The courts may be operating a bit differently in light of the current coronavirus pandemic, but they are still pursuing cases. In a recent example, the court issued a decision in a recent tax case involving a Foreign Bank Account Report (FBAR) violations.
United States v. Schwartzbaum involves a man who was born in Germany and became a U.S. citizen in 2000. In 2009, the man’s father died, leaving him millions in offshore accounts. When he told his accountant his father had died and left a large amount of money for him in Europe, the accountant advised him that there were no U.S. tax obligations on foreign gifts. They did not discuss the need to report income on foreign assets. Another accountant advised the same, but noted tax obligations may exist in the United States if there was a connection to the U.S.
As a result, Mr. Schwartzbaum reported money from accounts he transferred from the U.S. to other foreign accounts, because these accounts had a “connection to the U.S.” He did not report his other accounts because they did not have a connection to the U.S. He states this was in line with his experience in other countries, which tax based on residency not citizenship.
The court stated that when looking at a civil penalty, the definition for willfulness would include an actual knowing and reckless conduct. The court also stated willful blindness could apply, but the act of signing a tax return on its own would not be enough to meet this requirement. Ultimately, the court held that he was willfully blind when he failed to have the FBAR form he signed translated. The form specifically states that U.S. citizens are required to report all foreign accounts.
One important lesson from this case: The Internal Revenue Service (IRS) will hold taxpayers accountable who fail to report their foreign accounts. As such, those in a similar situation are wise to review their options for compliance.