In a big win for the IRS, a jury found it appropriate for a taxpayer with a foreign account to pay more in a penalty than his foreign account was worth. On May 28, 2014, a Federal District Court jury found that the IRS could assess penalties that aggregate $2,241,809 on an account that had a high balance of $1,691,054. That is a penalty of 150%. Carl R. Zwerner, 87, failed to timely report his interest in a foreign account, as required under federal law. He then made a voluntary disclosure regarding his foreign accounts for the years 2004-2006, prior to the government’s creation of the formal voluntary disclosure program for previously undisclosed foreign accounts. As a result of the voluntary disclosure, his returns were audited for 2004-2007 and he was found to have “willfully” hidden assets and income from the government.
When a taxpayer is found to have willfully violated the law in this area, the law allows for a penalty that is the greater of $100,000 or 50% of the account value for each year that the willful violation took place. Typically, the government has been assessing one 50% penalty, based on the highest account value, even in criminal cases. The Zwerner case indicates a much harder line that the government is drawing relative to fines for previously undisclosed foreign accounts. On June 6, 2014, the judge in the Zwerner case heard arguments about whether the fine assessed against Mr. Zwerner violates the Eighth Amendment of the constitution. This amendment prohibits excessive fines by the government. It will be interesting to see what the judge has to say about whether the fine imposed on Mr. Zwerner is constitutionally excessive.
What is the take-away here? If you or a client has an undisclosed foreign account, now is the time to determine whether the client should step forward and participate in the voluntary program the government has created for offshore accounts, if you are or the client is eligible. While account owners are initially put off by the steep penalties associated with that program, those penalties pale in comparison to the penalties that may be imposed outside of the voluntary program.
For a detailed explanation of the options available to foreign account owners, see http://
files.ali-cle.org/thumbs/datastorage/lacidoirep/articles/TPL1404_David_thumb.pdf or http://www.journalofaccountancy.com/Issues/2013/Dec/20138321.htm.