Is Zwerner's 200% Penalty Excessive?

Let me ask you a hypothetical question.

Say you made a million dollars in 2013. Even in a worst-case, salt-the-fields scenario, what would be the most the government could take from you in taxes? 

I am thinking a million dollars. 

His facts are not attractive. There is a saying that “bad facts make bad law.” We have both in this case. 

His name is Carl Zwerner, is 86 years old and lives in the Miami area. For years 2004 through 2007, Zwerner maintained an account at ABN AMRO Bank in Switzerland. It is not (yet) illegal for an American to have a foreign bank account, but it is illegal not to report it. 

Somewhere in 2008 he had a change of heart. He filed a delinquent FBAR and amended his 2007 tax return to include the earnings from the account. In 2009 he decided to come clean on years 2004, 2005 and 2006 also.

There was a twist: Zwerner did not hold the bank account in his own name. The account was in the name of the “Bond Foundation” for a while, then in the name the “Livella Foundation.” At all times, though, Zwerner had control and was the beneficial owner of the funds. Those account names were just speed bumps.

Then he does the unbelievable. In a letter dated August 2010, he admitted to the IRS that he was aware that he should have reported both the existence of the account and the earnings from it.

Why, Carl, oh why?

The IRS, in yet another example of why people hate the IRS, decided that he “willfully” evaded his taxes, used regular gasoline in a high-octane-only car and failed to hold the door for an elderly woman at the grocery store. The IRS determined that the balances at the Swiss account were as follows over the years:

           

2004	$1,447,000
2005	$1,490,000
2006	$1,545,000
2007	$1,691,000

This did not take Sherlock-type powers by the IRS, by the way, as Zwerner had already reported the account.

The IRS then remembered that the penalty for willful failure to file an FBAR is 50% of the highest balance for each year.

NOTE: Did you pick-up on what the fifth-amendment-pleading crowd has done here? Two years worth of penalties and the account is depleted – essentially seized by the government. 

Well, Zwerner was facing 4 years. His penalty was almost $3.5 million, whereas his account had never exceeded $1.7 million.

Good thing he voluntarily filed amended returns! What would they have done to him had he not come clean? 

In the area of foreign accounts, Treasury and the IRS have decided that we are all guilty, and that the only way to salvation is through their disclosure program du jour. The fact that these programs may not be a fit for many (or most, in my opinion) is beside the point. Many tax practitioners, me included, have represented clients with foreign non-reporting issues. My clients have been “ordinary” – an expat who started a business in Scotland, another who had no idea what an “FBAR” was, much less that she had to file tax returns even though she had lived out of the U.S. for two decades. These are not tax desperados, and to lump them in with IRS programs designed to avoid criminal prosecution is bonkers.

And there is the rub. The IRS took Zwerner’s letter as an admission of “willfulness,” meaning that he is charged with tax fraud. This is a criminal charge, and Zwerner should have entered the Offshore Voluntary Disclosure Program if he wanted protection from criminal charges. The IRS would say this is not the same as my Aberdeen restaurateur. I in turn would ask the IRS: why don’t you have a program for people like my restaurateur? Do you think I enjoyed that phone call with an expat who is afraid to return to the United States to visit her mother? Why are you terrorizing ordinary people? We could probably put all the people with significant money hidden overseas into one hotel conference room. Why is it that attorneys and tax CPAs in 50 states have horror stories to tell? There cannot be that many overseas-money-hiding uber-wealthies to go around.

Zwerner amended his returns. He did not enter the disclosure program. The IRS calls this a “quiet disclosure,” and they do not like it. They assessed 200% penalties.

What choice did the IRS leave him? He filed a lawsuit against the government.  He has an interesting argument, as the Eighth Amendment prohibits “excessive fines.” 

What do you think? Is a penalty of more than 100% an “excessive fine?”

There is precedent. There is a 1998 case where someone tried to take $357 thousand overseas and got caught with the money in his luggage. The U.S. sought forfeiture of the entire amount. The Supreme Court ruled against the government, stating that forfeiture of all the money was “grossly disproportional to the gravity of the offense.” The Supreme Court ordered him to pay $20,000 instead.

We’ll be paying attention to Zwerner’s case as it goes through the courts.