“Willful” in the FBAR Context Implies a Knowing of Reckless Failure to File an Accurate FBAR by Robert Horwitz
The Government prevailed in each of the FBAR penalty cases that had previously been decided, but finally a taxpayer convinced a court that he was not liable for the 50% willful penalty. The Court in Bedrosian v. United States (E.D. PA Sept. 20, 2017) held that a taxpayer was not liable for the penalty based on the facts presented at trial. The taxpayer paid $9,757 toward a $1 million FBAR penalty and sued to recover the money in federal district court. Note: In non-tax District Courts have jurisdiction over lawsuits against the Government where the amount sought does not exceed $10,000. If Bedrosian had paid more than $10,000, he would have sued in the Court of Federal Claims, which has exclusive jurisdiction in non-tax cases in which the amount of money sought from the Government is more than $10,000. The Government counterclaimed for the unpaid balance.
The case presented two legal issues: what is the Government’s burden of proof in FBAR penalty cases and what does “willful” mean for purposes of a civil FBAR case. The Court in Bedrosian adopted the view advanced by the Government: it needs to prove that the taxpayer was willful by a preponderance of the evidence, and not by the heavier burden of proving willful by clear and convincing evidence. It also held that “willful” means that a knowing or reckless failure to file an accurate FBAR form. It rejected Bedrosian’s claim that willful required proof of a voluntary and intentional violation of a known legal duty. According to the Court this was the standard used in criminal cases but not civil cases. [Note: The “voluntary and intentional” standard is also used for willfulness civil trust fund recovery penalty cases.]. These legal holdings were consistent with the published decisions in the FBAR cases the Government won.
So why Bedrosian win when others have not? The facts and the witness. The judge obviously found Bedrosian a credible witness. He testified that he set up his Swiss bank account in the early. 1970s because he frequently travelled to Europe on business and wanted access to funds when he was there. Ultimately the account became more of a savings account. In 2005 a second account was opened and his first account was converted to an investment account. He also testified that in the mid 1990s, he told his accountant that he had a Swiss account. The accountant told him that he was breaking the law each year by not reporting the account on his tax return, that he could not “unbreak” the law and that he should do nothing because his estate would deal with it after he died. The accountant in 2007 and Bedrosian got a new accountant, who filed Bedrosian’s 2007 return in 2008. That return checked the box box “yes” to the question whether he had an offshore account and identified Switzerland as the country where the account was located. In 2008 Bedrosian also filed for the first time an FBAR. The problem was, the FBAR form listed only the smaller of the two accounts. On the advice of his attorney, Bedrosian filed amended tax returns for 2004 forward reporting his foreign income. The IRS began an audit of Bedrosian in 2011. Bedrosian cooperated with the IRS. He was assessed a 50% penalty with respect to his 2007 FBAR filing.
The factual issue was whether Bedrosian knew that his 2007 FBAR form failed to disclose his second account, which had about $2 million, when he signed the form. Bedrosian said he did not pay close attention to the form when he signed it and that he considered the two accounts as being just one account. The Court accepted his testimony: “even if he did know that he had a second account yet failed to disclose it on the FBAR, there is no indication that he did so with the requisite voluntary or intentional state of mind; rather, all evidence points to an unintentional oversight or a negligent act.” The Court compared Bedrosian’s conduct to that of the taxpayers in U.S. v Williams, 489 F. App’x 655 (4th Cir. 2012), U.S. v McBride, 908 F.Supp. 2nd 1186 (D. Utah 2012), and U.S. v Bussel, (C.D. Cal. 2015), and found his less egregious. Since the Government failed to meet its burden of proof, Bedrosian was entitled to a return of the money “illegally exacted from him.”