CEO Did Not Willfully Fail to File Accurate FBAR

(Parker Tax Publishing October 2017)

A district court held that an individual who had two Swiss bank accounts and failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to one of them was not liable for the penalty for willful failure to file an FBAR under 31 U.S.C. Section 5321. The court defined willfulness for purposes of the FBAR penalty as a knowing or reckless violation of the statute and concluded that the taxpayer's conduct did not rise to the level of egregiousness that was found in other cases where the FBAR violation was found to be willful. Bedrosian v. U.S., 2017 PTC 431 (E.D. Pa. 2017).

Background

Arthur Bedrosian is the chief executive officer of a manufacturer and distributor of generic medications. In the 1970s, early in his career, Bedrosian's job required extensive international travel. Around 1973, Bedrosian opened a savings account with Swiss Credit Corp. in Switzerland. Swiss Credit Corp. was later acquired by UBS, and Bedrosian's account was switched to UBS. Initially, Bedrosian used the account to have access to funds while traveling abroad. Later, he began using the account as a savings account. Bedrosian did not actively manage the account, but he did receive mailings from UBS and had annual meetings with a UBS representative.

In 2005, UBS offered to lend Bedrosian 750,000 Swiss francs and convert his savings account into an investment account. The transaction resulted in a second account being created, although Bedrosian claimed he always considered them one account. In 2008, UBS informed Bedrosian that he had 60 days to repay the loan, close his accounts, and transfer his assets to another bank. Bedrosian closed each account via separate letters to UBS dated several weeks apart in late 2008.

From 1972 to 2007, Bedrosian used the accounting services of Seymour Handelman to prepare his income tax returns. Bedrosian did not tell Handelman about his Swiss account until sometime in the mid-1990s. Handelman responded that Bedrosian had been breaking the law every year that he did not report the account on his tax return. However, Handelman advised that Bedrosian should take no action because his estate would deal with it on his death when the money was repatriated. Bedrosian continued to not report either Swiss account on his tax returns.

Handelman died in 2007, and Bedrosian began working with a new accountant, Sheldon Bransky. The return that Bransky filed for Bedrosian in 2008, for tax year 2007, disclosed that Bedrosian had a Swiss bank account. Bedrosian also filed a Report of Foreign Bank and Financial Accounts (FBAR), which reported one of Bedrosian's two UBS accounts with assets of approximately $240,000. Bedrosian's other account, with assets of around $2 million, was not reported. Bedrosian said he did not remember discussing his UBS accounts with Bransky. He said he simply gave Bransky all of the tax related documents he received over the course of the year and then signed the return that Bransky prepared.

Around this time, Bedrosian became more aware of the seriousness of reporting foreign bank accounts and less comfortable with the nonreporting practice Handelman had condoned. He went to his personal lawyer who referred him to a tax attorney. Bedrosian consulted with his lawyers before the government began investigating him; he did not know that UBS had turned his information over to the IRS. On his lawyer's advice, Bedrosian filed amended returns for 2004 to the present and paid taxes on the gains from his Swiss accounts. The IRS notified him in 2011 that his returns were being audited. Bedrosian was cooperative and forthcoming in his dealings with the IRS.

The IRS imposed a penalty on Bedrosian for willful failure to report his second UBS account on his 2007 FBAR. Bedrosian paid the penalty and sued the IRS in a district court for a refund. There was no dispute that Bedrosian was required to file an FBAR for the second UBS account; the issue was whether Bedrosian had willfully failed to file an FBAR for that account. Under 31 U.S.C. Section 5314(a), an FBAR is required for any interest in a foreign bank account. Failure to timely file an FBAR for each foreign account over $10,000 results in a penalty under 31 U.S.C. Section 5321. The penalty for a nonwillful FBAR violation cannot exceed $10,000, whereas a willful violation leads to a penalty equal to the greater of $100,000 or 50 percent of the account balance.

Taxpayer's Argument

Bedrosian argued that willfulness as used in 31 U.S.C. Section 5321 is a criminal penalty standard that requires proof of a voluntary, intentional violation of a known legal duty. Bedrosian further asserted that even if a lower standard applied, his actions were far less egregious than those of taxpayers found liable in other cases for willfully violating the FBAR requirement. The IRS argued that a civil penalty willfulness standard applied, and is satisfied if the taxpayer either knowingly or recklessly failed to file. According to the IRS, Bedrosian willfully failed to file because he knew his 2007 FBAR was inadequate. Bedrosian's business acumen, the fact that Handelman told him in the mid-1990s that his failure to report his Swiss accounts was illegal, and various indications that he knew he had two UBS accounts were evidence of Bedrosian's willfulness, according to the IRS. The IRS further argued that even if Bedrosian did not know he had two accounts when he filed his 2007 FBAR, he easily could have gotten the information from UBS.

Analysis

The district court held that the civil penalty standard of willfulness applied and found that Bedrosian had not willfully failed to file an FBAR for his second UBS account. The district court defined willfulness for purposes of the FBAR penalty as a knowing or reckless violation of the statute. Proof of an improper motive or bad purpose is not required, according to the court. Acting with willful blindness to the obvious or known consequences of one's actions satisfies the willfulness test. In the tax reporting context, the district court said that willful blindness is established where the taxpayer makes a conscious effort to avoid learning about reporting requirements. To act willfully, the taxpayer's conduct must be voluntary, rather than accidental or unconscious. Reckless disregard also satisfies the willfulness standard and exists where there is action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known. According to the district court, willfulness can be established by evidence of conduct meant to conceal or mislead sources of income or other financial information.

Applying this standard, the district court concluded that Bedrosian's conduct did not rise to the level of egregiousness in other FBAR penalty cases where the willfulness penalty applied. In reaching its conclusion, the court cited U.S. v. Williams, 2012 PTC 202 (4th Cir. 2012), where the taxpayer failed to disclose two Swiss bank accounts on an FBAR after facing significant government scrutiny regarding his compliance with federal reporting requirements and acknowledged in a related criminal investigation that he had willfully failed to report the accounts as part of a larger scheme of tax evasion. The district court pointed out that Bedrosian had made no such acknowledgement and was fully cooperative and honest with the IRS from the moment it began investigating him.

The evidence against Bedrosian was summarized by the court as including (1) the inaccurate FBAR itself; (2) the fact that Bedrosian may have learned about a second account in a meeting with a UBS representative, which was supported by his having sent two separate letters to close the accounts; (3) Bedrosian's business sophistication; and (4) Handelman's advice in the mid-1990s that Bedrosian was breaking the law by not reporting the UBS accounts. According to the district court, none of these facts indicated conduct meant to conceal or mislead or a conscious effort to avoid learning about reporting requirements, even if they showed negligence. Moreover, the court noted, Bedrosian went to his lawyer and retained an accounting firm to file amended returns before learning that the government was investigating him. Considering these facts, the district court did not see Bedrosian's conduct as that intended by Congress to constitute a willful violation, especially given the lack of precedent finding a willful violation on comparable facts.

For a discussion of FBAR reporting requirements and penalties for not filing an FBAR, 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.

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