IN United States v. RundCase number 1:23-cv-00549 (August 6, 2024), the U.S. District Court for the Eastern District of Virginia granted the government's motion for summary judgment, resulting in almost $3 million in penalties against the taxpayer for failing to file a foreign bank and financial account report (FBAR). The court stopped at the recognition and responsibility of the taxpayer, applying the standard of objective will. The court confirmed that penalties cannot be mitigated by claiming reasonable reliance on a professional advisor when the taxpayer failed to inform the advisor of the existence of the foreign accounts.
Overview of the case
The Internal Revenue Service assessed approximately $3 million in penalties against Richard Rund, an inventor and international businessman, for willfully failing to comply with FBAR reporting obligations under the Bank Secrecy Act (BSA). Rund's inconsistency spanned several years, particularly when he involved a complex system of beneficially owned trusts and moved funds between the trust and his personal account. In defending his position for a reduced sentence, he claimed personal challenges and reasonable reliance on professional counsel. He also argued that the sentence was excessive under the Eighth Amendment.
The court ruled that the $2.9 million penalty assessed against Rund was not “grossly disproportionate to the gravity of his offense and therefore did not violate the Eighth Amendment.” Specifically, the court held that Rund had willfully disregarded his compliance obligations under the BSA because he successfully filed FBARs for prior years and noted on Schedule B of his income tax return that he kept foreign accounts until he suddenly stopped doing both in later years. . The court stated that his will showed reckless disregard for compliance obligations.
Get the main
Ignorance of the law is no excuse: The court's application of an objective standard for willfulness confirmed that a taxpayer's claim of ignorance of the law or personal health circumstances that prevented the filing or recognition of records did not serve as justification, particularly where the taxpayer had a history of consulting with advisors. for compliance.
The taxpayer is obliged to disclose the accounts to the advisor: The decision holds that the liability of advisers based on reasonable reliance on a professional tax defense for a taxpayer is limited when the taxpayer fails to provide full information to the adviser. The court appears to place the onus of asking the right questions on the taxpayer rather than the advisor.
Asset protection requires careful planning. The decision does not delve into the complexities of planning and protecting assets raised by a later trust when the taxpayer was the beneficial owner and claimed to have created the trust to hold offshore accounts to evade Hong Kong taxes. However, the court noted the nature of the transactions effectively flowing into Rund's personal accounts at certain times and on numerous occasions after Rund provided certifications or representations that he was the 100% owner of the accounts, particularly when he sought to recover from the misappropriation. assumed by the trustee of the trust. The case demonstrates the importance of ensuring that asset protection planning is not simply a collection of countless webs that ultimately lead to the same individual.
Implementation Trend
of AROUND the case is one of a series of recent Internal Revenue Service enforcement cases against failure to comply with FBAR and other foreign reporting obligations. This trend is particularly evident in cases involving complex estate structures and high net worth individuals. It is likely to increase given the proposed compliance obligations under the Foreign Trust Regulations, for example.
Property and tax advisors would be careful to ensure that clients ask the right questions and are advised of compliance obligations pending a change in asset and wealth holdings. of AROUND The ruling reminds taxpayers and advisers that inconsistent compliance can further sustain penalties, and that trusting and transparent relationships between taxpayers and their advisers are essential to protect against penalties for foreign asset reporting discrepancies.