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Federal Court Denies Summary Judgment Against Holocaust Survivor for Willful FBAR Violation

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Federal Court Denies Summary Judgment Against Holocaust Survivor for Willful FBAR Violation

 

Recently, a noted federal district court declined to grant summary judgment on a willful FBAR penalty assessment case involving a Holocaust survivor who left a safety net account in Switzerland despite immigrating to the United States.

The case cuts against a recent trend of federal courts finding willfulness on relatively scant evidence. But, as the court notes in the opinion, the determination was made with the unique facts of the case in mind, making this decision feel like the exception that proves the rule.

Where severe FBAR willful penalties are concerned, you would be wise to act early to protect your assets, wherever they may be. To get seasoned, dedicated assistance with your international tax and foreign asset disclosure issues, call a tax attorney at the Tax Law Offices of David W. Klasing today at (800) 681-1295.

SDNY Court Deviates, Offers Benefit of the Doubt to Holocaust Survivor

In a somewhat surprising recent decision, the United States District Court for the Southern District of New York declined to grant the government’s motion for summary judgment in a case concerning the assessment of willful FBAR penalties.

Background

The defendant in the case, Walter Schik, was alleged to have willfully failed to disclose assets held overseas in a Swiss bank account. Schik did not dispute that he failed to file the FBAR, nor did he dispute that his overseas assets met the reporting threshold to require an FBAR. Schik did contest the government’s argument that he failed to file willingly, which is a significant element when it comes to FBAR penalties.

Schik was born in eastern Europe before immigrating to the United States in the wake of the Holocaust. Schik’s traumatic experiences prompted him to preserve a financial safety net for himself in Switzerland, where he felt it would be safe in the hands of a neutral nation. Once he created the accounts, Schik ceded almost all control and decision power over the funds to a local manager and had little to no communication with the manager of the funds since that point.

FBAR Failure to Disclose

The critical aspect here is Schik’s 2007 tax return, specifically regarding his answer to Question 7(a) of Schedule B. Question 7(a) asks the taxpayer whether they had an interest in or authority over any foreign financial accounts in that taxable year. The form takes a simple yes or no answer and, if the answer is yes, directs the taxpayer to fill out the associated forms, such as an FBAR.

Schik’s tax preparer used a software program that inputted the answer to Question 7(a) as “no.” Schik never discussed the Swiss account with his tax preparer. Schik had the opportunity to review the tax return before signing but admitted to only “looking generally.”

Attempt to Voluntarily Disclose

Josef Beck, the manager of Schik’s Swiss accounts, would be indicted some years later for conspiring to conceal UBS bank accounts and income on those assets from the U.S. government. UBS, in turn, agreed to provide information on some U.S.-based customers in exchange for deferred prosecution.

After learning of the prosecution agreement, Schik applied to the IRS’s Offshore Voluntary Disclosure Program (OVDP) to avoid any appearance of impropriety. However, the IRS rejected his application due to “timeliness and/or completeness.” Schik then filed a late FBAR for 2007 but still was assessed willful penalties.

Denial of Summary Judgment

The government moved for summary judgment on the willful FBAR penalty assessment, claiming that Schik’s response of “no” to Question 7(a) on his 2007 tax return was enough to constitute willfulness. The court felt differently, however. In the opinion, the court pointed out that willfulness for these purposes must be something more than simple negligence.

According to the order denying the motion, written by Judge Mary Kay Vyskocil, “The Government’s suggested reading of the word– that willfulness should be found categorically even when an unsophisticated taxpayer did not know of an obligation to report and relied on a tax preparer– would abrogate that distinction.”

Key Takeaways from the Court’s Denial of Summary Judgment in Schik

Obviously, the court’s decision to deny summary judgment based on what could easily be seen as an honest mistake by an unwitting filer is a win for taxpayers. However, there are a few key aspects of this story that should cause some concern going forward.

The Defendant Is Not Out of Trouble Yet

This decision is only the denial of a motion for summary judgment. After trial, the court could still conclude that Schik was willful. Even if they do not find willfulness, Schik will still face some penalties for his nonwillful failure to file an FBAR.

Voluntary Disclosure Is a Tricky Process

Even after applying for admission into the OVDP, Schik was denied the benefits of cooperation. It is unclear whether the IRS issued the denial as a result of the UBS cooperation occurring first, an error in the application, or for some other reason. If you hope to use the IRS’ voluntary disclosure programs or provide amended filings to help fix your past noncompliance, it is important that you work with a Dual Licensed Tax Attorney and CPA when navigating these waters.

The Taxpayer Is Responsible for Their Own Return

Whether or not you use a tax preparer, when you sign your name on your return, you accept the responsibility for all of the information contained in your filing. Therefore, it is important that you always review your tax return fully. If you have reason to believe that a tax preparer may have made errors or included inaccuracies in your past filings, you should enlist the help of a Tax Attorney to evaluate your tax history and provide you with options.

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The Tax Law Offices of David W. Klasing Can Help Prevent FBAR Willful Penalties

If you are concerned about reporting requirements for overseas assets, reach out to the Dual Licensed Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing today by calling (800) 681-1295.

See our 2011 OVDI Q and A Library

See our FBAR Compliance and Disclosure Q and A Library

See our Foreign Audit Q and A Library

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