The 1939 song, “All or Nothing at All,” (by Arthur Altman and Jack Lawrence) made popular by Frank Sinatra might be sung in a new version by IRS, “OVDP or Nothing at All.”

The Bank Secrecy Act contains draconian penalties for failure to file the TD F 90-22.1 (FBAR) or to keep certain required records with regard to foreign accounts.  The penalty can range from zero to a maximum of 50% of the account value on the date of each violation.  For failure to file over the six-year statute of limitation period, the penalty could amount to 300% of the account value.  Such a penalty amounts to forfeiture of the assets involved.

In March of 2009 IRS announced its first Offshore Voluntary Disclosure Initiative.  Under the program taxpayers with unreported income from offshore accounts could escape criminal sanctions and pay, in lieu of the scary maximum FBAR penalty, a miscellaneous penalty of 20% of the highest balance during the OVDI period (then six years).  Under the 2011 program the reduced penalty was increased to 25%; and, under the 2012 OVDP the penalty is 27.5%.

FAQ 15 of the current program admonishes taxpayers who had previously made a “quiet disclosure” or who are contemplating amending returns outside the program, that such acts will not be considered by IRS to represent a voluntary disclosure.  Thus, such taxpayers could be subject to criminal sanctions and exposed to the maximum FBAR penalty.

Some taxpayers and practitioners believe IRS would not assess the maximum penalty in most cases and therefore have either filed so-called “quiet disclosures” by submitting amended Forms and FBARS, or, have entered the OVDP to obtain criminal amnesty and then opted out of the program for purposes of determining the income tax owed and FBAR penalty.  Others including myself have been less inclined to take the risk of IRS being fair and generous in assessing the FBAR penalty even though the penalties assessed in the small number of op-out  cases closed so far has been modest.

Some sidestepping the OVDP process believe that a maximum penalty would violate the Eighth Amendment which proscribes “excessive fines.”  They cite the Supreme Court decision in U.S. v. Bajakajian, (524 U.S. 321 (1998), which for the first time in the court’s history (with Justice Thomas writing the majority opinion) struck down a forfeiture of  $357,144 in currency with which Bajakajian had attempted to board an international flight without reporting.  He planned to use the cash to pay off a debt abroad.    Criminal charges were filed and he eventually plead guilty to one count of failure to report; but, argued the forfeiture before the court.  The District Court reduced the fine to $15,000 plus $5,000 under the Sentencing Guidelines; and, the Ninth Circuit affirmed.  The Supreme (5-4 decision) in affirming the Ninth Circuit, found the forfeiture to constitute an excessive fine in violation of the Eighth Amendment.  The court distinguished civil in rem proceedings against “guilty property” (fruits of the crime) from in personam criminal proceedings which seek to punish the defendant for a crime. The latter must not be grossly disproportional to the offense. The court then found the fine to be grossly disproportionate to a “solely reporting offense,” noting, “It was permissible to transport the currency out of the country so long as he reported it.” The money was not the proceeds of an illegal activity and was unrelated to any other crime, noting further, “He is not a money launderer, a drug trafficker, or a tax evader.” (emphasis added) Further, “There was no fraud on the U.S. and (he) caused no loss to the public fisc.” The court contrasted customs forfeitures when import duties have not been paid as an in rem action against the property intended to reimburse the U.S. for the loss sustained by the government due to the evasion of customs duties, which can constitutionally be a multiple of the value of the goods.  Justice Kennedy delivered a strong dissenting opinion (joined by then Chief Justice O’Connor and Justice Scalia).

In U.S. v. Carl R. Zwerner, the IRS has backed up its threat with action in filing a civil complaint in the Southern District of Florida seeking a judgment on assessed FBAR penalties approximating 300% of the value of Zwerner’s foreign account.  What led to IRS seeking to collect the harshest penalty?  The facts:

  • Zwerner resides in Miami-Dade County and is a U.S. citizen.
  • He had a foreign bank account with ABN AMRO in Switzerland.
  • He was required to but did not file timely FBARS for the years 2004 through 2007.
  • His failure to timely file was deemed wilful, in part, because:
    • He held the account from 2004 through 2006 in the name of a nominee, Bond Foundation.
    • In 2007, he transferred the account to another nominee, Livella Foundation.
    • He, however, was the beneficial owner at all times of the account.
    • His originally filed Forms 1040 did not report any of the income he earned the account.
    • He expressly told his return preparer that he had no foreign bank accounts.
    • He answered “No” to the question on Schedule B of his tax return asking if he had a financial interest in a foreign bank account.
    • In a letter to IRS dated August 9, 2010 he admitted that he was aware that he should have reported the account and income earned.
  • On about October 13, 2008 he filed a delinquent FBAR for 2007 along with an amended Form 1040 for such year.
  • He did not enter the 2009 OVDI which opened on March 23, 2009.
  • Instead on or about March 27, 2009 he file amended returns and FBARS for 2004 through 2006.
  • IRS assessed the maximum penalty of 50% of the account value for each violation for the years 2004 through 2007.
  • The total penalty assessed was $3,488,609.33.  The highest balance in the account for the four-year period wasi$845,527 for 2007.

The government has the burden of proving wilfulness by a preponderance of the evidence.  The fines assessed against and sought to be collected from Zwerner represent forfeiture and then some.  The case may turn on whether the FBAR penalties are considered punishment or are deemed compensation to the government for Zwerner’s tax evasion and impact on the governmental fisc.   That tax evasion is present, however, distinguishes the Zwerner civil complaint from the decision in Bajakajian. It is known that offshore tax evasion takes a large bite out of U.S. tax revenues.  Also, Bajakajian was a 5-4 decision and the court’s composition today differs from the court in 1998).


Many will decide to wait and watch for the outcome of this case as it weaves its way through the courts.  I believe the wiser approach for most is still to seek the shelter of certainty by entering the OVDP.  I believe the analysis for many is not so much as “risk tolerance” or can one sleep at night with IRS snooping about; but, “risk capacity” or how much can one afford to lose?  Those who consider the likelihood of being caught to be remote should ponder that Hurricane Andrew was a remote outlier until is occurred.  Although unlikely to repeat, I’ve not dropped my wind and flood insurance coverage.  Outliers happen all the time with regularity.  Moreover, getting caught is becoming less and less an outlier event with increased inter-governmental cooperation and leads from the 2009, 2011 and 2012 OVDPS directing IRS to others which, in turn, leads to yet others.  Some, however, will still bet that the government lacks the resources to pursue every quiet discloser.  That will not be comforting to one who finds him or herself among those the government has selected to pursue.

Some will continue to balk at the burden and cost of entering the OVDP. Well, that burden and cost are substantial but substantially less than the costs of fighting criminal tax charges and/or defending against a FBAR penalty suit, no less serving time or paying the FBAR penalty, if one loses the battle.

© 2013 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in 2012 OVDP, AMENDED RETURNS, DELINQUENT RETURN, FBARS, NEW OVDP, TAX, TAX CRIMES, VOLUNTARY DISCLOSURE and tagged , , , , , , , , , , , , . Bookmark the permalink.

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