Federal Court Imposes Deliberate FBAR Penalties on Long-Time CPA | Free human rights

In a recent ruling, a federal district court found that a longtime CPA / tax return preparer recklessly failed to file FBARs to disclose multiple foreign financial accounts. As avid readers of our Insights know, many federal courts have found that reckless reporting failures are enough to impose “voluntary” FBAR penalties – and those penalties can be quite significant.

The case was United States v. Kronowitz. And it’s yet another reminder that courts dealing with FBAR reporting failures tend to critically examine the account holder’s track record, especially when it comes to education and professionalism. Account holders with tax training or professionals with substantial business experience are often held to a higher standard.

Foreign accounts

After hearing a rumor that a former client was considering suing him for fraud, the CPA (Kronowitz) transferred assets overseas for protection, opening two bank accounts in the Cayman Islands. His goal in opening Cayman accounts was to keep funds away from potential creditors.

Kronowitz also signed a document entitled “Management and Administration Agreement” between itself and an entity named Consista Treuunternehmen (“Consista”), a Liechtenstein company regarding the management of an entity named Cramo Stiftung / Foundation (” Cramo ”). The agreement authorized Consista to manage Cramo (a foundation / creation in Liechtenstein) on behalf of Kronowitz.

Cramo has opened an account with the United Bank of Switzerland (“UBS”). Kronowitz has been listed as the beneficial owner. Kronowitz then created a trust to hold the proceeds of the investments. And even later, the funds held at UBS were transferred to an account at Basler Kantonalbank (“BKB”), which was also opened for the benefit of Kronowitz.

Declaration failures

Kronowitz has prepared its own tax returns for the 2005 to 2010 tax years. Schedule B is an attachment to the individual federal income tax return (Form 1040) that is used to report interest and dividend income. , as well as any financial interest or signing authority. on financial accounts located in foreign countries. Although he was required to file a Schedule B in conjunction with his personal income tax returns from 2005 to 2010, Kronowitz did not disclose his financial interest in foreign accounts in a Schedule B for his personal income tax returns. from 2005 to 2010, he also did not file an FBAR.

Instead, on the Schedule B form filed with her 2008 income tax return, in response to the question asking “[a]t at any time in 2008, did you have an interest or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? Kronowitz marked “no”. No Schedule B forms were attached to the 2005, 2006, 2009 or 2010 personal income tax returns.

Kronowitz also prepared the Trust’s income tax returns for the 2008, 2009 and 2010 tax years. He marked “no” in response to the question asking: “[a]at any time during [the] calendar year [], did the estate or trust have an interest or signature or other authority over a bank, securities or other financial account in a foreign country? “

Based on these essential facts, the IRS Examiner assessed the following FBAR penalties:

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FBAR penalty for the calendar year

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2005 $ 141,667.00

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2006 $ 140,066.00

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2007 $ 145,063.00

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2008 $ 76,781.00

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2009 $ 82,504.00

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2010 $ 77,960.00

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Total penalties assessed: $ 663,771.00

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FBAR laws

In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, known as the Bank Secrecy Act (BSA), 31 USC §§ 5311, et seq. See Pub. L. n ° 91-508, 84 Stat. 1114 (1970). The main purpose of the BSA is to require certain reports which “have a high degree of usefulness in criminal, fiscal or regulatory investigations or proceedings”. Identifier. § 202.

The regulations require that “every person in the United States with a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country” to file an FBAR. See 31 CFR § 1010.350 (a). The FBAR is required “with respect to foreign financial accounts over $ 10,000 maintained during the preceding calendar year”. See 31 CFR § 1010.306 (c).

The authority to assess and collect civil penalties for non-compliance with FBAR requirements rests with the IRS. See Delegation of Enforcement Authority Regarding Foreign Bank Account Reporting Requirements, 68 Fed. Reg. 26489 (May 16, 2003). The BSA did not originally contain a civil sanction provision for non-compliance with the requirements of the FBAR, see Pub. L. n ° 91-508, 84 Stat. 1114 (1970), but Congress added one in 1986. See Money Laundering Control Act 1986, Pub. L. n ° 99-570, subtitle H, 100 Stat. 3207, § 1357 (October 27, 1986). FBAR penalties may or may not be voluntary. See 31 USC § 5321 (a) (5).

In Kronowitz, the government imposed a voluntary penalty, in addition to late payment penalties and accrued interest. A voluntary FBAR sanction requires the following: (1) the person must be a US citizen; (2) the person must have or have an interest in or authority over a foreign financial account; (3) the account had a balance greater than $ 10,000.00 at any time during the reporting period; and (4) the person must have willfully failed to disclose the account and file an FBAR. 31 USC § 5314; 31 CFR § 1010.350 (a).

The laws and regulations in question do not define the term voluntary; however, the BSA identifies the applicable sanction as a “financial penalty”. 31 USC § 5321 (a) (5) (A).

Confronted with this lack of definitional orientation, the Court turned to case law:

“[W]here the will is a legal condition of civil liability, we have generally considered it to cover not only conscious violations of a norm, but also reckless violations. Safeco Ins. Company of Am. v. Burr , 551 US 47, 57 (2007). “Although the term recklessness is not self-defining, the common law has generally understood it in the field of civil liability as behavior which violates an objective standard: an action entailing an unjustifiable risk of harm which is known to exist. or so obvious that it should be known. ” Identifier. to 68 (citing Farmer v. Brennan, 511 US 825, 836, 114 S. Ct. 1970, 128 L. Ed 2d 811 (1994)) (internal citations omitted). In the context of the FBAR, the United States Court of Appeals for the Eleventh Circuit recently ruled that “the will in § 5321 includes reckless disregard of a known or obvious risk”. United States v. Rum , —F.3d—, 2021 WL 1589153, at * 6 (11th Cir. 23 April 2021).

Under this authority, “when imposing a civil penalty for a violation of the FBAR, recklessness intent is established if the defendant (1) clearly should have known that (2) there was a serious risk that a specific FBAR would not be deposited and if (3) it was able to know for sure very easily. Identifier. (citing United States v. Horowitz, 978 F.3d 80, 89 [126 AFTR 2d 2020-6551] (4th Cir. 2020) (citations and citation omitted)).

Evidence of recklessness

The Court then set out the basic and relatively scattered facts which led it to conclude that the deliberate sanctions were appropriate. Reduced, they were:

  • Kronowitz was a professional tax preparer for nearly sixty years
  • Kronowitz probably didn’t read the instructions
  • Kronowitz answered in the affirmative “no” to questions regarding interest in foreign accounts both on his individual tax returns and on the trust tax returns he prepared. He simply and incorrectly assumed that reporting the earnings of his Levy investments would be sufficient to meet tax reporting obligations.

The Court’s conclusion

In this context, the district court found that deliberate sanctions had been applied:

Based on Kronowitz’s track record and experience as a CPA and tax preparer, and all of his actions in this case, the Court concludes that he clearly should have known that there was a serious risk that it does not comply with the requirements of the FBAR with respect to its accounts abroad. In addition, he was able to find out very easily if he had taken the time to conduct independent research or consult with another person more knowledgeable in tax law to see if additional reporting requirements might apply to him.

Accordingly, the Court finds that Kronowitz’s FBAR violations for the 2006, 2007, 2008, 2009 and 2010 tax years were intentional, and that the government is entitled to recover intentional FBAR penalties for those years.

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