Court Finds CPA Should Have Known Better Regarding FBAR Reporting Obligations

(Parker Tax Publishing June 2021)

A district court held that a CPA willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR) as required by 31 U.S.C. Sec. 5314 and was therefore liable for penalties of more than $661,000 for a willful FBAR violation under 31 U.S.C. Sec. 5321(a)(5). The court found that the taxpayer's conduct in making offshore investments and reporting the gains from them was reckless, and therefore willful, because he never asked how the investments were being made or whether they triggered FBAR reporting requirements despite having years of experience preparing individual tax returns. U.S. v. Kronowitz, 2021 PTC 157 (S.D. Fla. 2021).

Background

Kenneth Kronowitz is a CPA and professional tax preparer. After graduating with an accounting degree from University of Miami, Kronowitz fulfilled a two-year work requirement at an accounting firm. In order to maintain his CPA certification, he was required to participate every two years in 80 hours of continuing professional education (CPE). During the course of his career, he took CPE courses such as Tax Shelter Seminar, Foreign Taxation, Offshore Trusts, and Asset Protection/Estate Planning. Kronowitz has been preparing tax returns since the early 1960s and has prepared returns for individuals and S corporations. He also prepared his own tax returns.

One of Kronowitz's clients was Eli Levy, a real estate developer whose invested in properties in different countries. Levy gave Kronowitz the opportunity to invest in his real estate projects as a reward for good service. Kronowitz would meet with Levy in person and give him a check for the investment. In return, Levy did not give Kronowitz any statement or confirmation of the investment because, Levy said, the documents were in foreign languages. Kronowitz's only record of his investments with Levy was a yellow legal pad on which he kept notes on the basis of the investments. Kronowitz no longer has that yellow legal pad.

In 2001, Kronowitz opened two bank accounts in the Cayman Islands (Cayman Accounts). His purpose in opening the Cayman Accounts was to keep funds out of reach from potential creditors. In 1999, Kronowitz signed an agreement regarding the management of an entity called Cramo Stiftung/Foundation (Cramo). The agreement was between Kronowitz and an entity named Consista Treuunternehmen (Consista), a company in Liechtenstein, and empowered Consista to manage Cramo on behalf of Kronowitz. The agreement was also signed by an individual named Beat Kranz, on behalf of Consista, and as director of Cramo. Kronowitz was designated as the beneficial owner of Cramo's assets. Kronowitz testified that he did not know what Cramo Stiftung was and never met Beat Kranz. Kronowitz gave his personal information to Levy and believed that Levy must have given that information to Consista.

In 2005, Cramo opened an account at United Bank of Switzerland (UBS), for which Kronowitz was listed as the beneficial owner. Kronowitz was the beneficiary of the account held at UBS by Cramo from 2005 to 2009. By 2008, Kronowitz's investments with Levy had generated significant gains. In order to protect and manage the gains, Kronowitz created the 1210 Trust (Trust). In 2008, someone associated with Levy contacted Kronowitz and told him to contact Consista to direct where Kronowitz wanted the proceeds from his investments with Levy sent. In response, Kronowitz contacted Consista and instructed them to send the proceeds to his Cayman Accounts. He called the Caymans bank to verify that the wire transfers from Consista were completed. The Trust's assets in its bank account were comprised solely of transfers from Kronowitz's Cayman Accounts. Nevertheless, the Trust did not own the Cayman Accounts. Kronowitz used the information on the yellow legal pad to report the gains from his investments with Levy on his Trust's tax returns. In 2009, the funds held by Cramo at UBS were transferred to an account at Basler Kantonalbank (BKB), which was opened for Kronowitz's benefit. All correspondence from the BKB account were directed to Consista. In 2010, Kronowitz instructed Consista to liquidate his account and transfer the remaining funds (approximately $318,067) to the Cayman Accounts.

