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.