Analysis of and reflections on recent cases and rulings..

• Author: Beavers, James A.
• Position: TAX TRENDS

Foreign Income & Taxpayers

Taxpayer's failure to report foreign accounts was willful

A district court held that a taxpayer's failure to report all of his foreign accounts in years in which he self-prepared his Report of Foreign Bank and Financial Accounts (FBAR) was willful despite his misunderstanding of the rules based on advice given to him by an accountant in an earlier year. The court found that because he had reviewed the FBAR instructions the first year he self-prepared the form, he knew or should have known the FBAR reporting requirements, and his violation of the requirements for those years was willful because he exhibited willful blindness and recklessness in violating them.

Background

Isac Schwarzbaum was born in Germany in 1955 but became a U.S. permanent resident in 1995 and a U.S. citizen in 2000. Schwarzbaum depended on his father, who had made a fortune in textiles and real estate, for financial support. Through the years, his father transferred Schwarzbaum between $100,000 and $200,000 a year, but also, in 2001, he signed over a Swiss account with approximately $3 million in it and made another large gift to Schwarzbaum in 2007. During the years in question, 2006-2009, Schwarzbaum had interests in 11 Swiss bank accounts and interests in two bank accounts in Costa Rica.

Schwarzbaum hired Doris Shaw to prepare his income tax return in 2006. He told Shaw about the gifts he received from his father. She advised him that gifts are not reportable in the United States unless there is a U.S. connection, which Schwarzbaum interpreted to mean that a gift was only reportable if it came from a foreign country to the United States or went out from the United States to a foreign country. Although it is unclear what, if anything, Shaw told Schwarzbaum about foreign account reporting, he believed based on her advice about gifts that foreign accounts were only reportable if they had a U.S. connection (i.e., they had received transfers from or sent transfers to a U.S. account).

On his 2006 Form 1040, Schedule B, Interest and Ordinary Dividends (in Part III, "Foreign Accounts and Trusts") and a 2006 FBAR, Schwarzbaum should have reported three of his Swiss accounts and his two Costa Rican accounts. However, only one of the Costa Rican accounts and none of the Swiss accounts had a U.S. connection, so he only told Shaw about the Costa Rican account with the U.S. connection. Based on this information, she reported only the Costa Rican account on Schwarzbaum's Form 1040, Schedule B. Likewise, she prepared a 2006 FBAR for him that reported only that account. According to Schwarzbaum, he first learned about the Schedule B and FBAR reporting requirements in 2006.

In 2007-2009, Steven Weitz prepared Schwarzbaum's returns. In 2007, the same five foreign accounts were reportable. However, Weitz did not ask about foreign accounts, and Schwarzbaum did not tell him about his accounts. Consequendy, Weitz did not report any foreign accounts on Schwarzbaum's 2007 Schedule B or prepare a 2007 FBAR for him. Schwarzbaum, however, self-prepared a 2007 FBAR reporting the Costa Rican account that he had reported in 2006.

The income tax return prepared for Schwarzbaum by Weitz also did not report any accounts on his 2008 Schedule B, and Weitz did not prepare a 2008 FBAR. Due to the death of his father and other family matters, however, Schwarzbaum did not self-prepare and file a 2008 FBAR.

In 2009, although Schwarzbaum claimed he had told Weitz about both Costa Rican accounts, the Schedule B of his return did not report any foreign accounts. Schwarzbaum did personally prepare and file a 2009 FBAR, though, on which he reported the Costa Rican account and one of his Swiss bank accounts. He included the Swiss account in 2009 because he made multiple transfers to it from...