Jeffrey P. Pomerantz, a dual US-Canandian citizen had two overseas accounts. One was in Canada at CIBC in his own name, and one was in Switzerland under a shell company's name. Mr. Pomerantz did not report these accounts on the Report of Foreign Bank Accounts, otherwise known the FBAR form, for years 2007-2009.
FBAR penalties cannot be collected like regular taxes. In order to enforce collections, a civil judgement is required. The IRS civilly assessed Mr. Pomerantz FBAR willful penalties and interest on these unreported accounts. The US government brought this case to perfect their assessed FBAR penalties into a civil judgment they could collect upon.
Things did not go well for the government.
Mr Pomerantz, representing himself, was able to get the court (Robart, J.) to toss out the complaint against him.
Judge Robart correctly stated the Title 31 standard of willful FBAR penalties as stated in Ratzlaf v. United States, 510 US 135, 154 (1994) as adopted by the Zwerner FBAR case of 2014. When confronted with this standard, the government's complaint wilted.
The government failed to allege any facts other than the failure to report the CIBC account. The court said the government had to do more than that. Willfulness requires something much more than just non-filing. The court noted Mr. Pomerantz opened the CIBC account in his own name, so that seemed at odds with any willful act to conceal.
On the other hand, the court did agree that the government could have prevailed on the unreported Swiss account, as there is a possible inference that using a shell company is to conceal ownership.
So, if the court stopped the government on CIBC but said the government could win on the Swiss account, why was the case dismissed?
In its complaint the government jumbles together all FBAR penalties into one. The court would likely have allowed to government to proceed on the Swiss account, but they failed to segregate the willful penalties properly so the court dismissed the entire complaint!
The government may refile, so this win may only be temporary. I imagine this defeat is not sitting well with them.
Interesting – if the government aimed a little lower, say for non-willful penalties, it would have likely prevailed. It is too late for the government to assert non-willful penalties — the 2009 statute of limitations on FBAR assessment expired June 30, 2016.
This is a huge win for Mr. Pomerantz, who represented himself pro se (we think he may have gotten some incredible research help). And it is a huge win for taxpayers considering an OVDP opt-out or facing an FBAR audit. If you have accounts in your own name or in the name of someone you inherited the funds from, the IRS is going to need some strong evidence to prove willfulness. For instance, testimony from a banker, CPA, or someone else stating that the taxpayers acted willfully. This decision clearly stands for the proposition that that government needs something much more than just an unfiled FBAR to assess willful penalties.
For taxpayers with shell companies, there is still good news. Shell company ownership may lead to an inference of willfulness, but also may not. Shell companies are the de facto business custom many places overseas and are used routinely for liability protection. Having an LLC in the US is very routine, yet its equivalence overseas somehow becomes evidence of trickery? That does not seem quite right.
The most common FBAR decisions cited by the IRS as authority are Williams and McBride. But they have facts that are incredibly rare and are seem to never be on point. (Mr. Williams plead guilty to tax evasion but failed to file FBARs during plea negotiations; Mr. McBride allowed his emotions towards perceived IRS incompetence get the best of him; he "mouthed off" to a revenue agent who later imposed willful FBAR penalties).
Pomerantz clearly states the government has the burden of proving additional facts that could sustain a willful finding.
