The IRS had assessed a willful FBAR penalty against Walter Schik (Schik) in the amount of approximately $8.8 million for failure to timely file FinCEN Form 114 for the year 2007.  When Schik did not pay the assessed amount the government brought suit in U.S. District Court to reduce the assessment to judgment.  The IRS could not attempt to administratively collect the penalty assessment through levy because the FBAR penalty is not a penalty that IRS is empowered to collect administratively.  Rather, the government must sue to obtain a judgment which it then can pursue collection on. (USA v.Walter Schik US District Court SDNY Case No. 20 Civ. 2211(MVK) filed 8/0/21)

The Government’s Argument

The Government’s motion was supported in part by the following averred undisputed facts (per Memorandum of Law in Support of the USA’s Motion for Summary Judgment)

1. Schik was the beneficial owner of two Swiss foreign financial accounts at UBS during all of 2007.
2. As of December 31, 2007 the account balances together amounted to more than $14 million.
3. The bulk of the funds were held in a numbered account.
4. The other account was held in the name of a nominee shell entity organized in Panama.
5. Schik had personally signed the documents opening the accounts.
6. Schik was required under law to file and FBAR for the year 2007.
7. Schik had instructed UBS to send all bank statements to David Beck (and later his son Josef Beck), a financial advisor, whom Schik had designated to manage the account for him.
8. Beck sent copies of the UBS statements to Schik periodically.
9. In 2012 Josef Beck was indicted on federal charges of conspiring to enable U.S. persons to evade U.S. taxes on their Swiss bank account earnings.
10. Schik had signed a document instructing UBS not to invest in U.S. securities after November 1, 2000 because, in his words “I am aware of the new tax regulations.”
11. Schik’s tax return for 2007 reported a “No” answer to the question on Schedule B asking if the taxpayer had an interest in a foreign financial account and referencing the instructions for reporting of such accounts.
12. Schik did not file a timely FBAR for the year 2007.
13. Schik did not initially inform his CPA tax return preparer of the existence of the Swiss accounts during 2007
14. Schik had the opportunity to review his 2007 return prior to filing but did not do so.
15. In 2009 Schik had learned through newspaper reports that UBS had entered into a Deferred Prosecution Agreement with the Department of Justice under which the bank had agreed to disclose names of U.S. customers to the DOJ and to cease to conduct business with customers who had undeclared accounts.
16. At some point in 2009 UBS required that Schik’s accounts with them be closed.
17. After learning of the UBS/DOJ agreement, Schik submitted a Voluntary Disclosure to IRS under the IRS’s 2009 Offshore Voluntary Disclosure Program.
18. The IRS in February 2010 notified Schik that his Voluntary Disclosure was not accepted “due to timelines and / or completeness.”
19. Schik’s 2008 return filed in October 2009 disclosed his Swiss accounts.
20. Schik belatedly filed a 2007 FBAR in December 2010.

The Government argued in its Motion for Summary Judgment that, consistent with rulings in the bulk of decided cases dealing with this issue, the above facts objectively establish as a matter of law that Schik was reckless in signing his 2007 return without reviewing it: that he is charged with knowledge of everything stated in the return including his false “No” answer to the Foreign Financial Account question  on Schedule B  of the return; and, that as such, his conduct in not filing an FBAR or reporting his Swiss foreign financial accounts, as a matter of law, was willful.  Thus, the government argued, its Motion for Summary Judgment should be granted because there were no material facts germane to the question of Schik’s willfulness  for a jury to consider.

Schik’s Counter-argument

Schik’s  counter-arguments ( per Defendants’ Memorandum of Law in Opposition to Plaintiff’s Motion for Summary Judgment) focused on his subjective intent, state of mind, and terrible events of his childhood that molded an adult who obsessively feared disclosing all of his financial resources to the government, any government.  Schik’s Memorandum included:

