The Tax Times
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In United States v. Schwarzbaum, a federal judge has now taken the
unusual step of ordering the arrest of a U.S.-German expatriate who failed to
appear at a court-ordered hearing tied to a nearly $20 million FBAR judgment.
Background: From FBAR Penalties to Contempt
The case has been closely
watched for years. The government originally assessed substantial FBAR
penalties against Isac Schwarzbaum for willfully failing to report foreign
accounts in Switzerland and Costa Rica for tax years 2007 through 2009.
Key developments include:
·
A 2020 finding of willful FBAR violations
·
A 2022 judgment of approximately $12.5 million
·
An Eleventh Circuit adjustment in 2024
·
A revised 2025 judgment totaling approximately $19.6 million with
interest and penalties
Despite the judgment, the
government has alleged that Schwarzbaum moved assets abroad—reportedly
maintaining tens of millions of dollars in Swiss accounts—while refusing to
satisfy the liability.
The Court’s Escalation: Civil Contempt and Arrest
The latest development stems
from Schwarzbaum’s failure to appear at an August hearing addressing the
government’s motion for civil sanctions, including an order to repatriate
foreign assets.
Judge Beth Bloom rejected
several defenses for nonappearance, including:
·
Lack of proper notice
·
Health-related travel limitations
·
Residence abroad
The court emphasized that
Schwarzbaum made no effort to request a continuance or appear remotely.
As a result, the court:
·
Found him in ongoing civil contempt
·
Ordered his arrest
·
Authorized incarceration until he complies (i.e., repatriates
assets to satisfy the judgment)
·
Referred the matter to the U.S. Attorney’s Office for potential
criminal prosecution
One complicating factor is
that Schwarzbaum resides in Switzerland.
Civil contempt alone is
generally not extraditable under the U.S.–Switzerland treaty. However, the
court’s referral for potential criminal prosecution introduces a new variable.
If criminal contempt or related charges are pursued, Swiss authorities would
evaluate extradition under the treaty’s dual-criminality standard.
In practice, that creates
uncertainty:
·
Civil remedies may have limited cross-border enforceability
·
Criminal escalation may be necessary to compel compliance
·
Even then, extradition is far from guaranteed
Schwarzbaum has also
challenged the underlying FBAR penalty on constitutional grounds, arguing a
violation of his Seventh Amendment right to a jury trial.
This argument has gained
some traction in other jurisdictions, particularly following a 2024 Texas
federal court decision questioning the IRS’s ability to assess FBAR penalties
without a jury proceeding.
While that issue remains
unresolved at a broader level, it did not persuade the court here to delay or
avoid enforcement.
For practitioners advising
clients with offshore exposure, this case highlights several important points:
·
FBAR enforcement is not slowing down; the government continues to
pursue high-dollar cases aggressively.
·
Moving assets offshore does not eliminate enforcement risk; it
often escalates it.
·
Courts are increasingly willing to use civil contempt—and even
incarceration—to compel compliance.
·
Failure to engage with the court process (even from abroad) can
significantly worsen outcomes.
·
Constitutional challenges to FBAR penalties remain unsettled but
are not currently a reliable defense strategy.
Perhaps most importantly, this case illustrates that FBAR enforcement is no longer confined to financial penalties—it can evolve into personal liberty risk when taxpayers refuse to comply with court orders.
Do You Have Undeclared Offshore Income?
Background:
A Telemarketing Fundraiser That Didn’t Pay Payroll Tax
The defendant in the case was the
estate of Richard T. Cole Jr., identified in court and media filings as a
co‑founder of a defunct telemarketing fundraising company that operated
large‑scale robocall campaigns. According to the government’s complaint, the
company withheld federal income tax and FICA from its employees’ wages but
failed to remit those “trust fund” amounts to the IRS over multiple quarters,
generating millions of dollars in unpaid tax, penalties, and interest.
The United States filed suit in
December 2022 in the Eastern District of Michigan, Detroit Division, to reduce
to judgment the trust fund recovery penalty and related assessments that had
been made against Cole during his lifetime. After Cole’s death, the case
proceeded against his estate and associated defendants, with the government
seeking to collect from probate assets based on his role in the company and its
payroll tax compliance.
The
Court’s Ruling: Personal Liability Survives Death
In its May 2026 decision, the court
granted the government’s motion to hold Cole’s estate liable for more than $4.3
million in unpaid payroll taxes. While the written opinion is technical,
several themes stand out for tax practitioners and business owners:
·
The
court accepted the government’s position that Cole was a “responsible person”
who willfully failed to collect, account for, and pay over trust fund taxes for
the company.
