In a recent decision, a federal district court found that a long-time CPA/tax-return preparer recklessly failed to file FBARs to disclose several foreign financial accounts. As avid readers of our Insights are aware, many federal courts have found that reckless reporting failures are sufficient to impose “willful” FBAR penalties—and those penalties can be quite signficant.
The case was United States v. Kronowitz. And it is yet another reminder that courts addressing FBAR reporting failures tend to look critically at the account holder’s background, including educational and professional. Account holders with tax-related backgrounds or professionals with substantial business experience are often held to a higher standard.
The Foreign Accounts
After hearing a rumor that a former client was considering sueing him for fraud, the CPA (Kronowitz) moved assets offshore for protection, opening two bank accounts in the Cayman Islands. His purpose in opening the Cayman accounts was to keep funds out of reach from potential creditors.
Kronowitz also signed a document titled “Management and Administration Agreement” between himself and an entity named Consista Treuunternehmen (“Consista”), a company in Liechtenstein regarding the management of an entity name Cramo Stiftung/Foundation (“Cramo”). The Agreement empowered Consista to manage Cramo (a sifting/foundation in Liechtenstein) on behalf of Kronowitz.
Cramo opened an account at United Bank of Switzerland (“UBS”). Kronowitz was listed as the beneficial owner. Kronowitz later created a trust to hold proceeds from the investments. And still later, funds held at UBS were transferred to an account at Basler Kantonalbank (“BKB”), which was also opened for Kronowitz’s benefit.
The Reporting Failures
Kronowitz prepared his own tax returns for tax years 2005 through 2010. Schedule B is an attachment to the individual federal income tax return (Form 1040) that is used for reporting interest and dividend income, as well as any financial interest in, or signature authority over, financial accounts located in foreign countries. Although he was required to file a Schedule B in conjunction with his 2005 through 2010 individual income tax returns, Kronowitz did not disclose his financial interest in foreign accounts in a Schedule B for his 2005 through 2010 individual tax returns—nor did he file an FBAR.
Instead, on the Schedule B form filed with his 2008 tax return, in response to the question asking “[a]t any time during 2008, did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” Kronowitz marked “no.” There were no Schedule B forms attached to the 2005, 2006, 2009, or 2010 individual tax returns.
Kronowitz also prepared the tax returns for the Trust for tax years 2008, 2009, and 2010. He marked “no” in response to the question asking, “[a]t any time during [the] calendar year , did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country?”
Based on these essential facts, the IRS Examiner assessed the following FBAR penalties:
Calendar Year FBAR Penalty
Total Penalties Assessed: $663,771.00
Federal Court Imposes Willful FBAR Penalties on Long-Time CPA | Freeman Law