure of 2008 Finter account.

The Horowitzes filed a protest against the penalties with the IRS, and the case went to IRS Appeals. The Appeals officer determined that the penalties were prematurely assessed prior to Appeals review. The Appeals officer asked an Appeals coordinator to remove/reverse the penalties as prematurely assessed. Another Appeals employee then removed the penalty “input date.” The government brought this suit against the Horowitzes in 2016 to collect the penalties and moved for summary judgment. The Horowitzes argued that the IRS reversed the penalties in 2014, that the statute of limitations ran in 2015, and, therefore, that the action to collect the penalties in 2016 was untimely. The Horowitzes alternatively argued that their failure to disclose was not willful and that the maximum penalty that could be assessed against them is $10,000 for each account.

The court found that the taxpayers did not meet their burden of proving the statute of limitations ran before the FBAR penalties were assessed. The court reasoned that there was not sufficient evidence to show the penalty was reversed and that the Appeals employee did not have authority to reverse/remove the penalty. To remove the penalty, the court said the employee would have needed a manager’s signature, just as a manager’s signature is needed to impose a penalty. Additionally, the IRS must have DOJ approval to compromise post-assessed FBAR cases in excess of $100,000.

The court also held that the Horowitzes’ failure to report their foreign accounts was a willful violation. The court cited several cases to say that willfulness may be proven through “inference from conduct meant to conceal or mislead sources of income or other financial information.” The court further stated that willfulness could be inferred from a conscious effort to avoid learning about the reporting requirements. The court then stated “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts that point to such liability.”

The court stated several reasons for finding that the Horowitzes willfully failed to report their Swiss accounts. First, the 1040 Schedule B on the Horowitzes’ 2007 and 2008 returns directed the Horowitzes to complete Part III if they had either over $1,500 of taxable interest in ordinary dividends or had a foreign account. The Horowitzes answered no to the question of whether or not they had an interest in or signature authority over a financial account in a foreign country. Despite this, the Horowitzes insisted that neither had actual knowledge of the FBAR requirement, and therefore, their violation of the reporting requirement could not be willful. The court rejected this argument on the basis that the Horowitzes knew the answer to the question was yes, and stated that a signature is prima facie evidence the taxpayer had constructive knowledge of the return contents, and they were, therefore, put on inquiry notice of the FBAR requirement. Second, the Horowitzes had conversations with expat friends in Saudi Arabia who told them that they did not need to pay taxes on their foreign accounts. The court rejected that it was reasonable for the taxpayers to rely solely on their friends’ advice, and reasoned that the taxpayers discussing the accounts with their friends demonstrated their awareness that the income could be taxable, and they should have had the same discussion with their accountants. Looking at these factors in conjunction, the court determined that the Horowitzes were willfully blind.

The court, however, held that Mrs. Horowitz was not liable for the 2008 penalty for non-disclosure of the Finter account. The government argued that Mrs. Horowitz had a “financial interest” in and authority over the account based on the Horowitzes intent for her to be a joint account holder. However, the court reasoned that when Finter would not allow Mr. Horowitz to open a joint account, Mr. Horowitz transferred funds to an account in his name only. Furthermore, Mrs. Horowitz could not exercise any authority over the account since she had not signed the power of attorney in 2008, and therefore, Mr. Horowitz could not be seen as acting on her behalf. Therefore, Mrs. Horowitz did not have a financial interest in the Finter account in 2008.

Based on this court case, and other recent court cases, it is imperative that U.S. persons with foreign accounts consult with their tax advisors to ensure timely and complete compliance with FBAR rules. The government has a low evidentiary standard to prove willful blindness, and as evidenced by this case, the resulting penalties can be very high.