Tax Byte
Taxpayer Was Willful in Failure to File FBARs When He Ignored Red Flags (US v. David Vettel, Apr. 11, 2024. US District Court for the District of Columbia, No. 4:21-CV-03099)
David Vettel opened a Swiss bank account and, from 2006 to 2011, failed to file FBARs to report the account. CPA Terri Phelps prepared Mr. Vettel’s federal income tax returns for tax years 2006, 2007, 2008, 2009, 2010, and 2011. Mr. Vettel did not provide CPA Phelps with information about his Swiss bank account.
CPA Sent Organizer and Engagement Letter:
CPA Phelps sent Mr. Vettel an “organizer” each year that contained a series of questions to which Mr. Vettel was supposed to respond in order to aid CPA Phelps’s preparation. The organizer included a question about whether Mr. Vettel had a foreign bank account. Mr. Vettel did not fill out the question in the organizer. CPA Phelps’s engagement letter advised Mr. Vettel to review the forms she prepared prior to signing and to ask questions about anything he did not understand. On Line 7a of the Form Schedule B attached to each of Mr. Vettel’s Forms 1040 from 2006 to 2011, the box asking whether the taxpayer held an interest in or signature or other authority over a financial account in another country during the relevant year is marked “no.”
$619,000 of Penalties Applied:
Mr. Vettel believed that since the money was earned in Ukraine and reinvested in Turkey, he did not need to pay taxes or otherwise report it to the United States. However, Mr. Vettel’s subjective belief that he did not owe US taxes did not preclude a finding of willfulness. The Court found Mr. Vettel acted willfully in failing to meet the FBAR reporting requirement. As such, the United States accurately assessed the enhanced penalties for willfulness for a total of $619,863.
Tax Practitioner Planning:
The court’s decision names the tax return preparer and discusses the preparer’s use of an organizer, the client’s failure to answer the organizer’s foreign financial account question, and the preparer’s “no” answer to the Schedule B question on foreign accounts. “Best practices” require the preparer to consider an email to the client confirming that the client does not have a foreign financial account and (while you are at it) that the client does not have digital asset transactions for the tax year. An email may be especially important when the client mails in documents and notes without completing the organizer.