Horowitz, (DC MD 1/18/2019) 123 AFTR 2d ¶2019-362
A district court has ruled on various issues regarding the Report of Foreign Bank and Foreign Accounts (FBAR), including the statute of limitations for assessing FBAR penalties and the definitions of various FBAR terms, including the term "financial interest".
Background. Under 31 USC 5314(a) and 31 CFR 1010.350, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. The penalty for violating the FBAR requirement is set forth in 31 USC 5321(a)(5). 31 USC 5321(a)(5)(A) provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of 31 USC 5314(a). The maximum amount of the penalty depends on whether the violation was non-willful or willful. (31 USC 5321(a)(5)(B))
The statute of limitations for assessing civil penalties for FBAR violations of 31 USC 5314 is six years, and it begins to run on the date that the FBAR is due. (31 USC 5321(b)(1))
Facts. United States citizens Peter Horowitz and Susan Horowitz lived in Saudi Arabia for most years between '84 and 2001. Beginning in '88, they maintained a Swiss bank account at the Union Bank of Switzerland ("UBS"). When they returned to the United States they did not close their Swiss bank account; by 2008, its balance was almost $2 million. Toward the end of 2008, Peter closed the UBS account and intended to open a joint account at another Swiss bank, Finter, but Finter would not allow him to do so because Susan was not present. When Peter opened the account, he filled out a "List of Authorized Signatories and Powers of Attorney for Natural Persons", designating Susan as a person to whom he gave "an unlimited power of attorney", but that form was also not put into effect because Susan wasn't present. As a result, Peter transferred the money to Finter in his name only.
The Horowitzes did not make any additional deposits after opening the Finter account. In 2009, they traveled to Switzerland and added Susan as a joint owner of the Finter account.
The Horowitzes' tax returns, including those for 2007 and 2008, were prepared relying on summaries of information that Peter prepared and mailed to the return preparer each year; those summaries never listed the UBS or Finter accounts. Additionally, Peter, who communicated with the accountants on behalf of himself and his wife, never asked whether he should disclose either account.
The Horowitzes signed their tax returns each year without ever answering "Yes" to the income tax return question about whether they had money in an overseas account or filing a file Form TD F 90-22.1 ("FBAR") to disclose either account.
In 2010, they disclosed the funds for the first time. They requested they be accepted into the Department of the Treasury's Offshore Voluntary Disclosure Program (the "Program"), which they were that same month. As required by the Program, the Horowitzes filed an FBAR for each year 2003 through 2008 and amended Form 1040 income tax returns for 2003 through 2008. They opted out of the Program in Dec. 2012.
In June 2014, IRS assessed penalties of $247,030 against each of them for their alleged willful failure to disclose the UBS account for the 2007 tax year and penalties of $247,030 against each of them for their alleged willful failure to disclose the Finter account for the 2008 tax year.
Thereafter, Peter filed an FBAR protest, appealing the proposed FBAR penalties to the IRS Appeals division. The Appeals officer assigned to the case determined that the Horowitz case should have been in an unassessed posture for purposes of IRS Appeals review. In Oct. 2014, the appeals officer asked IRS Appeals FBAR coordinator Batman to remove/reverse the FBAR penalties as prematurely assessed. Another Appeals employee, Ms. Beasley, then removed the penalty "input date".
IRS brought this action to collect those penalties, and it moved for summary judgment on its claims.
The Horowitzes filed a cross-motion for summary judgment, arguing that the IRS reversed the 2014 penalties, such that the penalties IRS tried to collect were not assessed until 2016, at which time they were untimely.
Taxpayers did not prove statute of limitations violation. The court found that the taxpayers did not meet their burden of proving that the statute of limitations ran before the FBAR penalties were assessed.
The parties agreed that the IRS timely assessed the FBAR penalties on June 13, 2014, and the statute of limitations for assessing FBAR penalties ran on Dec. 31, 2015. The issue was whether the penalties could have been, and in fact were, reversed.
IRS conceded that, around Oct. 24, 2014, Ms. Beasley removed the penalty input dates from the modules in her database corresponding to the penalty assessments against the Horowitzes, as well as that she took this action in response to Ms. Batman's request that she remove/reverse the assessed penalties. But, IRS did not agree that these actions amounted to an actual removal of the penalties themselves.
The court concluded that the Horowitzes did not provide sufficient evidence that Beasley reversed the assessment. It also said that the Horowitzes did not show that, even if Beasley believed she reversed the penalty, she had the authority to do so. Notably, to assess the penalties in the first place, Beasley not only had to input the data; she then printed a form that her manager signed. For Beasley to be able to reverse or remove an FBAR penalty assessment without her manager's signature would be incongruous with his initial signature required to impose the penalty in the first instance.
IRS also noted that an agency must have Department of Justice (DOJ) approval to compromise a claim of the government that exceeds $100,000. (31 USC 3711(a)(2)) And, it noted that the penalty section of the Internal Revenue Manual advises IRS employees that post-assessed FBAR cases in excess of $100,000 cannot be compromised by Appeals without approval of the DOJ.
