In United States v. Rund, Case Number 1:23-cv-00549 (Aug. 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 report of foreign bank and financial accounts (FBAR). The court focused on the knowledge and responsibility of the taxpayer, applying the objective willfulness standard. The court confirmed that penalties couldn’t be abated by claiming reasonable reliance on a professional advisor when the taxpayer failed to inform the advisor about the existence of the foreign accounts.
Case Overview
The Internal Revenue Service assessed approximately $3 million in penalties against Richard Rund, an inventor and an international businessman, for willfully failing to meet FBAR reporting obligations under the Bank Secrecy Act (BSA). Rund’s non-compliance spanned several years, particularly when he incorporated a complex system of trusts with beneficial ownership and shifted funds between the trust and his personal account. In defending his position for penalty abatement, he claimed personal challenges and reasonable reliance on professional advisors. He also argued that the penalty was excessive under the Eighth Amendment.
The court held that the $2.9 million penalty assessed against Rund wasn’t “grossly disproportional to the gravity of his offense and therefore did not violate the Eighth Amendment.” Specifically, the court held that Rund had willfully disregarded the compliance obligations under the BSA because he successfully filed the FBARs for years past and noted on Schedule B of his income tax return that he held foreign accounts until he suddenly failed to do both in later years. The court stated that his willfulness showed reckless disregard for compliance obligations.
Key Takeaways
Ignorance of law no excuse: The court’s application of an objective standard for willfulness confirmed that a taxpayer’s claim about the ignorance of the law or personal health circumstances that prevented filings or knowledge of filings didn’t serve as an excuse, especially when the taxpayer had a history of consulting with advisors for compliance.
Taxpayer obligated to disclose accounts to advisor: The ruling affirms that advisors’ liability under the reasonable reliance on a tax professional defense for a taxpayer is limited when the taxpayer doesn’t fully disclose to the advisor. The court appears to be placing the responsibility for asking the right questions on the taxpayer rather than the advisor.
Asset protection requires careful planning. The decision doesn’t delve into the intricacies of the planning and asset protection driven by a later trust when the taxpayer was the beneficial owner and claimed to have created the trust to hold foreign accounts to navigate taxes in Hong Kong. However, the court noted the nature of transactions flowing effectively to Rund’s personal accounts at certain times and on multiple occasions, as Rund provided certifications or affirmations that he was the 100% owner of the accounts, especially when he sought to recover from alleged embezzlement by the trustee of the trust. The case indicates the importance of ensuring that asset protection planning isn’t just a myriad collection of webs that ultimately leads to the same individual.
Enforcement Trend
The Rund case is one of a series of recent Internal Revenue Service enforcement cases against non-compliance with FBAR and other foreign reporting obligations. This trend is particularly evident in cases involving complex estate structures and high-net-worth individuals. It’s likely to increase given the compliance obligations proposed under the Foreign Trust Regulations, for example.
Estate and tax advisors would be prudent to ensure that clients ask the correct questions and are advised of compliance obligations in anticipation of changing asset holdings and wealth. The Rund decision reminds taxpayers and advisors that inconsistent compliance can support penalties further, and trusted, transparent relationships between the taxpayers and their advisors are paramount to safeguard against penalties for foreign asset reporting noncompliance.
