On June 11, 2013, the Assistant United States Attorney General Kathryn Keneally sued Carl R. Zwenker of Miami, Florida for penalties for not filing timely foreign bank account reports. While the complaint itself is rather short for a legal pleading, this lawsuit is incredibly significant for several reasons.
The IRS has already assessed FBAR penalties, it does NOT need to sue to "win"
Here's the thing. Mr. Zwenker was ALREADY penalized! He owes the IRS $3.5 million in FBAR penalties. The IRS actually didn't need to sue Mr. Zwenker in order to win $3.5 million in penalties. All the IRS needed to do in order to to levy or garnish him was issue a Notice of Levy. This lawsuit is merely to convert the FBAR tax liability assessed in June and August of 2011 into a civil judgment.
It is NOT normal for the IRS to sue for a civil judgment so quickly.
While the IRS does, from time-to-time, sue taxpayers to convert taxes owed into a civil judgment, typically we see this after the IRS has exhausted all other means of collecting on a debt, like levies and garnishments. But in this case, just a few years after the FBAR penalties were assessed, the IRS sued to convert this into a civil judgment. So why?
The timing of the suit? Two possible reasons, one likely reason
Why would the IRS want to convert this judgement into a civil judgment? First, there is no statute of limitations that exists on "regular" tax debt. By converting this debt into a civil judgment, the IRS will have forever to collect on the amount. Because there were at least 8 years left on this CSED (penalties assessed in June and August of 2011, there's a 10-year statute to collect), we strongly suspect that IRS wanted the public to know that people like Mr. Zwenker were being assessed strict FBAR penalties. In this case – multiple 50% willfull penalties, more than double the entire account value!
The only way to disclose otherwise private tax information is to file a public law suit like this one.
Don't make a soft disclosure…or else
From the sole count of the complaint, it appears the IRS alleges that Mr. Zwenker made a foreign bank account report disclosure outside the Offshore Voluntary Disclosure Program (OVDP) that was available at the time. It is this non-compliance with the OVDP that the IRS said it would be targeting with a vengeance. This complaint thoroughly is in accord with the IRS' earlier threats about imposing stiff FBAR penalties for those who make a soft-disclosure.
It is likely that the IRS sued merely to let other taxpayers know that if they have made a soft disclosure, they can still avoid the multiple 50% FBAR treatment that Mr. Zwenker had received in 2011, if they, unlike Mr. Zwenker request to get into the OVDP.
Missing facts about non-compliance
There is no evidence that the IRS tracked down Mr. Zwenker, there is no evidence that he owes the IRS money, and in fact, there is no claim that he intended to defraud the government of the United States by engaging in tax fraud. Rather, all the IRS needs to do in order to assess the FBAR penalties is prove there was a later effort to correct a mistake in filing that occurred outside of the OVDP.
The IRS is not bound by concepts of proportionality
The IRS has penalized a taxpayer approximately $3.5 million for account worth approximately $1.7 million for failing to report foreign bank accounts properly. Again, no amount of tax evaded is given, and tax evaded is apparently unrelated to proving FBAR willfulness.
The IRS assumed willfulness
From the IRS allegations, all they claim they need in order to assess FBAR penalties are:
(1) proof of a late-filed FBAR forms
(2) proof of an Amended return that shows there was unreported income from the foreign bank accounts that were not reported on the the FBAR form.
That is all the IRS thinks it needs to assume willfulness. Remember, there appears to be confusion. According to both this complaint and tax attorney Hale Sheppard, the law was changed to place of the burden of proof on taxpayers to prove reasonableness by the Jobs Act of 2004. That is, taxpayers must prove they WEREN'T willful.
So what will happen?
Will this stand constitutional scrutiny? Forgive the editorial, but well, the Supreme Court has upheld stupider things. Our thoughts are certainly with Mr. Zwenker and his legal team. If they have anything they wish to share, they are invited to contact us.
Case Cite: United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013)