1. Schik is an almost 100 year-old Holocaust survivor.
2. A history of his childhood leading up to and during World War II.
3. How in 1938 his family, Jewish, was forced to flee persecution and Vienna leaving behind all of their possessions and friends
4. How they sought safety in Hungary until Hitler’s occupation of that country in 1944.
5. How at that time the Nazis forcefully separated Schik, then thirteen, from his family. 
6. How Schik was sent to a concentration camp near Budapest while his parents, two brothers and sisters were transported to Auschwitz, the Nazi’s most infamous death camp.
7. Schik was later released and travelled alone by foot to find shelter with a relative in Budapest.
8. Not long after Schik and his relative were rounded up by the Nazi’s and forced to walk on foot to Austria, a long and hazardous journey during which they witnessed the death of many in route.
9. During the Death March Schik furtively removed the Yellow Star from his coat and slipped away.
10. With the help of an old Jewish forger Schik was able to walk his way back to Budapest where he learned that his parents and siblings had been murdered at Auschwitz.
11. Following the war Schik, on his way to Belgium was stopped by police and placed in a UJA orphanage in Strasbourg, France.
12. At the orphanage Schik connected with a Yeshiva group and was allowed to join the group emigrating to the U.S. by adopting the identity of a boy who’d dropped out.
13. These horrific experiences left Schik with what is referred to as Holocaust mentality, a real and intense fear of future discrimination or persecution together with a compulsive need to have hidden financial resources and an escape plan should there be another Holocaust.
14. This fear shaped Schik’s life and thinking.
15. That Schik immigrated to the U.S. in 1947at age 16.
16. That Schik received little formal education in Vienna, not having advanced past elementary school with no formal education at all in the U.S.
17. Schik had no education in English and had never studied U.S. tax law, international tax law or accounting.
18.  Schik started working as an errand boy and worked his way up to his having his own tie company which he ran with a partner.
19. He was never involved with managing the financials for the company, his involvement was with selling the ties. Schik was a tie salesman.
20. Schik became a U.S. citizen in1957.
21. He opened the first Swiss account during the 1960s with funds he inherited from family member’s estates as most of the family had perished in the Holocaust.
22. None of the funds in Schik’s accounts came from outbound transfers from Schik’s U.S. business earnings or bank accounts.
23. The Swiss funds were not managed by Schik.  He had completely entrusted his overseas funds to the Becks.
24. The Backs and not Schik had set up the Panama Company to hold one of the accounts.  Schik did not instruct them to form this company to hold his account.
25. The net unreported additional income from the Swiss accounts turned out to be less than four percent of Schik’s total adjusted gross income for the tax year 2007.
26. The Government has never fully explained why it had rejected Schik’s Voluntary Disclosure.
27. Schik’s 2007 tax return preparer was a CPA amply qualified to preparer individual tax returns.
28. The preparer had never asked Schik if he had foreign financial accounts.
29. Schik was not required complete a Tax Return Questionnaire or other document that might have inquired about foreign financial accounts.
30. The preparer only requested of Schik that he forward to him all of the tax forms (1099s, etc.) that he’d received pertaining to the year 2007.
31. Schik never received any Form 1099-like forms from UBS regarding his accounts held by them.
32. Schik had no clue about the requirement to file and FBAR.
33. He had no knowledge that U.S. citizens were required to report and pay tax on their world-wide income.
34. Had he reviewed his tax return prior to filing he would not have understood what he was reviewing.
35. As soon as Schik learned of the problem with the Swiss account, he’d contacted his return preparer who, in turn, referred his to tax counsel resulting in the Voluntary Disclosure mentioned above.

Schik’s Legal Argument

Schik argued that the above facts evince that there are real issues about material facts in dispute for the jury to decide.  Further, that the Government has the burden of establishing the absence of a genuine issue of material fact. Further, that the court in ruling on the Government’s Motion must view the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable references against the moving party.

Schik argued that reckless conduct or careless disregard, despite the rulings on other cases on different facts, does not rise to the level of willful conduct as defined by the U.S. Supreme Court, that is, an intentional violation of a known legal duty.  That a taxpayer who fails to review his or her return should not be deemed to have knowledge of the entire contents of the return including the questions regarding foreign financial accounts at the bottom of Schedule B.  To do so ignores that most taxpayers would not understand their return, even if reviewed, because tax returns have become extremely complex and obscure. It also ignores Schik’s Holocaust mentality and how those events during his most impressionable years may have impacted his state of mind. 

It is noteworthy that a number of studies have established that Holocaust survivors can experience post traumatic stress long into their elderly years. Schik did not argue that he was suffering from ongoing PTSD which generated such intense fears that it was impossible for him to disclose his safety-net funds in Switzerland.  That, in effect, his failure to disclose was involuntary.   The court file does not disclose if there was evidence to support such an argument.

Schik also argued that the standard of proof for the jury should be “clear and convincing evidence” and not by a “preponderance of the evidence” as the government and other cases have held. Schik also argued that the 50%FBAR penalty volutes the Eighth Amendment to the U.S. Constitution which he argued prohibits fines grossly disproportionate to the offense committed.  He also argued that the penalty was calculated incorrectly, on the bank balances as of 12/31/2007 rather than on the date of the offense, namely 6/30/2008, the due date for filing the FBAR.

