Assertion of Reasonable Cause Defense to Penalty Results in Loss of Attorney-Client Privilege

Chuck Rubin Posted on RUBIN ON TAX: ASSERTION OF REASONABLE CAUSE DEFENSE TO PENALTY RESULTS IN LOSS OF ATTORNEY-CLIENT PRIVILEGE, where he discusses that written and oral communications between a client and his or her attorney are generally privileged. This includes communications regarding taxes.

In a recent Tax Court case, an example of “the exception swallowing up the rule” arose. The case
threatens to void the attorney-client privilege in a great swath of tax cases that are litigated where the
taxpayer asserts a reasonable cause defense to a penalty.


In the subject case, the taxpayer was threatened with a substantial underpayment of income tax
penalty. In defense of that threat, the taxpayer claimed the reasonable cause exception for the penalty
under Code §6664(c). That Section applies to the portion of an underpayment “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion (emphasis added).”

By asserting that defense, the government claimed that that taxpayer had waived the attorney-client
privilege. The government could thus access communications between the taxpayer and his attorney
that related to the tax issue, because that is relevant to whether the taxpayer acted in ‘good faith.’ More specifically, the government was seeking access to written tax opinions that would otherwise have been privileged.

The Tax Court agreed with the government, finding that the required inquiry into ‘good faith’ makes the reasonable cause exception a ‘state-of-mind’ exception. Thus, a review of the knowledge and thinking of the taxpayer as to the law is relevant. Further, knowledge and statements communicated by the attorneys to the taxpayer relating to the reporting of the tax item are directly relevant to such an inquiry.

Thus, by asserting the penalty exception, the taxpayer waived the attorney-client privilege.

The reach of this exception is broad, since it presumably will apply to all accuracy related penalties,
including fraud penalties, when the reasonable cause exception is asserted by the taxpayer. Thus,
taxpayers and their tax attorneys do have the benefit of the attorney-client privilege, but a taxpayer that wants to assert the privilege may have to sacrifice any claim to any state-of-mind penalty exception, including the reasonable cause exception, if it wants to maintain the privilege. Since reasonable cause is a common and important penalty defense, the impact of this case will be very significant (forcing a choice between an exception to penalty argument vs. protecting privileged communications).

The exception should not result in a waiver of all attorney-client communications – only those relevant to the taxpayer’s state of mind and knowledge of the applicable law when filing its tax return.



A similar case and result occurred in a District Court bankruptcy proceeding relating to tax issues, in In Re: G-I Holdings, et al., 92 AFTR2d 2003-6451 (DC NJ), 07/17/2003. See also New Phoenix Sunrise Corp. v. Comm., 106 AFTR 2d 2010-7116 (CA6 2010) for another similar result.

I leave it to the litigators whether there is any method to bifurcate the tax determination phase of a
proceeding from the penalty phase, so that the privileged items need not be disclosed unless the
taxpayer lost the tax determination phase. This was attempted in the In Re: G-I Holdings case cited
above. It was not rejected out-of-hand, but was ultimately denied because the court determined that
the taxpayer had already waived the privilege by asserting the reasonable cause defense to penalties
in discovery responses and thus it was too late to salvage it.

AD Investment 2000 Fund LLC, Community Media, Inc., 142 TC No. 13 (2014) 

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What To Do If Your FATCA Registration Has Been Put Into “Registration Under Review” Status?

My FATCA account status is “Registration Under Review.”  What should I do?

According to the IRS, if your registration has been put into “Registration Under Review” status, please contact e-Help at 1-866-255-0654 begin_of_the_skype_highlighting 1-866-255-0654 FREE  end_of_the_skype_highlighting and indicate that your registration is in “Registration Under Review” status.  

In addition, please provide:

(1) the Name of the Financial Institution and FATCA ID, and

(2) the name, telephone number, and email address of either the FATCA Responsible Officer (listed on Part 1, Question 10) or a Point of Contact (listed on Part 1, Question 11.b).

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IRS FATCA FAQ's

IRS Successfully Assesses 50% FBAR Penalty for "Quiet Disclosures"!

We have previously posted on Tuesday, May 13, 2014, "Zwerner' FBAR Case Goes To Trial 5/20/14 and Will Test The IRS' Ability to Assert The Willfulness Penalty For Multiple Years." where we discussed the U.S. government's Complaint to collect multiple civil FBAR penalties in the amount of $3,488,609.33 previously assessed against Carl R. Zwerner of Coral Gables, Florida for his alleged failure to timely report his financial interest in  a foreign bank account, as required by 31 U.S.C. § 5314 and its implementing regulations. See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013). 

We had stated that as this case goes to trial on May 20, 2014 it may help to set the standard for whether the IRS can assert willfulness and multiple year penalties in a taxpayer's failure to timely file the Report of Foreign Bank and Financial Accounts (FBAR).