·
The
government’s assessments and supporting account transcripts were sufficient to
establish the amount of liability, shifting the burden to the estate to rebut
those figures, which it apparently could not do.
·
The
court allowed the United States to enforce those assessments against the
decedent’s estate, confirming that trust fund and related payroll tax
liabilities remain collectible from estate assets even after the responsible
person’s death.
The net result was a judgment of more
than $4.3 million in favor of the United States, to be satisfied from the
assets of Cole’s estate and any other property reachable under federal
collection law.
Why
Payroll Taxes Are So Dangerous
The case is a vivid illustration of
why employment tax noncompliance is often described as “the nuclear issue” in
federal tax enforcement. When an employer withholds federal income tax and the
employee’s share of FICA from wages, those amounts are held in trust for the
United States, and using them as working capital is treated as a serious breach
of duty.
Key risk points highlighted by the
case include:
·
Trust fund recovery exposure: Individuals who have authority over
payroll, bank accounts, or bill‑paying decisions can be tagged as “responsible
persons” and assessed personally under the trust fund recovery provisions if
they willfully allow withheld taxes to go unpaid.
·
No corporate veil: The government is not limited to the
employer entity; it can and will pursue officers, owners, and other responsible
persons individually.
·
Liability outlives the taxpayer: As Cole’s estate learned, trust fund
liabilities do not evaporate upon death; they become claims against the estate,
competing with other creditors and heirs for limited assets.
For closely held businesses with
cash‑flow issues, there is often intense pressure to use withheld taxes to
cover payroll, vendors, or lenders, but this case reinforces that doing so
simply converts a business cash‑flow problem into a long‑term personal collection
problem.
Practical
Takeaways For Business Owners And Fiduciaries
For business owners, officers, and
professional fiduciaries, United States v. Estate of Cole offers several
practical lessons.
·
Always prioritize payroll deposits. Federal employment tax deposits
should be treated as a non‑negotiable expense; if the business cannot make its
payroll tax deposits in full, that is a red flag that the underlying business
model may be unsustainable.
·
Document who is responsible. Boards and owners should be
deliberate about who has signatory authority, who approves disbursements, and
who oversees payroll tax filings; those roles are precisely what the government
looks at in assessing trust fund liability.
·
Address problems early. If a pattern of missed deposits
emerges, prompt engagement with a tax professional and, where appropriate, the
IRS Collection function can prevent a manageable shortfall from snowballing
into multi‑million‑dollar personal liability.
· Estate and probate implications. Personal representatives should expect that significant unpaid payroll tax liability will surface as a federal claim against the estate, and they should factor that into decisions about distributions, creditor negotiations, and litigation strategy.
If your business has ever delayed payroll tax deposits to cover other expenses, now is the time to evaluate your risk and discuss options, not after the IRS has filed suit.
Have Payroll Tax Problems?
Contact the Tax Lawyers at
Marini & Associates, P.A. 
for a FREE Tax HELP Contact Us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888-8TaxAid
Sources:
1.
https://law.justia.com/cases/federal/district-courts/michigan/miedce/2:2022cv12916/366243/67/
2.
https://www.law360.com/employment-authority/other/articles/2478384/co-founder-of-robocall-company-liable-for-4-3m-tax-debt
3.
https://www.law360.com/tax-authority/federal/articles/2478384/co-founder-of-robocall-company-liable-for-4-3m-tax-debt
4.
https://dockets.justia.com/docket/michigan/miedce/2:2022cv12916/366243
5.
https://www.law360.com/cases/63891cb6df8164027bcba22c
6.
https://appliedantitrust.com/06_conspiracy/b_twombly/allegations_sufficient/packaged_ice/packaged_ice_edmich_docket_sheet.pdf
7.
https://case-law.vlex.com/vid/u-s-v-cole-888382328
8.
https://www.ca10.uscourts.gov/sites/ca10/files/opinions/01019203633.pdf
9.
https://www.govinfo.gov/content/pkg/USCOURTS-mied-5_24-cv-10560/pdf/USCOURTS-mied-5_24-cv-10560-2.pdf
10.
https://www.govinfo.gov/app/details/USCOURTS-ca6-08-05752
11.
https://litigationtracker.law.georgetown.edu/wp-content/uploads/2023/01/Long-Island-Anesthesiologists_2024.10.14_REPLY-IN-SUPPORT-OF-MOTION-TO-DISMISS-PLAINTIFF-AMENDED-COMPLAINT.pdf
12.
