Jury Determines 150-Percent FBAR Penalty and U.S. Seeks FBAR Related Forfeiture of $12 Million!"

"Jury Determines 150-Percent FBAR Penalty and U.S. Seeks FBAR Related Forfeiture of $12 Million!"  
Journal of Tax Practice and Procedure, June-July 2014

CHARLES P. RETTIG, Hochman, Salkin, Rettig, Toscher & Perez, P.C.
In Zwerner, the government assessed civil FBAR penalties equivalent to 50 percent of the highest account balance for each of tax year 2004, 2005, 2006 and 2007, aggregating $3,488,609.33 for an account that appears to have had a high balance of $1,691,054 during the relevant time period! The IRS asserted a 75-percent civil income tax fraud penalty for tax years 2004, 2005 and 2006. Following the audit, the income tax civil fraud penalty was abated in the U.S. Tax Court for 2006, by IRS Appeals for 2004 and 2005, and was not even asserted by the IRS for 2007. 

The jury trial in Zwerner began on May 19, 2014, in the Federal District Court for the Southern District of Florida. Today, the jury returned a verdict finding Mr. Zwerner “willful” and thus liable for an FBAR penalty equivalent to 50 percent of the high balance in his foreign financial account for each of the years 2004, 2005 and 2006 years as previously assessed by the government. The jury determined Mr. Zwerner was not “willful” as to the year 2007. 

Essentially, the assessed FBAR penalties upheld by the jury aggregate $2,241,809 on an off-shore account that had an apparent high balance of $1,691,054 during the years at issue. This is a significant win for the government in their efforts to encourage certain US persons having undisclosed interests in foreign financial accounts to come into compliance with the applicable filing and reporting requirements. 

While post-trial arguments were pending on whether the Zwerner penalties violate the constitutional prohibition against excessive fines, the case settled with Mr Zwerner agreeing to 50-percent FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively. 

U.S. taxpayers should carefully review the underlying factual scenario set forth in C.R. Zwerner before making any decision to pursue any form of voluntary disclosure regarding previously undisclosed interests in a foreign financial account. Many taxpayers are considering opting out of the OVDP — some might reconsider in light of the jury verdict in Zwerner for multiple FBAR penalties. Various taxpayers who have opted out of the OVDP have already received notices asserting multiple FBAR penalties for the years involved.

"The Psychic Cost of Tax Evasion"  
Boston College Law Review, Vol. 56, 2015, Forthcoming

KATHLEEN DELANEY THOMAS, University of North Carolina (UNC) at Chapel Hill - School of Law

Each year, the government loses hundreds of billions of dollars in tax revenue due to underreporting by individual taxpayers. According to standard deterrence theory, policymakers should be able to reduce tax evasion by increasing tax penalties, raising the audit rate, or some combination of the two. This Article refers to these strategies as increasing the “monetary cost” of tax evasion. To date, budgetary limitations and political hurdles have made these strategies difficult for the government to employ. 

There is, however, another potential means by which the government can improve tax compliance, apart from raising the monetary cost of evasion. Empirical evidence shows that people experience some form of psychological discomfort when they are dishonest, which may deter them from cheating. This Article proposes employing subtle behavioral interventions that encourage more honest tax reporting by raising the level of psychological discomfort experienced from underreporting. I refer to this approach as increasing the “psychic cost” of tax evasion. 

Adopting measures designed to increase the psychic cost of tax evasion, such as making small adjustments to the way that taxpayers fill out their tax forms, could generate much needed tax revenue. Moreover, these measures would impose very little administrative expense to the government as compared to traditional deterrence mechanisms like audits and penalties. While further empirical research is needed to test how to increase the psychic cost of tax evasion in the most cost-effective manner, this Article proposes a roadmap for beginning that process.