I’ll tell you what caught my eye:
This is a tax case in which the Government alleges that Defendant Walter Schik, a Holocaust survivor, failed to file a foreign bank account reporting form with the Internal Revenue Service …, which now seeks by this action to collect an almost nine-million-dollar civil penalty assessed against him for that failure.”
There are so many things wrong with that sentence.
Let’s talk about Form TD F 90-22.1, also known as the
FBAR (“Eff- Bar”). The form existed before I took my first course in accounting
years ago, but it has gathered steam and interest when Treasury started to
chase overseas bank accounts during the aughts. If one has a foreign account,
or has authority over a foreign account, which exceeds $10,000 during the
taxable year, one is required to disclose on one’s individual income tax return
(on Schedule B) and file Form TD F 9-22.1 with the Treasury.
Up to this point, it is just another form to file. We
are drowning in forms, so what is the big deal?
The deal is the penalties for not filing the form.
Let’s separate not filing the form because you did not know you had to file from
knowing you had to file but deciding not to. That second one is considered
“willful” (which makes sense) and can cost you a penalty from $100,000 to 50%
of the account balance at the time of violation.
This is VERY expensive money.
The IRS assessed a penalty of almost $9 million
against Schik for failure to file an FBAR.
Some background:
· Mr
Schik is a Holocaust survivor.
· His
education was cut short by, how shall we say this …, being in a concentration
camp.
· After
the war, he immigrated to the U.S. and became a citizen.
· After
becoming a citizen, he opened a Swiss bank account where he deposited monies
recovered from relatives who were slaughtered during the Holocaust.
· He
left the monies in Switzerland as he was fearful that another Holocaust-like
event could occur.
· Schik
did not touch or manage the money. That was done by his son and a Swiss money
manager.
· Schik
did talk with the money manager occasionally, though.
· By
2017 one of those Swiss accounts had over $15 million.
· His
accountant never asked Schik if he had overseas bank accounts or explained the recently
heightened IRS interest in the area.
I am sympathetic with the accountant. What are the
odds of having a client who is a Holocaust survivor and having over $15 million
in a Swiss bank account? One could go a career. I have.
The year at issue is 2007. There is a question on the individual
tax return whether one has an interest or signature authority over a foreign
bank account. Schik’s accountant answered it “No.” Schik did not correct his
accountant. More fairly, Schik did not even notice the question.
Wouldn’t you know that Schik’s Swiss money manager got
pulled into the UBS investigation?
UBS entered into a deferred prosecution arrangement
with the United States. It however had to provide identities of U.S. citizens
and residents who were customers of the bank.
At which point Schik submitted a voluntary disclosure
to the IRS.
Which the IRS denied.
Without an alternative, Schik submitted a late FBAR.
The IRS then slapped the 50% penalty we are talking
about.
Which brings us up to speed.
The penalty requires one’s behavior to be “willful.”
Not surprisingly, the word has specific meaning under the law, and the Court evaluated
whether Schik’s behavior was willful.
Treasury argued that “willful” means “objectively
reckless.”
Got it. Ignoring an issue to an extreme degree is the
same as knowing and not caring.
Schik argued that willful means “intentional
disregard.”
The difference?
Schik argued that the underlying law was opaque,
long-ignored and now quickly – if somewhat capriciously – conscripted into action.
He no more intentionally disregarded his tax reporting obligations than he
intentionally disregarded the newest developments in cosmological galaxy
formation. There was no conspiracy by hundred-year-old Holocaust survivors: he just
didn’t know.
And such is tax law. Nine million dollars hangs on the
meaning of a word.
The Court noted that other courts – relying on records
similar to those available to it - have found willfulness.
Not good for Schik.
However, the Court was concerned about the many countervailing
factors:
· Schik
was nearly 100 years old.
· Schik
had minimal formal education.
· Schik
did not manage the money.
· Schik
did not prepare his own tax returns.
· Schik
had no idea about a disclosure requirement.
· Schik’s
accountant did not explain the disclosure requirement.
· The
question answered “No” was pre-filled by the accountant’s software and did not
represent any assertion made by Schik.
The Court denied the IRS summary judgement, noting there
was a substantial question of fact.
I agree.
Who will review and clarify the facts?
“The
Court believes that the Parties in this case would benefit from mediation. By
separate order the Court will refer the Parties to the Southern District of New
York’s Mediation Program. … the assigned District Judge … may determine that a
case is appropriate for mediation and may order that case to mediation, with or
without the consent of the parties.”
Methinks the IRS should just have allowed the
voluntary disclosure.
Was the IRS encouraging compliance, promoting
education and providing a ramp to enter/reenter the tax system? Or is this
something else, something with the purpose of terrifying the next person?
Our case this time was United States of America v
Walter Schik, 20-cv-02211 (MKV)
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