On September 20, 2017, the Eastern District of Pennsylvania issued an important taxpayer friendly opinion regarding the “willfulness” standard in FBAR penalty matters.
In Bedrosian v. United States, Case No. 2:15-cv-05853-MMB (E.D. Pa., Sept. 20, 2017), the court held that the government had not met its burden in proving that Bedrosian had willfully violated FBAR reporting requirements.
This opinion could have a major effect on future IRS decisions in the offshore compliance arena and may cause some taxpayers, to seek a more aggressive approach in addressing prior non-compliance.
This is a Big Win for Taxpayers!
Bedrosian represents yet another loss, after Pomerantz and Hom, for the government, where the court ruled that the IRS failed to meet the burden for proving a willful FBAR penalty violation.
In U.S. v. Williams, (CA 4 2012), the Fourth Circuit, overturning the district court’s finding, held that the taxpayer was liable for a willful violation the FBAR reporting requirement.
In U.S. v. McBride, (DC UT 2012), the district court found that the taxpayer was liable for a willful violation the FBAR reporting requirement.
In U.S. v. Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757, the district court found that the taxpayer’s failure to timely file a FBAR was willful where, among other things, he refused to give the foreign bank his home address, never informed his tax preparer that the account existed, never asked for any professional advice on any requirements regarding the account, stopped employing a bookkeeper or keeping any books after opening the foreign bank account, and made several misrepresentations under penalty of perjury when he applied to participate in IRS’s Offshore Voluntary Disclosure Program (OVDP).
Bedrosian Challenges FBAR Based Upon Illegal Exaction.
An illegal exaction claim involves money that was "improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation." (Norman v. U. S., (Fed. Cir. 2005) 429 F.3d 1081) Where a taxpayer is able to establish that he paid taxes that were improperly collected by the government, he succeeds on such a claim.
Arthur Bedrosian is a U.S. citizen who has had a successful career in the pharmaceutical industry over the past several decades, including as Chief Executive Officer at Lannett Company, Inc., a manufacturer and distributor of generic medications. In the early ’70s, he opened a savings account with a bank in Switzerland; at some point, at least as early as 2005, a second account was added.
Throughout the decades that Bedrosian maintained the Swiss accounts, he did not prepare his own tax returns and instead had his accountant do so. Bedrosian did not inform the accountant of the bank accounts until the 1990s, because, he stated, the accountant never asked about them. When informed, Bedrosian indicated that the accountant told him that he had been breaking the law for the past 20 years by not reporting the accounts. He also said that the damage was already done, that Bedrosian should do nothing, and that the issue would be resolved on Bedrosian’s death when the assets in the Swiss accounts would be repatriated as part of his estate and taxes would be paid on them then. Based on this advice, as well as his fear that he would be penalized for his years of noncompliance, Bedrosian did not report either Swiss account on his tax returns until 2007, when the accountant died and he hired a new accountant.
Bedrosian filed a federal income tax return for 2007 that reflected, for the first time, that he had assets in a foreign financial account in Switzerland. He also filed a FBAR for the first time in 2007. But, he only reported the existence of one of his Swiss accounts (which had assets totaling approximately $240,000) and did not report the other account (which had assets totaling approximately $2.3 million). Bedrosian did not report any of the income that he earned on either Swiss account on his 2007 return.
Sometime after 2008, the Swiss bank told Bedrosian that it would be providing his account information to the U.S. government. Around this time, prior to the government’s initiation of its investigation, Bedrosian hired an attorney to look into his reporting obligations for the Swiss accounts. In August 2010, he filed an amended 2007 federal return on which he reported the approximately $220,000 of income he had earned from the Swiss accounts; he also filed an amended FBAR for 2007, on which he reported both bank accounts. Although Bedrosian took this corrective action before the government began its audit, he did not do so until after IRS had discovered the existence of the two accounts.
IRS initiated its investigation of Bedrosian in April 2011, with a focus on tax year 2008. Beginning then, Bedrosian engaged with IRS cooperatively, providing them with all documentation requested. The investigation culminated in a case panel of IRS agents recommending that Bedrosian be penalized for nonwillful violations of the FBAR reporting requirement and that the case against him be closed. For reasons unclear in the record, the case wasn’t closed but instead was re-assigned to another IRS agent, who conducted her own review and concluded that Bedrosian’s violation had been willful.
On July 18, 2013, IRS sent Bedrosian a letter stating that it was imposing a penalty for his willful failure to file the FBAR form for tax year 2007. The proposed penalty was $975,789, 50% of the maximum value of the account ($1,951,578), the largest penalty possible under the regs.
Bedrosian filed suit in the district court alleging illegal exaction, i.e., that an unwarranted penalty was imposed on him; IRS counterclaimed for full payment of the penalty, as well as accrued interest on the penalty, a late payment penalty, and other statutory additions to the penalty. Both parties sought summary judgment.