Government Seeks to Collect $1.1 Million for Unreported Swiss Accounts

In U.S. v. Kochav, case number 9:19-cv-80648, the Government seeks to reduce a $1.1 million willful FBAR civil penalty assessment to judgment. It’s helpful for clients to understand what types of fact patterns will elevate a failure to file FBARs to a willful one.

FBAR filing & willful penalty statute

31 U.S.C. 5314 – FBAR filing requirement

Section 5314 of Title 31 of the U.S. Code authorizes the Secretary of the Treasury to require United States citizens to report certain transactions with foreign financial agencies. Under the statute’s implementing regulations, “[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship” to the IRS for each year in which such relationship exists. 31 C.F.R. § 1010.350(a).

31 U.S.C. 5321(a)(5) – FBAR willful penalties

Section 5321(a)(5) of Title 31 authorizes the imposition of civil penalties for willful failure to comply with the reporting requirements of § 5314. Specifically, § 5321(a)(5)(C) provides for a willful penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. The penalty set forth under 31 U.S.C. § 5321(a)(5)(C) is subject to interest and further penalties pursuant to 31 U.S.C. § 3717.

Case facts

General facts:

Taxpayer was born in Argentina in 1969. She immigrated to the United States, and she became a United States citizen prior to 1994.

Taxpayer is a United States citizen and was a United States citizen during the years at issue, 2006 through 2010, when she had one or more foreign bank accounts.

She resided in the United States from 1996 to 2010.

In July of 1996, Taxpayer opened two accounts at Union Bank of Switzerland (UBS) with money she inherited.

Facts indicative of willfulness:

(1) Use of bank accounts with different names and passports; opening an account in a jurisdiction in which the taxpayer has no other ties; use of bank accounts held under nominees; use of numbered accounts

Taxpayer opened one account under her married name, and on the account documents reported having U.S. nationality and living in the United States.

On another account document, she user her maiden name and identified her nationality as Argentinian and claimed she lived in Argentina.

In 2008 Taxpayer opened another Swiss account at Maerki Baumann & Co, AG (Baumann) in Zurich. At the same time she transferred all the funds in her two UBS accounts to the Baumann account.

The Baumann account was opened as a numbered account using her mother’s identity (an Argentine national) rather than her own because Baumann would not accept U.S. persons as clients. Taxpayer was the sole beneficial owner of the account.

(2) A consistent pattern of under-reporting large amounts of income

The balances in Taxpayer’s foreign accounts ranged from a total of between $1,253,266 to $1,774,925 between 2006 and 2010.

Taxpayer failed to report foreign income on her tax returns and did not file any amended Form 1040X returns or amended FBARs for the years at issue.

(3) Selectively filing some forms but not others, or reporting some accounts but not others

Taxpayer initially did not file an FBAR for any of the periods that she was required to. In 2011, Taxpayer filed FBARs for years 2006 through 2010 but failed to report the two UBS accounts and the Baumann account on any of the FBARs. Instead she reported her mother’s Swiss bank account.

Taxpayer’s 2007 income tax return included a Schedule B, Part III, Question 7a, to which she answered “No,” that she did not have a foreign bank account. Taxpayer’s 2011 income tax return included a Schedule B, Part III, which falsely stated that she had authority over a financial account in Israel. She did not disclose her UBS and Baumann accounts in Switzerland.

(4) Active involvement in managing the foreign account

Taxpayer was actively involved in her foreign accounts. Taxpayer instructed UBS to wire funds out of her UBS accounts on more than a dozen occasions by faxing handwritten instructions to UBS bankers and naming funds recipients and their account numbers.

(5) Requesting your bank to not send statements

Taxpayer signed forms waiving her right to invest in U.S. securities, indicating her awareness of new tax regulations, and “expressly agree[ing]” that UBS would not invest in U.S. securities.

Taxpayer signed Swiss bank documents for her UBS accounts in July 1996 and November 2002 to have her mail held at UBS so she would not receive correspondence in the United States.

(6) Providing false testimony during the examination

After the IRS contacted Taxpayer, she denied ownership of foreign accounts and stated in an interview with the IRS that she did not have any foreign bank accounts.

The IRS made an FBAR penalty assessment for 2006 through 2010 and by Letter 3708 of February 20, 2018, made demand for payment thereof of nearly $1.1 Million.

What should non-compliant taxpayers do?

If taxpayers are non-compliant with their foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

Why hire us?

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.