https://48hourprobate.com/guides-media/2020/04/In-re-Estate-of-Cole.pdf
13.
https://case-law.vlex.com/vid/in-re-in-the-888083798
14.
https://www.law360.com/cases/686533726e2dfd36435e400e
15.
https://law.justia.com/cases/texas/second-court-of-appeals/2022/02-21-00410-cv.html
16.
https://law.justia.com/cases/federal/district-courts/michigan/miedce/2:2022cv12916/366243/67/
17.
https://www.law360.com/employment-authority/other/articles/2478384/co-founder-of-robocall-company-liable-for-4-3m-tax-debt
18.
https://www.law360.com/tax-authority/federal/articles/2478384/co-founder-of-robocall-company-liable-for-4-3m-tax-debt
19.
https://dockets.justia.com/docket/michigan/miedce/2:2022cv12916/366243
A Shift
in Settlement Strategy
Since 2020, the IRS has offered
settlement programs in syndicated conservation easement cases, generally
requiring taxpayers to concede the charitable deduction entirely, accept
penalties, and retain only a limited deduction for out-of-pocket costs. While
those initiatives resolved over 400 cases, acceptance rates remained relatively
modest.
This new initiative attempts to
remove key barriers to participation—most notably by eliminating the
requirement for an upfront payment in many cases and reopening settlement
opportunities for taxpayers who previously declined or were ineligible.
Key
Terms of the New Initiative
Eligible partnerships will receive
individualized settlement offers, with a structured timeline and tiered penalty
framework:
·
No
charitable contribution deduction will be allowed.
·
Taxpayers
may claim an “other deduction,” typically equal to estimated out-of-pocket
costs.
·
A
reduced gross valuation misstatement penalty applies:
o 10% if accepted within the initial
90-day window
o 20% if accepted within the following
45 days
·
Interest
will continue to accrue under normal rules.
·
No
upfront payment is required at the time of election (a notable departure from
prior initiatives).
·
Cases
will be resolved through stipulated decisions (for docketed cases) or closing
agreements (for non-docketed cases).
After 135 days, the IRS will only
consider settlements based on hazards of litigation—typically reflecting just
5% to 7% of the claimed deduction and a 40% penalty.
The initiative potentially affects a
significant portion of the IRS’s current inventory:
·
Approximately
1,100 total cases remain pending.
·
Nearly
450 cases will benefit from deferred payment terms.
·
Around
500 previously rejected or expired offers may be revived.
·
Up to
175 new cases may now be eligible.
However, several categories are
excluded, including cases on appeal, cases already tried, and certain imminent
or designated test cases.
Litigation
Reality Continues to Favor the Government
The IRS emphasized that recent court
outcomes have overwhelmingly favored the government. On average, the Tax Court
has allowed only about 6% of claimed deductions in these cases, typically
coupled with a 40% gross valuation misstatement penalty and interest.
This context is central to evaluating
the new offer: even with the disallowance of the deduction, the reduced penalty
structure and deferred payment terms may produce a materially better economic
outcome than continued litigation.
The mechanics of liability will
differ depending on the applicable partnership regime:
·
TEFRA
cases (generally pre-2018): Investors will receive computational adjustments
after settlement.
·
BBA
cases (2018 and later): Liability generally remains at the partnership level
unless a push-out election applies, in which case partners will bear the
adjustments individually.
This initiative reinforces the IRS’s
dual-track approach: aggressive litigation paired with structured settlement
opportunities. For taxpayers and advisors, the decision is less about whether
to concede and more about when—and on what terms.
The reduced penalty tiers,
elimination of upfront payment in many cases, and the IRS’s strong litigation
record all point to a narrow window for achieving a more favorable resolution.
Taxpayers with pending cases should expect individualized correspondence and should be prepared to act quickly, as no extensions will be granted.
Once the IRS releases the detailed terms of the new settlement initiative, affected taxpayers will need to make fast, high‑stakes decisions. We expect the program to involve trade‑offs between certainty, cost, and the likelihood of success in continued litigation.
Our firm can assist by:
· Reviewing your existing conservation easement transactions and identifying which are likely to be targeted.
· Evaluating the strengths and weaknesses of your position in light of recent court decisions and IRS guidance.
· Modeling the financial impact of potential settlement versus continued dispute.
· Guiding you through the procedural steps of responding to settlement offers, negotiating where appropriate, and coordinating with other partners and advisers.
If you are involved in a conservation easement transaction or have received IRS correspondence regarding such an investment, now is the time to get ahead of the forthcoming settlement opportunity—not after the clock starts running.
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