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A District Court Pushes Back on Government's Willful FBAR Penalty

By Joel N. Crouch on June 5, 2020

After a string of government victories in willful FBAR penalty cases, there may be some light at the end of the tunnel for taxpayers challenging an assertion of a willful FBAR penalty. In United States v. Sandra J. de Forrest , the U.S. District Court for the District of Nevada denied the government’s motion for partial summary judgment regarding a willful FBAR penalty, finding there were genuine disputed material facts regarding the taxpayer’s knowledge of the obligation to file an FBAR. 

Ms. de Forrest’s late husband had bank accounts outside the United States that he owned prior to the marriage.  In 1994, prior to their marriage, Mr. de Forrest granted his soon-to-be wife Power of Attorney over one of the accounts in Switzerland and applied for a Visa Gold card linked to the account.  In December 1995, the parties married and soon thereafter, Ms. de Forrest retained a CPA to prepare annual tax returns for her and her husband.  The CPA provided tax preparation services for Mr. de Forrest until his passing in 2006 and for Mrs. de Forrest until 2011.  Ms. de Forrest testified that Mr. de Forrest was controlling and abusive and warned her “not to say anything about anything” regarding the Swiss bank accounts.

After her husband died in 2006, Ms. de Forrest, with the help of her attorney, contacted UBS in Zurich to take possession of the funds in the Swiss accounts.  UBS required Ms. de Forrest and her attorney to travel to Zurich to discuss the accounts and while in Zurich, Ms. de Forrest opened eightadditional accounts and transferred money into one of the accounts.  She also signed a declaration requesting that all mail, statements and correspondence related to the accounts be retained by the bank and gave investment decision-making authority to an individual in Switzerland.

Ms. de Forrest’s 2005 tax return did not contain a Schedule B, where foreign account ownership and income is normally reported, although her CPA was aware of the UBS accounts.  In 2009, the CPA sent a letter to Ms. de Forrest, enclosing completed FBAR forms for 2003, 2004 and 2005 with instructions to sign and mail them to the Department of Treasury.  Ms. de Forrest claims she did not receive the CPA’s letter or enclosed FBARs.

In 2011, the IRS initiated an examination of Ms. de Forrest’s tax and FBAR compliance, ultimately assessing willful FBAR penalties of over $2.5 million.  In December 2017, the government filed a complaint seeking a judgment against Ms. de Forrest for the FBAR penalties.  The government filed a motion for partial summary judgment asking the court to find, as a matter of law, that Ms. de Forrest’s failure to file an FBAR for 2005 was willful.  Ms. de Forrest countered that she was not obligated to file an FBAR for 2005 and if she was required to file a 2005 FBAR, her failure to do so was not willful. The court held that Ms. de Forrest failed, “to show a genuine dispute as to her interest in, and authority over, the UBS accounts” but denied the government’s motion regarding willfulness. 

With regard to the term “willful”, the government argued that “as a matter of law, all taxpayers who sign and file a federal income tax return know or should know about the requirement to file an FBAR.”  The government argued that Ms. de Forrest was willfully blind in failing to file an FBAR for 2005 because she signed her 2005 tax return, which omitted foreign income, and through the omission of a Schedule B, claimed she owned no interest in any foreign account.  “Further, the Government points out that Defendants’ contention that she did not read her tax returns does not make her innocent.  Rather, it reinforces that Defendant was willfully blind because she failed to pursue knowledge of reporting requirements related to her UBS accounts.” 

In support of its motion, the government placed great emphasis on the CPA’s testimony that he sent Ms. de Forrest a tax preparation questionnaire each year, which included a question regarding foreign bank accounts, and that Ms. de Forrest never filled it out. The court found that genuine disputes of material fact existed regarding (1) whether the CPA informed Ms. de Forrest in 2006 that FBARs would need to be filed for all open years and that there would be penalties otherwise, (2) whether Ms. de Forrest received the 2009 letter from the CPA, (3) the CPA’s understating of the FBAR filing requirements, and (4) why the CPA failed to include the foreign bank accounts, of which he was aware, on the 2005 tax return. 

Although a jury may ultimately decide Ms. de Forrest is liable for a willful FBAR penalty, at least one judge is not rubber stamping a government request for the willful penalty.

For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.