Third Circuit: Taxpayer's Actions Indicated His Failure to File FBAR Was Willful

(Parker Tax Publishing August 2022)

The Third Circuit affirmed a district court and held that a taxpayer willfully failed to report his ownership of certain foreign bank accounts on Financial Crimes Enforcement Network Form 114, Report of Foreign Bank and Financial Accounts (FBAR), and the taxpayer was thus liable for a penalty of half the balance of the undisclosed accounts. The court agreed with the district court's finding that the taxpayer acted recklessly (and therefore willfully) because he knew or should have known that an FBAR he signed was inaccurate as he checked a box on the form reflecting there was less than $1 million in his account while knowing that his main account had over $1 million in it. Bedrosian v. U.S., 2022 PTC 214 (3d Cir. 2022).

Background

Arthur Bedrosian, a successful businessman in the pharmaceutical industry, opened a savings account with Union Bank of Switzerland (UBS) in the 1970s. In 2005, he opened a second bank account at UBS. Under the Bank Secrecy Act, 31 U.S.C. Section 5311 et seq., and its implementing regulations, individuals with foreign financial interests are required to file with the Treasury Department annual disclosures. These disclosures are reported on Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Pursuant to 31 U.S.C. Sec. 5321(a)(5)(A), the Secretary of the Treasury has the authority to impose civil money penalties on any person who fails to file a required FBAR. From 1986 to 2004, Sec. 5321 only authorized penalties for willful violations of Sec. 5314 and capped such penalties at $100,000. In 2004, Congress amended Sec. 5321 to authorize penalties up to $10,000 for non-willful violations and to increase the maximum penalty for willful violations to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.

In 2007, Bedrosian hired a new accountant who prepared his 2007 tax return. Bedrosian's tax return for the first time indicated that he owned a foreign bank account. The accountant also prepared an FBAR, which identified one of Bedrosian's two accounts at UBS. The account identified on the return had assets totaling approximately $240,000, while the account omitted had assets totaling approximately $2 million.

In 2011, the IRS began an audit of Bedrosian's tax returns. In 2015, the IRS assessed against Bedrosian a penalty for willfully failing to disclose the larger UBS account on his 2007 FBAR. The penalty assessed was equal to the statutory maximum of approximately $975,000, which was 50 percent of the undisclosed account. Bedrosian paid 1 percent of the penalty and then sued in a district court to recover the payment as an unlawful exaction. The government counterclaimed for the full penalty amount plus interest and a late payment penalty.

At first, Bedrosian prevailed. In Bedrosian v. U.S., 2017 PTC 431 (E.D. Pa. 2017), a district court found the government failed to prove Bedrosian willfully filed an inaccurate FBAR. The evidence, the court said, did not reflect "conduct meant to conceal or mislead or a conscious effort to avoid learning about the reporting requirements." Thus, the omission of the second Swiss account was, if anything, negligent. On appeal, however, the Third Circuit, in Bedrosian v. U.S., 2018 PTC 427 (3d Cir. 2018), remanded after explaining "willfulness" for an FBAR violation was more expansive (and less forgiving) than the district court may have allowed.

According to the Third Circuit, courts should use an objective standard to determine whether a person knew or should have known about an "unjustifiably high risk of harm." In layman's language, the court said, if the government could show Bedrosian (1) "clearly ought to have known" (2) "there was a grave risk" the FBAR filing requirement "was not being met," and if (3) he "was in a position to find out for certain very easily," it would satisfy the willfulness element. Because the Third Circuit was unsure whether the district court applied this test, it remanded for further proceedings consistent with its opinion and for the district court to render a new judgment.

On remand, in Bedrosian v. U.S., 2020 PTC 374 (E.D. Pa. 2020), the district court concluded that its earlier decision focused too heavily on Bedrosian's subjective intent. After reevaluating the trial record from an objective viewpoint, the court determined that Bedrosian acted willfully because he "recklessly disregarded the risk that his FBAR was inaccurate." The district court also ordered him to pay the penalty in the amount the IRS calculated (plus interest) because the agency had not abused its discretion in the amount of the penalty imposed.

Bedrosian appealed to the Third Circuit. He argued that the district court clearly erred in finding his conduct willful because the district court exceeded the scope of the remand by making supplemental findings that led to its conclusion that he acted willfully, and his conduct was not willful. He also argued that the court incorrectly affirmed a penalty beyond what the IRS proved was permitted by law.

Analysis

The Third Circuit affirmed the district court's willfulness finding and, while it agreed that the government failed to provide sufficient evidence at trial showing its $975,000 penalty was no greater than half of Bedrosian's account balance, the court found that Bedrosian had admitted this fact during opening statements and thus relieved the government of its burden of proof on that point.

The court noted that it set forth the definition of "willfulness" in its earlier decision and left it to the district court to apply that definition as it reconsidered the trial evidence. And, the court determined the district court did just that. According to the Third Circuit, the district court's decision was rational and was grounded in credible evidence that Bedrosian clearly ought to have known that there was a grave risk that an accurate FBAR was not being filed and he was in a position to find out for certain very easily. The court looked at the five supplemental findings made by the district court, as listed below, and agreed with all of them:

(1) Bedrosian's cooperation with the government began only after he was exposed as having hidden foreign accounts.

(2) Shortly after filing the 2007 FBAR, Bedrosian sent two letters to his Swiss bank directing closure of two accounts, but only one of these accounts had been disclosed on his FBAR.

(3) Bedrosian did not dispute he saw an article in The Wall Street Journal about the federal government tracing mail coming into the United States and was therefore alerted to the possibility of the United States finding out about his foreign bank accounts if the bank sent information through the mail.

(4) Bedrosian's Swiss accounts were subject to a "mail hold" and Bedrosian did not dispute the existence of the mail hold or that he signed a form and paid a fee to the bank for this benefit.

(5) Bedrosian acknowledged that he was aware of the significant amount of money held in his foreign bank accounts.

For a discussion of the FBAR penalty and "willfulness" standard used in imposing the penalty, 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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