FBAR Penalty Calculations: Does the IRS Have to Show its Work?
When the IRS imposes penalties, it can sometimes seem as though the number is plucked from the air. But when an FBAR penalty case goes to trial, the IRS is required to prove the amount of its penalty complied with the law. However, a now-familiar case shows that sometimes taxpayers do their work for them.
Former Big-Pharma Executive Owes an Almost $1 Million FBAR Penalty
Arthur Bedrosian is the former owner of a successful pharmaceutical company. In 1973, he opened a Swiss savings account and began growing an international investment portfolio. When the IRS started investigating Swiss bank account holders for tax evasion, Bedrosian signed up for a “mail hold” on the account, where he paid a fee so the bank would not mail information about the accounts to him in the United States. The value of the accounts continued to climb, totaling more than $1.9 million dollars by 2007. In 2008, after hiring a new accountant, Bedrosian filed an inaccurate FBAR, disclosing one of his Swiss bank accounts, worth less than $1 million, but not the other, worth more. The IRS audited Bedrosian, and imposed an FBAR penalty of $976,789.17, one half the balance of the undisclosed account.
How They Got Here
If you feel like you’ve heard about this case before on this blog, it is because you have. Bedrosian has been making its way up and down the ladder of federal courts since 2018. Bedrosian paid 1% of the FBAR penalty and then sued to get that money back. The IRS counter-sued for the remaining 99%. The District Court had a one-day trial and determined that the Government had failed to prove Bedrosian’s “conduct meant to conceal or mislead or a conscious effort to avoid learning about the reporting requirements.” Calling the omission of the second account at most negligent, the District Court reversed the IRS’s FBAR Penalty.
However, on appeal, the Third Circuit Court redefined willful FBAR penalties to include both intentional and reckless conduct. This was the first decision of its kind, but many other courts have echoed that language since. The Third Circuit Court referred the case back to the District Court to see if the Government could show Bedrosian:
- “clearly ought to have known”
- “there was a grave risk” the FBAR filing requirement “was not being met,” and
- he “was in a position to find out for certain very easily.”
If so, it would satisfy the willfulness element. The District Court held a new trial, and determined “its earlier decision focused too heavily on Bedrosian’s subjective intent” instead of an objective recklessness standard. This time, the District Court upheld the IRS’s FBAR penalty because the agency had “not abused its discretion in the amount of the penalty imposed.”
Circuit Court Upholds Willfulness Finding
Bedrosian still was not satisfied. He appealed to the Third Circuit again, asking the Circuit Court to determine whether the violation was willful, and whether the IRS properly proved the value of its FBAR penalty. The Third Circuit Court said the District Court’s “rational decision was grounded in credible evidence” calling it “thorough and well-reasoned” based on the evidence presented at trial. The Circuit Court said that Bedrosian had checked a box on his FBAR indicating the account held less than $1 million, but that he testified at trial it was worth more than that. This should have prompted him to investigate further, such as contacting the bank to determine why the amounts were inaccurate. The Circuit Court also emphasized that his new accountant had told him he was breaking the law by not disclosing his Swiss bank accounts, but he continued to do it anyway.
How the IRS Proves FBAR Penalty Calculations
What is new in the most recent Bedrosian decision is an analysis on how the IRS proves the amount of its FBAR penalties. The Court said:
The amount of a civil penalty for a violation of the Bank Secrecy Act depends on three things: (1) whether the violation was willful, (2) the calculation of the maximum penalty permitted by law, and (3) the IRS’s discretionary decision whether to assess a penalty at or below the statutory maximum.
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 at the time of a willful FBAR violation. When a taxpayer contests an FBAR penalty at court, the amount of the penalty is one element in the case. That means that the IRS must prove its FBAR penalty calculations. Once the maximum penalty is properly calculated, the Court will only set aside an IRS decision to impose that maximum or some lower amount if the decision was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” That means proving the FBAR penalty calculations is key to the IRS having those penalties upheld.
At the second trial, the IRS contended that Bedrosian’s undisclosed Swiss bank account held $1,951,578.34, making its $975,789.17 penalty lawful. However, the only evidence the IRS provided to support that amount was a balance sheet with no name, no account number, no bank name, and no listed currency. The Court said “All we know from the record is Exhibit R shows someone’s ‘monthly balance’ for something somewhere.” That may have been enough to defeat the IRS’s FBAR penalty calculations except for one thing: Bedrosian admitted that the account was worth around $2 million at trial. That admission was enough to prove the value, even though it wasn’t put forward by the IRS. As a result, the Third Circuit again affirmed the willful FBAR penalty, forcing Bedrosian to pay nearly $1 million, plus interest.
Is this the last readers will see of Bedrosian’s FBAR penalties? Probably. Since the Third Circuit Court of Appeals affirmed the penalty, Bedrosian only has one appeal left: to the U.S. Supreme Court. The Supreme Court hears very few of the cases submitted to it, and generally limits its review to cases that involve a dispute between the courts or a substantial issue of law. It is possible, though unlikely, that Bedrosian’s definition of willfulness will make the cut. Unless it does, the case will be over and Mr. Bedrosian will have no choice but to finally pay the FBAR penalty.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions the IRS’s FBAR penalty calculations, contact Joe Viola to schedule a free consultation.