The Horowitzes argued that removal or reversal does not fit the definition of compromise. But, the court said, the Horowitzes did not establish that, given that IRS could not "compromise" an FBAR penalty above $100,000 at all without DOJ approval, it nonetheless could eliminate the debt altogether by removing the FBAR penalties after they undisputedly were assessed.
Wife not liable for 2008 penalty. But the court held that Susan was not liable for the FBAR penalty with respect to 2008.
IRS argued that Susan had a financial interest in and authority over the Finter account, based on the Horowitzes' intent to include her as an account owner and Peter's designation of Susan as a power of attorney. Susan countered that, despite their intent, she simply was not an owner of the Finter account in 2008 and, because she had not provided a "signature specimen" on the power of attorney form, she did not have any authority over the account.
Instructions to the 2008 FBAR Form provide "A United States person has a financial interest in... [a] financial account in a foreign country for which the owner of record or holder of legal title is... a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person".
The court said that when Finter would not allow Peter to open the account in both of their names, he proceeded to take their joint funds and place them into an account in his name only, over which Susan could not exercise any control without traveling to Switzerland and providing a signature specimen. "Taking money that was in Susan's name and placing it in an account that was not in her name cannot, in any light, be seen as acting on her behalf."
Moreover, the court said, the question was whether Peter acted on her behalf with respect to the account, that is, after the Finter account existed. Peter did not make any additional deposits after opening the account. And, there was no evidence that Peter did anything with the account before Oct. 2009 when Susan became a joint account owner.
As to the issue of whether Susan had authority over the account, the taxpayer's and IRS disagreed as to what was the definition of "signature or other authority". IRS argued for an inclusive definition contained in 31 CFR 1010.350(f)(1) which provides the following: "the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained".
Without deciding the issue of which definition should apply, the court said that even under IRS's definition, Susan did not have authority over the Finter account in 2008. Without the required signature specimen, she could not write to, or otherwise directly communicate with, the bank "to control the disposition of money, funds or other assets" in the Finter account. Accordingly, she did not have authority over the Finter account in 2008.
Willfulness penalty applied. The court held that the willfulness penalty applied with respect to both taxpayers for 2007 and with respect to Peter for 2008.
Citing a large series of cases including Poole, (CA 4 2011) 107 AFTR 2d 2011-2163, the court said that willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information, and it can be inferred from a conscious effort to avoid learning about reporting requirements. "Willful blindness" may be inferred where "a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability".
For 2007 and 2008, Schedule B of Form 1040 provided that taxpayers must complete part III of that schedule if they had either over $1500 of taxable interest in ordinary dividends or had a foreign account. The Horowitzes had to complete part III for the "unrelated reason" that they had more than $1500 in ordinary dividends. Question 7a of that part asked whether at any time during the year the taxpayer had an interest in or signature or other authority over a financial account in a foreign country. It referred taxpayers to the FBAR form. Nonetheless, they answered "no" to that question.
The Horowitzes testified that, based on conversations with other expatriates living in Saudi Arabia, they believed that income that was earned in Saudi Arabia was subject to tax only in Saudi Arabia if they banked it overseas. Peter stated that he did not think he needed to file an FBAR for 2007 or 2008. Susan stated that she did not even know what FBAR was at that time. Their tax accountants neither asked about overseas bank accounts nor explained the FBAR question about foreign accounts on Form 1040, Schedule B, which they completed on the Horowitzes' behalf. The Horowitzes insisted that neither of them had actual knowledge of the FBAR requirement and therefore penalties for willful violations were not appropriate.
The court said, "Because a taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents, their signatures are prima facie evidence that they knew the contents of the return, including the foreign accounts question and the cross-reference to filing requirements, which put them on inquiry notice of the FBAR requirement".
The Horowitzes argued that their friends told them they did not need to pay taxes on the interest in their foreign accounts. Maybe so, the court said, but there was not any information from which the court could assess whether it was reasonable for them to have accepted what their friends told them as legally correct. And, in any event, their friends' views would not override the clear instructions on Schedule B, which requires a "Yes" answer if the taxpayer has an interest in a foreign account, regardless of whether the funds within it constituted taxable income. Moreover, the fact that the Horowitzes discussed their tax liabilities for their foreign accounts with their friends demonstrated their awareness that the income could be taxable. Their failure to have the same conversation with the accountants they entrusted with their taxes for years, notwithstanding the requirement that taxpayers with foreign accounts complete Part III of Schedule B, "easily" showed a conscious effort to avoid learning about reporting requirements. On these facts, the court said, willful blindness could be inferred.
References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶S-3650; United States Tax Reporter ¶60,114.06.
This article was originally published by Thompson Reuters in their Checkpoint Newsletter for Tax Preparation Professionals and CPAs on February 1st, 2019. Poston, Denney, & Killpack, PLLC does not claim any ownership or copyright of this article nor is any implied by our republishing of this material. All rights reserved by the original and respective author(s).
