In a recent ruling, a federal district court found that a longtime CPA / tax return writer frivolously filed FBARs to disclose multiple foreign financial accounts. As avid readers of our Insights know, many federal courts have found that frivolous reporting errors are enough to impose “premeditated” FBAR penalties – and those penalties can be quite hefty.
The case was USA versus Kronowitz. And it’s another reminder that courts dealing with FBAR reporting errors tend to be critical of the account holder’s background, including education and professional background. A higher standard is often expected for account holders with a tax background or professionals with significant business experience.
The foreign accounts
After the CPA (Kronowitz) heard a rumor that a former client was considering suing him for fraud, the CPA (Kronowitz) moved assets abroad for protection and opened two bank accounts in the Cayman Islands. His purpose in opening the Cayman accounts was to keep funds out of the reach of potential creditors.
Kronowitz also signed a document entitled “Management and Administration Agreement” between him and a company called Consista Treuunternehmen (“Consista”), a company in Liechtenstein, on the management of a company called the Cramo Stiftung / Foundation (“Cramo”). The agreement authorized Consista to administer Cramo (a screening / foundation in Liechtenstein) on behalf of Kronowitz.
Cramo opened an account with the United Bank of Switzerland (“UBS”). Kronowitz was listed as the beneficial owner. Kronowitz later set up a trust to hold the proceeds from the investments. And even later, the UBS funds were transferred to an account at Basler Kantonalbank (BKB), which was also opened in favor of Kronowitz.
The reporting errors
Kronowitz prepared its own tax returns for the tax years 2005 to 2010. Appendix B is an annex to the individual federal income tax return (Form 1040), which is used for reporting interest and dividend income as well as any financial participation or authorization to sign on financial accounts abroad. Although he was required to file Appendix B in connection with his 2005-2010 individual income tax returns, Kronowitz did not disclose his financial interests in overseas accounts on Appendix B for his 2005-2010 individual tax returns – nor did he file FBAR. a .
Instead, the Appendix B form filed with his 2008 tax return in response to the question “[a]At any point in 2008, did you have an interest or signature or other authority over a financial account abroad, such as a bank account, securities account, or other financial account? ”Kronowitz marked” no “. The individual tax returns for 2005, 2006, 2009 or 2010 were not accompanied by any forms in accordance with Appendix B.
Kronowitz also prepared the tax returns for the trust for the tax years 2008, 2009 and 2010. When asked “No”, he answered “No”.[a]t anytime during [the] Calendar year Did the estate or trust have an interest or a signature or other authority over a bank, securities or other financial account abroad? “
Based on these material facts, the IRS examiner assessed the following FBAR penalties:
Calendar year FBAR penalty
2005 $ 141,667.00
2006 $ 14,066.00
2007 $ 145,063.00
2008 $ 76,781.00
2009 $ 82,504.00
2010 $ 77,960.00
Total convicted penalties: $ 663,771.00
The FBAR laws
In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, known as the Bank Secrecy Act (BSA), 31 USC Sections 5311 ff. See Pub. L. No. 91-508, 84 Stat. 1114 (1970). The main purpose of the BSA is to require certain reports that “have a high degree of usefulness in any criminal, tax, or regulatory investigation or proceeding”. I would. § 202.
The regulations require that “any US person who has a financial interest in, or has a signature or other authority to, a bank, security, or other financial account in a foreign country” file an FBAR. See 31 CFR § 1010.350 (a). The FBAR is “required in relation to overseas financial accounts greater than US $ 10,000 held in the previous calendar year.” See 31 CFR § 1010.306 (c).
The authority to judge and collect civil penalties for non-compliance with FBAR requirements rests with the IRS. See Enforcement Delegation for Foreign Bank Account Reporting, 68 Fed. Registration number. 26489 (May 16, 2003). The BSA originally did not contain a civil sanction for non-compliance with FBAR requirements, see Pub. L. No. 91-508, 84 Stat. 1114 (1970), but Congress added one in 1986. See Money Laundering Control Act of 1986, Pub. L. No. 99-570, Subtitle H, 100 Stat. 3207, § 1357 (October 27, 1986). FBAR penalties can be either willful or not willful. See 31 USC § 5321 (a) (5).
In Kronowitz, the government imposed an intentional penalty in addition to default interest and accrued interest. An intentional FBAR penalty requires the following elements: (1) the individual must be a US citizen; (2) the person must have or have had an interest in or authority over a foreign financial account; (3) the account was in excess of $ 10,000.00 at any time during the reporting period; and (4) the individual must have intentionally failed to disclose the account and file an FBAR. 31 USC § 5314; 31 CFR § 1010.350 (a).
The laws and regulations at issue do not define the concept of will; however, the BSA identifies the applicable penalty as a “civil fine”. 31 USC § 5321 (a) (5) (A).
In the face of this lack of defining guidelines, the Court turned to a precedent:
“[W]Here, intent is a legal requirement of civil liability, whereby we generally cover not only knowing but also grossly negligent violations of the norm. ”Safeco Ins. Co. of Am. v. Burr, 551 US 47,57 (2007). “Although the term recklessness is not self-defined, common law in the area of civil liability has generally understood it as behavior that violates an objective standard: acts that involve an unjustifiably high risk of harm that is either known or so obvious that it should be known. “I would. at 68 (cited Farmer v. Brennan, 511 US 825, 836, 114 S. Ct. 1970, 128 L. Ed 2d 811 (1994)) (internal citations omitted). Im In connection with the FBAR, the US Court of Appeals for the Eleventh District recently ruled that “intent in Section 5321 includes the reckless disregard of a known or obvious risk.” United States v. Rum, —F.3d “, 2021 WL 1589153, * 6 (11th Cir. April 23rd 2021).
Under this authority, “In imposing a civil penalty for an FBAR violation, willful intent due to recklessness is determined when the accused (1) should have clearly known that (2) there was a serious risk that a correct FBAR was not filed and if (3) he was able to find out for sure very easily. “I would. (citing United States v Horowitz, 978 F.3d 80, 89 [126 AFTR 2d 2020-6551] (4th Cir. 2020) (quotations and quotation omitted)).
Evidence of recklessness
The court then set out the basic and relatively scanty facts that led to the conclusion that the premeditated sanctions were appropriate. They were boiled:
- Kronowitz was a professional tax return writer for nearly sixty years
- Kronowitz probably didn’t read the instructions
- Kronowitz replied in the affirmative with “No” both in his individual tax returns and in the trust tax returns he had prepared. He simply and incorrectly assumed that reporting the profits from his Levy investments would be sufficient to meet tax reporting requirements.
Conclusion of the court
Against this background, the district court has determined intentionally imposed penalties:
Given Kronowitz’s background and experience as a chartered accountant and tax advisor, and the entirety of his actions in this case, the court finds that he should have clearly known that there was a great risk that he would not meet FBAR requirements in relation to his Foreign accounts. In addition, he could very easily have obtained information with certainty if he had taken the time to either do independent research or to consult with another person better versed in tax law as to whether 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 willful and that the government has the right to reclaim intentional FBAR fines for those years