Kronowitz prepared his own tax returns for tax years 2005 through 2010. Kronowitz was required to file a Schedule B, which specifically asks for information requiring foreign financial accounts and trusts; however, Kronowitz did not disclose his financial interest in foreign accounts in a Schedule B or in a Report of Foreign Bank and Financial Accounts (FBAR) on his 2005 through 2010 individual tax returns. In fact, on the Schedule B form filed with his 2008 tax return, Kronowitz answered "no" in response to the question asking whether he had an interest in, or signature authority over, a foreign financial account. Furthermore, there were no Schedule B forms attached to the 2005, 2006, 2009, or 2010 individual tax returns. Kronowitz also prepared the tax returns for the Trust for tax years 2008, 2009, and 2010. He also marked "no" in response to the question of whether the Trust had an interest in, or signature authority over, a foreign bank account. On the 2008, 2009, and 2010 Trust tax returns, Kronowitz reported gains from investments from Brazil, Panama, and Israel, and other foreign countries. However, beyond writing the names of certain of the Levy investments on these Trust returns, Kronowitz did not otherwise disclose his interest in any foreign accounts or assets.

Kronowitz admitted that he did not timely file FBARs for tax years 2005 through 2010. In preparing tax returns, Kronowitz was aware of the question asking about interests in foreign accounts, but he did not do any research. He testified that he had not heard of the FBAR and that he had no knowledge that he was a beneficiary of the UBS and BKB accounts until he hired an attorney to represent him before the IRS during an audit in 2011. Kronowitz believed that if he reported the income from a foreign source on the Trust tax returns, he had complied with his tax obligations, but he never asked anybody about this assumption. The IRS determined that Kronowitz failed to file FBARs disclosing his interest in foreign accounts during 2005 through 2010 and assessed penalties of $663,771 for willfully violating the FBAR requirement for each year.

A U.S. person who has a financial interest in or signature authority over a foreign financial account with a balance that exceeded $10,000 during the calendar year is required under 31 U.S.C. Sec. 5314 to disclose the interest in the foreign account on an FBAR. Under 31 U.S.C. Sec. 5321(a)(5)(C), civil money penalties of the greater of $100,000 or 50 percent of the account balance apply for willful noncompliance with the FBAR reporting requirements. In U.S. v. Rum, 2021 PTC 120 (11th Cir. 2021), the Eleventh Circuit held that willfulness under 11 U.S.C. Sec. 5321 includes reckless disregard of a known or obvious risk. In the context of an FBAR violation, willfulness based on recklessness is established if the U.S. person clearly ought to have known that there was a grave risk that an accurate FBAR was not being filed and if he or she was in a position to find out for certain very easily.

Analysis

The district court upheld the penalties imposed on Kronowitz after finding that Kronowitz recklessly failed to report his interest in his foreign accounts. In the court's view, Kronowitz clearly ought to have known that there was a grave risk that he was failing to comply with the FBAR requirements. Furthermore, the court found that Kronowitz could have found out about the FBAR requirements very easily had he taken the time to either conduct independent research or consult with another person more knowledgeable on tax law as to whether any additional reporting requirements might apply to him.

In the court's view, Kronowitz displayed a surprisingly laissez-faire attitude, beginning with his investments with Levy and his lack of questioning how his funds would be held for him or how he might access them if needed. The court therefore assigned no weight to Kronowitz's assertion that he did not know he was the beneficiary of Swiss bank accounts containing his investment proceeds. Kronowitz did not know, the court found, because he never asked how Levy would handle his investments or the proceeds they generated. Moreover, even when he learned that his investments had generated significant gains, Kronowitz still asked no questions and simply directed the transfer of funds to the Cayman Accounts. The court observed that, despite preparing hundreds of tax returns over nearly 60 years, and being familiar with the purpose of Schedule B and its requirements, Kronowitz never inquired whether his foreign accounts might trigger any additional obligations on his part.

Further, the court found that Kronowitz's handling of the gains from his Levy investments, and reporting those gains on the Trust tax returns, showed recklessness rather than a simple mistake. The court noted that Kronowitz instructed that the funds be transferred first to the Caymans, and then to the Trust, rather than directly to the Trust's bank account in the United States. In addition, Kronowitz admittedly opened the Cayman Accounts to keep assets out of reach of potential creditors without conducting any follow-up to determine the potential tax effects of maintaining offshore accounts. And while Kronowitz insisted there was no intent to defraud the IRS, the court found that no fraudulent intent was required for a finding of willfulness in the FBAR context.

For a discussion of the FBAR reporting requirement, 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