U.S. v. Colliot (W.D. Tex. Case No. 1:16-cv-01281) is an action to reduce to judgment civil penalties allegedly assessed for failure to report foreign financial accounts on Reports of Foreign Bank and Financial Accounts (“FBARs”).

The Complaint alleges that, from 2007 through 2010, the defendant had 13 foreign financial accounts at banks in the United Kingdom, Switzerland, and France; that some of the accounts were held through shell entities; that the defendant actively managed and controlled his foreign accounts, and transferred funds between them; and that the defendant withdrew funds from the accounts for the benefit of himself and his children. These allegations if proved are bad for the defendant. They evince willfulness.

The Complaint also alleges that the defendant failed to disclose two U.K. accounts, two Swiss accounts, and a French account on his 2007 U.S. income tax return, and that he failed to report his U.K. accounts or his Swiss accounts on a 2007 FBAR. The Complaint further alleges that the defendant failed to report a U.K. account on his 2008 U.S. income tax return, and that he failed to report two U.K. accounts and two Swiss accounts on a timely-filed 2008 FBAR. The Complaint further alleges that the 2009 FBAR filed by the defendant omitted British, Swiss, and French accounts. The Complaint further alleges that the 2010 FBAR filed by the defendant omitted a Swiss account and a French account. These allegations mitigate the defendant’s willfulness. Patchy, uneven compliance seems more the responsibility of defendant’s tax preparer.

The Court granted a motion by the defendant to limit under 31 C.F.R. § 1010.820(g) to limit the penalties to $100,000 per year per account. But it is a limited victory, as the United States still claims substantial penalties owing by the defendant.

Colliot highlights the importance of proactive, voluntary compliance. Had the defendant filed necessary delinquent or amended income tax returns or FBARs, and paid any tax and interest owing, then surely no FBAR penalty would have been assessed.

U.S. v. Wahdan (D. Colo. Civil No. 17-cv-1287) is a civil action to recover penalties “imposed” upon Urayb and Said Wahdan under 31 U.S.C. § 5321(a)(5) for alleged “failure to timely file accurate” 2008, 2009, or 2010 FBARs. The Complaint alleges that the Wahdans are husband and wife and that they operate a restaurant in Denver and a market and deli in Boulder, Colorado

The Complaint further alleges that from 1999 to 2005 the Wahdans opened financial accounts at UBS, Geneva, Switzerland; that the Wahdans instructed UBS not to send them any correspondence concerning their UBS, but to retain such correspondence in Switzerland; that the Wahdans waived their right to invest their UBS accounts in U.S. securities, thereby avoiding the possibility that income in the accounts, or the accounts’ existence, would be reported to the Internal Revenue Service.

The Complaint further alleges that from 2001 to 2005, the Wahdans sent more than 20 checks to UBS in Switzerland for deposit into the Wahdans’ accounts; and that on several occasions the Wahdans transferred funds from their UBS accounts to their accounts at other foreign financial institutions.

The Complaint further alleges that on or about July 1, 2008, the United States district Court for the Southern District of Florida approved a John Doe summons to UBS for information on its U.S. clients; and that on or about July 17, 2008, UBS announced that it would no longer provide cross-border services to clients “located” in the United States.

The Complaint further alleges that on or about March 27, 2009, UBS sent the Wahdans a letter informing them that it was terminating its banking relationship with them. The letter asked the Wahdans to identify another financial institution to which they would like to transfer their financial assets then being held by UBS. The letter suggested that the Wahdans transfer their financial assets to a UBS entity registered with the U.S. Securities and Exchange Commission; such entity would require the Wahdans to identifying their Social Security numbers on Forms W-9, enabling the entity report income realized by the Wahdans on the account to the Internal Revenue Service. The letter further recommended that the Wahdans consult with a U.S. advisor “to determine any . . . other disclosure obligations with respect to prior years or the closure of your account.” The letter informed the Wahdans that the IRS “has a voluntary disclosure practice to encourage U.S. taxpayers to bring themselves voluntarily into full compliance with U.S. tax laws.” Finally, the letter noted that the U.S. Department of Justice “has an ongoing investigation of United States taxpayers using offshore accounts to evade U.S. taxes.” The letter included a form which the Wahdans could complete and return to UBS permitting UBS to disclose the Wahdans’ identity and account information to the IRS.

The Complaint further alleges that the Wahdans did not enroll in the IRS voluntary disclosure program, or return the form permitting UBS to disclose their identity and account information to the IRS.

The Complaint further alleges that, on Mr. Wahdan’s instruction, UBS issued three checks to Mr. Wahdan in the amount of €50,000 each, and transferred the balance of the Wahdans’ funds at UBS, €2,063,832, to the Wahdans’ account at Arab Bank of Switzerland.

The Complaint further alleges that the Wahdans also had accounts at Arab Bank of Jordan, Jordan Islamic Bank, and Arab Bank of Palestine.

The Complaint further alleges that Ms. Wahdan failed to file an FBAR for any year before 2009; and that she filed FBARs for 2009 and 2010, but they omitted some of her interests in foreign financial accounts, and failed to accurately report the maximum balance of other foreign financial accounts in which she held an interest.

The Complaint further alleges that Mr. Wahdan failed to file an FBAR for any year before 2009; and that he filed FBARs for 2009 and 2010, but they omitted some of his interests in foreign financial accounts, and failed to accurately report the maximum balance of other foreign financial accounts in which he held an interest.

The Complaint further alleges that the 2008 and 2009 U.S. income tax returns filed by the Wahdans each included a Schedule B with “No” checked in response to a question asking whether the they had a financial interest in, or signature authority over, one or more foreign financial accounts during the tax year. The Complaint further alleges that the Wahdans did not report any income from their foreign financial accounts on their 2008 or 2009 U.S. income tax returns. The Complaint says that in approximately 2011 the IRS opened an income tax examination of the Wahdans. The Complaint does not say what became of the examination.

The Complaint seeks to collect penalties under 31 USC § 5321(a)(5) (FBAR penalties) in the amount of $4,225,479 against Ms. Wahdan, and in the amount of $4,303,603 against Mr. Wahdan.

The Wahdans won a motion under 31 CFR § 1010.820(g) limiting their liability for penalties to $100,000 per account per defendant per year.

Had the Wahdans filed correct FBARs and U.S. income tax returns in 2009 or 2010 for all affected years, paid any U.S. income tax due, and maintained their compliance going forward, surely the IRS would not have assessed FBAR penalties against them. Nor would the IRS have opened an income tax examination of the Wahdans, seeking to assess substantial amounts of tax, penalties, and interest against them. Considering the allegations in the Complaint, the Wahdans are fortunate the IRS is not criminally prosecuting them.

Colliot and Wahdan underscore the critical importance on compliance with U.S. laws concerning foreign financial accounts, as soon as possible, even if late.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.