On May 28, 2014, the Department of Justice released the outcome of that trial declaring that a jury in Miami found Carl R. Zwerner responsible for civil penalties for willfully failing to file required Reports of Foreign Bank and Financial Accounts (FBARs) for tax years 2004 through 2006 with respect to a secret Swiss bank account he controlled. According to evidence introduced at trial, the balance of the bank account during each of the years at issue exceeded $1.4 million, and the jury found Zwerner should be liable for penalties for 2004 through 2006. Zwerner faces a maximum 50 percent penalty of the balance in his unreported bank account for each of the three years. The jury found that Zwerner’s failure to report the account was not willful for 2007, and the court will determine the final amount of the judgment after further proceedings in June 2014.

“As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high,” said Assistant Attorney General Kathryn Keneally for the Justice Department’s Tax Division. 


“Those who still think they can hide their

assets offshore need to rethink their strategy.”

U.S. citizens who have an interest in, or signature authority over, a financial account are

required to disclose the existence of such account on Schedule B, Part III of their individual

income tax return. Additionally, U.S. citizens must file an FBAR with the U.S. Treasury

disclosing any financial account in a foreign country with assets in excess of $10,000 in which

they have a financial interest, or over which they have signatory or other authority. Those who

willfully fail to file their FBARs on a timely basis, due on or before June 30 of the following

year, can be assessed a penalty of up to 50 percent of the balance in the unreported bank account

for each year they fail to file a required FBAR.

The evidence at trial showed that Zwerner opened an account in Switzerland in the1960s, which he maintained in the name of two different foundations he created. Zwerner was able to use the proceeds of the account whenever he wanted and used it for personal expenses,including European vacations. Even though he filled out a tax organizer provided by his accountant, every year, Zwerner answered “no” to questions asking whether “you have an

interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account or other financial account” and whether “you have any foreign income or pay any foreign taxes.”

U.S. persons must report their worldwide income on their taxes. Plus, they must file an FBAR annually if their offshore accounts total over $10,000 at any time.  If you have both failures, the IRS wants you to go into the Offshore Voluntary Disclosure Program, also known as the OVDP. It involves reopening 8 tax years, and paying taxes, interest and penalties, but no prosecution.

The OVDP penalties including the FBAR Penalty equal to 27.5% of the highest balance in the offshore accounts; can  and do and do far exceed the unpaid tax on the undeclared account. As a result, some people want to amend  and file their taxes and file FBARs  without  participating  in the OVDP  program and  thereby pay the taxes they owe, but no the 27.5% penalty. The IRS  refers to this as a "quiet disclosure," which they currently discourage and advise taxpayers that they will find  these quite disclosures, audit them and that they have exposure  to the higher 50% FBAR penalty.

The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriateIf a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice." 

Many have been wondering whether the IRS will pursue examinations of "Quiet Disclosures" of taxpayers residing in the United States in some manner.  Now these Taxpayer's have their answer: They Will!

As Mr. Zwerner  discovered a incomplete attempt to make a voluntary disclosure on an anonymous  basis will not  protect you from  the assertion  of the 50%  intentional failure to file penalties. You are either in  the OVDP program or you are not!

The IRS  assessed Mr. Zwerner $3,488,609.33 in penalties for FBAR violations, based upon 50% of the highest balance in his account(s) each year. Mr. Zwerner fought the penalty in court, but a jury has found in favor of the IRS. The jury found Mr. Zwerner willful for 2004, 2005 and 2006, but not for 2007.

That meant  upholding the assessment of FBAR penalties  in the amount  of  $2,241,809 for an account worth $1,691,054. . The fact that Mr. Zwerner kept the accounts under two different entity names, and his tax return said “No” he didn’t have any foreign accounts; supported  the IRS is  conclusion  that Mr.  Zwerner's  failure  to file his FBAR report was intentional.  

The court is expected to next address that the issue whether such penalties could be unconstitutional. The Excessive Fines Clause of the  Eighth Amendment  provides that a civil penalty may be unconstitutional if it is part punishment, and if the punishment is grossly disproportionate to the conduct.

Did You Make a "Quite Disclosure"? 

 

 

Want To Avoid a 50% FBAR Penalty?

 

 

Contact the Tax Lawyers

at Marini & Associates, P.A.

for a FREE Tax Consultation

at www.TaxAid.us or www.TaxLaw.ms

or Toll Free at 888-8TaxAid (888 882-9243).

Sources

DoJ

Bloomberg

Forbes

Owe Employment Taxes?

You May Qualify For An In-Business Trust Fund Express Installment Agreement

Small businesses with unpaid employment taxes may qualify for an In-Business Trust Fund Express installment agreement. Small businesses who currently have employees can qualify for an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA). These installment agreements generally do not require a financial statement or financial verification as part of the application process.

