U.S.A. v. Zwerner

June 6, 2014 Tax Report at WSJ

Offshore account holders take note: In what experts call a big win for the Internal Revenue Service, a Miami jury has found that a millionaire could owe penalties of $2.2 million on a secret Swiss bank account that held about $1.5 million.

Carl Zwerner, lost a big penalty case to the IRS. Meg Laskey Buscema/Georgia State University

Experts say the decision in U.S.A. v. Zwerner, a civil case that concluded in May, could encourage the IRS to assess outsize fines in similar cases.

"They've always had these penalties, and now they've used them effectively," says Steven Toscher, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Los Angeles who wasn't involved in the case. "They'll absolutely do it again." The IRS declined to comment on the case.

The decision comes at a time when U.S. taxpayers hiding money abroad already are under pressure. Provisions of the Foreign Account Tax Compliance Act—known as Fatca—start taking effect on July 1 and will help authorities find secret accounts. In addition, Swiss banks are pushing current and former customers to come forward to the IRS to lessen the banks' penalties for encouraging earlier U.S. tax evasion.

As a result of the jury's verdict, Carl Zwerner, who is 87 years old and lives in Coral Gables, Fla., could owe penalties that amount to more than the account balance during the years in question.

While the jury determined that Mr. Zwerner is liable for the penalties, the judge determines the amounts. According to a person familiar with the matter, the two sides have been negotiating a settlement that would lower Mr. Zwerner's total payment.

A settlement also likely would mean that the government avoids having the judge rule on an important question—whether penalties that large run afoul of a constitutional prohibition on "excessive fines."

The decision surprised many observers, and has delighted U.S. officials. "This jury verdict shows that people who still think they can hide their assets offshore need to rethink their strategy," Kathryn Keneally, who until Friday headed the U.S. Justice Department's Tax Division, said in a statement after the decision.

Mr. Zwerner's case is the first to become public in which offshore-account penalties exceeded the account balance, experts say. Under a 2004 law, taxpayers can owe up to 50% of an offshore account's highest balance for each year they "willfully" fail to file an annual Foreign Bank Account Report—or Fbar—disclosing accounts totaling $10,000 or more.

Typically, the IRS has asserted only one 50% penalty on offshore accounts that were intentionally hidden. For example, Beanie Babies creator Ty Warner was required to pay one Fbar penalty of $53.6 million when he pleaded guilty to tax evasion last year involving long-held Swiss accounts holding more than $100 million. Under the law, the IRS could have imposed several years' penalties that would have more than drained the account.

Mr. Zwerner is a retired specialty-glass importer. He first opened his Swiss account in the 1960s and placed it in a Liechtenstein-based foundation, according to court filings and his lawyer, Martin Press of the Gunster Firm in Fort Lauderdale, Fla. Mr. Press says that for now, his client declines to comment on the case.

According to the filings, Mr. Zwerner first funded the account with money earned overseas, and over the years he made both deposits and withdrawals. He kept the account secret until 2008, a few months before the IRS set up a special limited-amnesty program for U.S. taxpayers with secret offshore accounts.

Mr. Zwerner's disclosure led to protracted wrangling with the IRS that included fraud penalties and four years of Fbar penalties, as well as allegations by Mr. Zwerner of misconduct by an IRS agent.

The two sides resolved all issues except the Fbar penalties, and that dispute went to federal court last year. The jury decided last month that Mr. Zwerner willfully failed to file Fbar reports for 2004, 2005 and 2006, but not 2007.

If the case is settled, the government could preserve a notable victory and avoid a possible setback. The Eighth Amendment prohibits excessive fines, which the U.S. Supreme Court has interpreted to mean those that are "grossly disproportionate to the gravity of the offense."

Mr. Toscher says lawyers who represent offshore account holders were hoping for clarity on whether multiple 50% penalties adding up to more than the balance in an account would violate the Eighth Amendment.

Instead, the jury's decision makes the IRS's limited-amnesty program for offshore-account holders look more appealing, experts say. The program typically levies a 27.5% penalty on the highest balance in a secret account. That is stiff, Mr. Toscher says, but "compared with 150%, it looks pretty good."

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