The Court’s Ruling

The Court denied the Governments Motion for Summary Judgment.  In doing so, it adopted the “preponderance of evidence” standard, however.  The court ruled that the penalty calculation could be corrected by the Government without suffering a dismissal of its case.   The court did not address the Eighth Amendment question, a strictly legal matter.

The Court found that “there are genuine issues of fact regarding whether Mr. Schik willfully failed to disclose his foreign bank accounts. If one were to be found willful as a matter of law from merely signing a return it would render any distinction between willful and non-willful conduct, which congress had clearly intended, as completely meaningless.

The Court acknowledged that the Supreme Court has stated that “the plain meaning of willful is elusive because it is a word “of many meanings whose construction is often dependent on the context in which it appears.”  Sofeco Ins.Co.v.Burr 351 U.S. 47, 57 (2004)   “In a civil tax context, however, willful conduct generally includes not only knowing violations of a standard but reckless ones as well.” (Sofeco Ins. Co v.Burr 551 U.S.47, 57). The Court also noted that while the Second Circuit (to which appeal would lie in this case) has not yet ruled, every circuit court that has addressed this issue reads the FBAR penalty statute (BSA 5321(a)(5) to include as willful violations reckless disregard of a known or obvious risk.

The Court did not accept that signing a return without reviewing it was reckless as a matter of law as opposed to merely negligent.  Here the court found material facts in dispute, which, if believed by a jury, could result in a verdict for Schik, namely:

1. That Schik did not manage his Holocaust safety net account.
2. That Schik did not know of the requirement to disclose those funds.
3. That Schik’s tax preparer, an experienced  CPA, trusted and relied upon by Schik, never asked Schik if he had an interest in any foreign bank accounts.
4. That it is likely the preparer’s software auto-filled in the “No” answer to the foreign bank account question on Schik’s return.

In the end, the court decided, whether Schik’s conduct was willful or not willful is a question of fact.  There are facts material to that determination in dispute about which only the jury can decide. Determining the truth would involve examining Schik’s subjective state of mind, whether he honestly did not know of the reporting requirement and relied solely on his return preparer.  The Court therefore cannot determine as a matter of law that Schik’s conduct was willful.

Again, no argument was raised suggesting that Schik’s Holocaust mentality rose to the level of clinical post traumatic stress disorder continuing into elderly years which created such fear as to compel him obsessively to secret his Swiss accounts.

The Settlement

On August 23, 2023 Schik and the Government filed a Stipulation and Order of Settlement and Dismissal under which the FBAR penalty was reduced to $6,030,000 from the assessed penalty of $8,822,806.

Why did the government agree to the reduction?  Presumably, the government assessed the hazards of litigation including that Schik’s Holocaust trauma might make the jury sympathetic towards him.  There is also the cost of litigation to the government.

The government seeks to resolve these FBAR penalty cases in a Motion for Summary Judgment before the judge instead of having the issue go to a jury.

Schik also likely weighed the risks of a jury trial.

The settlement did not resolve any income tax adjustments although Schik may have filed amended returns and, if so, would have  paid the income taxes due.

Likewise, the settlement did not grant immunity to Schik for any criminal violations although, given the facts and, that willfulness for criminal purposes does not include reckless conduct and statute of limitations such charges are unlikely.

RSS Comments

The courts seem to take an ivory tower view of tax returns.  Tax preparation is certainly not a “scrivener’s function” as some courts have suggested.  Today’s tax returns are complex document with every entry representing an interpretation of some provision in the Internal Revenue Code.  Consequently, to suggest that the average taxpayer can review and understand his or her tax returns is naïve   To suggest that the average taxpayer can read and understand the FBAR instructions is a fantasy.  Professionals disagree about whether certain assets are reportable.  Thus, the District Court in this case was correct in questioning the legal framework for other courts holding that a person with foreign financial accounts who signs and files a return without reviewing will be deemed willful when the FBQR question is answered “No” or not answered.

The Memorandums in Support and Opposition to the Motion for Summary Judgment filed in this case also present a good illustration of the facts which must be adduced to argue for non-willfulness in streamlined filings or in requests for abatement of willful penalty assessments.

Caveat:  Evaluating whether conduct is willful or negligent for FBAR penalty purposes is a legal determination which should be undertaken by a tax attorney experienced in such matters.    

Robert S. Steinberg, Esquire

rss@taxpenaltylawyer.com

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