Court Denies Taxpayer's Request to Dismiss Willful FBAR Penalties Case

(Parker Tax Publishing June 2024)

A district court denied a motion to dismiss filed by a taxpayer against whom the IRS assessed over $38 million in penalties for willful violations of the requirement to file a Report of Foreign Bank and Financial Accounts (FBAR). The court held that the government sufficiently alleged that the taxpayer acted willfully and rejected his argument that the amount of the penalty for a willful FBAR violation is limited to $100,000 under 31 U.S.C. Section 5321(a)(5). U.S. v. Gyetvay, 2024 PTC 157 (M.D. Fla. 2024).

Background

Mark Gyetvay is a United States citizen who is also a citizen of both Russia and Italy. Gyetvay holds a Bachelor of Science degree in accounting and a graduate degree in Strategic Management. Gyetvay is also a CPA licensed in Colorado. In 1996, Gyetvay became a partner at PricewaterhouseCoopers. He was based in Moscow, Russia, and he performed audit, consulting, and various accounting-related services for the firm's clients, which included Novatek, Russia's largest independent natural gas producer. In 2003, he became the Chief Financial Officer of Novatek. Two years later, Gyetvay guided Novatek through its initial public offering (IPO) on the London Stock Exchange. In connection with the IPO, Gyetvay was promised a significant block of Novatek shares.

In October 2005, an account (the Original Opotiki Account) titled in the name of Opotiki Marketing was opened at Coutts & Company LTD in Zurich, Switzerland, with Gyetvay listed as the sole beneficial owner. Gyetvay requested that no correspondence concerning that account be mailed to him in the United States. Gyetvay retained a Swiss wealth advisory firm. The firm allegedly helped Gyetvay hide and disguise his ownership and control of the Opotiki and Felicis Swiss Accounts. After Swiss Bank UBS announced that was the target of a criminal investigation by the IRS and the U.S. Department of Justice (DOJ) in June 2009, Coutts launched a tax compliance review of all accounts with a U.S. nexus. Coutts requested certain information from Gyetvay as part of this compliance effort. Gyetvay listed his wife, Ms. Gavrilova (who at the time was only a Russian citizen) as the beneficial owner of the Original Opotiki Account and the Original Felicis Account, and provided only a Moscow address, rather than the Naples, Florida, address at which she principally resided with Gyetvay.

Gyetvay opened two new accounts at Hyposwiss Privatbank Zurich (Hyposwiss) in Zurich, Switzerland, and named Gavrilova the sole beneficial owner of the accounts. The account-opening documents requested that all correspondence from Hyposwiss be retained at the bank and sent only to Gyetvay's Zurich-based wealth advisors. Gyetvay then closed the Original Opotiki Account and the Original Felicis Account at Coutts and transferred the assets to the Hyposwiss Accounts. In 2013, Falcon Private Bank (Falcon) in Zurich, Switzerland acquired the assets of Hyposwiss. The Opotiki account at Falcon (Falcon Opotiki Account) had maximum assets under management valued at $9,148,420. The Felicis account at Falcon (Falcon Felicis Account) had maximum assets under management valued at $84,264,354 that year. These assets maintained the same structure, listing Gavrilova as the sole beneficial owner of the accounts.

Sometime in 2014, Coutts notified Gyetvay and Gavrilova that it intended to provide certain information concerning accounts maintained at Coutts by U.S. taxpayers and others in connection with a program the DOJ offered to Swiss banks. Coutts requested that Gyetvay and Gavrilova certify that Gyetvay had either properly disclosed the existence of, and any income received in, his foreign account at Coutts, or that he had entered an IRS voluntary offshore disclosure program. Gyetvay allegedly falsely certified that he had properly disclosed the existence of, and income received through, his accounts at Coutts. In that same month, Gyetvay's attorney sent a letter to Coutts indicating that he was in the process of disclosing all previously undeclared foreign bank accounts and assets.

