Court Finds Drug CEO’s FBAR Violations Willful, Even if Unintentional

Can the IRS assess penalties for willful FBAR violations if the taxpayer didn’t mean to lie to the government or hide assets? In a second opinion, one federal judge in Pennsylvania has ruled that a drug company’s CEO owed more than $1 million in willful FBAR penalties because of his reckless, if unintentional, behavior.

Drug Company CEO Fails to Disclose Nearly $2 Million Swiss Assets

Arthur Bedrosian owned a successful pharmaceutical company. By 1973, he had enough money to start making investments overseas by opening a Swiss savings account. At some point over the years, one account became two, and Bedrosian signed up for a “mail hold” on the account, where he paid a fee so the bank would not mail information about the account to him in the United States. The value of the accounts continued to climb, totaling more than $1.9 million dollars by 2007.

That’s when Bedrosian hired a new accountant, who told him about the potential penalties for failing to file annual Reports of Foreign Bank & Financial Accounts (called FBARs). Today, the civil penalties for failing to file a single report can be up to $10,000 for a non-willful violation and up to $100,000 or 50% of the balance of the account if the IRS determines that the taxpayer acted “willfully.”

Court’s First Opinion Focused on Subjective Intent

That was the question that came before the United States District Court for the Eastern District of Pennsylvania after Bedrosian sued the IRS in 2015. The Court initially entered a Findings of Fact, Conclusions of Law, and Judgment on September 20, 2017, finding that Bedrosian had not acted willfully, and ordering the IRS to return the $9,757.99 he had paid so far. In reaching its conclusion, the District Court had compared Bedrosian’s actions to other taxpayers within the same circuit who failed to file FBARs. It focused on:

• Inaccuracies in the FBAR and tax return forms
• When Bedrosian learned of the second account from a representative of the Swiss Bank UBS
• Bedrosian’s sophistication as a businessman
• His accountant’s advice in the mid-1990s that he was breaking the law by not reporting the UBS accounts

A later review of these findings said:

“In summary, this Court’s prior analysis focused almost entirely on the Bedrosian’s subjective intent and did not adequately consider whether the evidence warranted a conclusion, from an objective point of view, whether Bedrosian acted either “knowingly or recklessly” in failing to file a FBAR.”

Higher Court Says Recklessness Must be Measured Objectively

The IRS appealed the decision to the United States Third Circuit Court of Appeals, saying the District Court had applied the wrong definition of willfulness. You can read more about that court’s decision here. Ultimately, the Circuit Court said that the District Court needed to apply the same civil willfulness standard that applies to other areas of tax law, including both “knowing and reckless conduct” under the umbrella of willfulness. In making that decision, the Circuit Court said the District Court needed to apply an “objective standard.” Because it couldn’t tell from the District Court’s opinion whether that standard had been met, the Circuit Court remanded the case (sent it back) to the District Court for a second opinion.

What Objective Willfulness Looks Like

Under this new standard set by the Circuit Court, a taxpayer can unintentionally create a willful FBAR violation if they acted recklessly. That recklessness can be shown objectively if the person who failed to file the FBAR “(1) clearly ought to have known that (2) there was a grave risk that [the filing requirement was not being met] and if (3) he [or she] was in a position to find out for certain very easily.”

On remand, the District Court followed the Circuit Court’s lead, despite noting that “the Third Circuit did not rely on any FBAR precedents.” It compared what Bedrosian had done to taxpayers in other parts of the country where courts had found willful FBAR violations based on objective recklessness, including one case recently addressed by this blog. The District Court found very few differences between what Bedrosian had done and those existing cases. It found that Bedrosian had acted willfully because:

• He didn’t start cooperating with the IRS until after his foreign financial accounts were exposed
• He sent two letters to UBS closing his accounts in 2007, but only reported one of those accounts on his FBAR.
• He moved the money from the second account to a different Swiss bank account instead of bringing it back to the United States
• He read about the IRS tracing mail coming into the U.S. from foreign banks
• He opted for a “mail hold” on his Swiss bank accounts
• He kept a significant amount of money -- more than could be accidentally overlooked
• He reviewed and signed his tax forms avowing that the amounts in it were accurate
• He received advice from his tax preparer that not reporting his overseas bank accounts was breaking the law
• He was a sophisticated and successful businessman

Altogether, the court found that Bedrosian knew or should have known that the form he signed was inaccurate, so even if he acted unintentionally, it was still a willful FBAR violation. That meant the IRS imposed the proper penalties, and Bedrosian owed the government nearly $2 million.

Predicting whether the IRS and the courts will assess non-willful or willful FBAR penalties involves far more than just looking at what the taxpayer intended. It takes careful analysis of the circumstances by an experienced tax attorney to anticipate the IRS’s decision, and advocate for the lower, non-willful penalty.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding willful FBAR penalties, contact Joe Viola to schedule a free consultation.