The criteria to qualify for an IBTF-Express IA are:

• You owe $25,000 or less at the time the agreement is established. If you owe more than $25,000, you may pay down the liability before entering into the agreement in order to qualify.
• The debt must be full paid within 24-months or prior to the Collection Statute Expiration Date (CSED), whichever is earlier.
• You must enroll in a Direct Debit installment agreement (DDIA) if the amount you owe is between $10,000 and $25,000.
• You must be compliant with all filing and payment requirements.

Need An In-Business Trust Fund Express Installment Agreement?

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax Consultation Contact US at 

www.TaxAid.us or www.TaxLaw.ms

or Toll Free at 888-8TaxAid (888 882-9243).

IRS 

Lowering the Bar For Willfulness For FBAR Penalties

The IRS has authority to assert FBAR civil penalties.  Before delving into the FBAR abyss, this is a good time to debunk some FBAR myths.  First, there is no such thing as an FBAR penalty within the Offshore Voluntary Disclosure Program (OVDP).  The FBAR penalty exists only outside of the OVDP framework.  

 

However, there is a penalty within the OVDP that is often considered to be the equivalent of the FBAR penalty.  That penalty is commonly referred to as the offshore penalty.  Generally, it is 27.5% of the highest aggregate balance of all foreign accounts during the disclosure period. Read More ...Lowering the Bar for Willfulness for FBAR Penalties.

Have Un-Reported Foreign Income

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Credit Suisse Cuts Deal With US DoJ & They Spin Off Vulnerable Units

We had previously postedAre You A Credit Suisse Client? You May Really Want to Make Your Voluntary Disclosure NOW!

where we discussed that the founder of a Swiss trust pleaded guilty to helping Americans evade taxes and said Credit Suisse Group AG was involved in the scheme, adding to its pressure as it tries to resolve its U.S. criminal probe.
 
Josef Dorig, 72, was indicted in 2011 with seven Credit Suisse bankers on a charge of conspiring to hide $4 billion from the IRS. The U.S. told Credit Suisse then that it was a target of the probe. Dorig has been cooperating with prosecutors probing Zurich-based Credit Suisse, the largest of 14 Swiss banks under U.S. criminal investigation amid a crackdown on offshore tax evasion. The bank has said it’s trying to negotiate a resolution with the U.S. Former Credit Suisse banker Andreas Bachmann, who pleaded guilty on March 12, also is cooperating in the probe. 

 

Now various news agencies are reporting that Credit Suisse has settled its tax evasion dispute with the US Department of Justice for USD 2.5 billion, an amount that dwarfs even the USD 780 million penalty paid by its chief rival UBS in 2009.

Credit Suisse will pay financial penalties to the U.S. Department of Justice, the Internal Revenue Service, the Federal Reserve and the New York State Department of Financial Services to settle the charges. It had already paid $200 million to the Securities and Exchange Commission.

The New York Department of Financial Services said it had determined not to revoke the bank's license in the state.

Also, it is rumoured that the banks's chief executive Brady Dougan is under pressure to resign.

Prior to this announcement, Credit Suisse's specific businesses, which were threatened with US prosecutions for aiding tax evasion, were moved into a separate bank specially created for the purpose of separating the affected units form its other lines of Business. CS International Advisors AG, which is wholly owned by Credit Suisse, was funded with SFR21 million of capital to cover its 1,040 active accounts, 43,000 closed accounts and 1,144 dormant accounts.

As is customary in these settlements, Credit Suisse will  most likely be required to Turn Over the Names of All of its US Depositors!

US taxpayers who have undeclared accounts in Credit Suisse or other Swiss banks, may now want to consider applying for the US Offshore Voluntary Disclosure Program (OVDP), which sets a limit to the penalties imposed on them by the Internal Revenue Service (IRS) for failing to declare foreign assets and earnings.

 

Once either:

• The Swiss Banks disclose an account holder's name to the IRS under the non prosecution agreement or 
• Mr. Andreas Bachmann or Josef Dorig or Markus Walder or Susanne Ruegg-Meier or Roger Schaerer discloses an account holder's name to the IRS or
• Any 1 of the other 11 Credit Suisse Bankers, who were indicted in 2011 along with Mr. Dorig, discloses an account holder's name to the IRS 

the OVDP election is no longer available to that account holder!!!

 

Taxpayers Who Wish To Take Advantage

Of The OVDP Must Act Quickly! 

 

Have Un-Reported Income From a Swiss Bank?

Value Your Freedom?

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax Consultation Contact US at 

www.TaxAid.us or www.TaxLaw.ms

or Toll Free at 888-8TaxAid (888 882-9243).

Sources:

 

Bloomberg

Reuters

Reuters

Swissinfo