Gyetvay filed late Reports of Foreign Bank and Financial Accounts (FBARs) for years 2008 through 2013 pursuant to the IRS's Streamlined Foreign procedure, which the IRS established for the voluntary disclosure of foreign financial assets. Gyetvay disclosed the Falcon Opotiki Account and the Falcon Felicis Account. Gyetvay timely filed an FBAR for 2014, on which he reported that he had signatory authority, but no financial interest, in the Falcon Felicis account, and failed to report his interest in another account.

Gyetvay was found guilty of willfully failing to timely file tax returns for 2013 and 2014, as well as for willfully failing to file an accurate FBAR for 2014. He was sentenced to 86 months in prison and ordered to pay over $4 million in restitution. In addition, the IRS assessed a penalty of $28,606,520 against Gyetvay for his failure to file an accurate FBAR for 2014. In 2023, the government filed a complaint in a district court requesting a judgment of penalties under 31 U.S.C. Section 5321(a)(5)(C).

The Bank Secrecy Act generally requires individuals residing or doing business in the United States who have a financial interest in or signatory authority over a foreign financial account that exceeds $10,000 during the year to report the account on an FBAR. Under 31 U.S.C. Section 5321(a)(5), when a person willfully fails to file an FBAR, the maximum penalty is the greater of (1) $100,000 or (2) "in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, [50 percent of] the balance in the account at the time of the violation." A "willful" failure includes knowing and reckless conduct.

Gyetvay filed a motion to dismiss the complaint. First, he argued that the government failed to allege a willful FBAR violation. Gyetvay reasoned that because he disclosed the existence of the Falcon Felicis Account, any other omissions on his FBAR could not, as a matter of law, be found willful. Gyetvay also contended that, since the government did not allege he failed to report the existence of or identifying information about the Falcon Felicis Account, the maximum penalty was $100,000. According to Gyetvay, this interpretation made sense because 31 CFR Section 101.350(g)(1) provides that taxpayers who disclose 25 or more foreign financial accounts need only provide the number of financial accounts and other basic information. Gyetvay noted that in Bittner v. U.S., 2023 PTC 42 (S. Ct. 2023), the Supreme Court used the relaxed regulations for individuals with more than 25 accounts as an example to show that the BSA "aims to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake."

Analysis

The district court denied Gyetvay's motion to dismiss. The court found that the government alleged myriad deliberate actions over the course of a decade by Gyetvay that established plausible allegations of willfulness. In the court's view, Gyetvay is a sophisticated international businessman with an extensive background as a CPA, audit partner, CFO, and consultant, who retained a Swiss wealth advisory firm to help him hide his ownership and control of certain foreign accounts, transferring such accounts between different banks. The court also noted that Gyetvay made his wife the beneficial owner of the foreign accounts and requested that all correspondence be retained at the bank.

The court also rejected Gyetvay's argument that the penalty must be limited to $100,000. In the court's view, the disjunctive language in Section 5321(a)(5) sweeps in two categories of violators: (1) those who flat out failed to report the existence of foreign account, and (2) those who did disclose the existence of a foreign bank account but failed to provide the identifying information about an account. In other words, the court found that the reporting requirement for a willful violator is a full reporting requirement, not a partial reporting requirement, as Gyetvay suggested. The court said that Gyetvay's attempt to sidestep disclosing all information required on the FBAR by choosing to disclose only the existence of a foreign bank account belied the plain and ordinary meaning of the text of Section 5321(a)(5).

The court noted that in Bittner, the Supreme Court analyzed the BSA's treatment of non-willful, as opposed to willful, violations, and the court pointed out that willful violations are by definition not mere honest mistakes. In addition, the court thought that the broader statutory context supports its conclusion because the reasonable cause exception in Section 5321(a)(5)(B)(ii) shows that Congress knew how to carve out a specific exception from increased penalties when it wanted to do so.

For a discussion of FBAR reporting, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com