Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: TAX TRENDS

Procedure & Administration

Counsel's admission costly to taxpayer in FBAR case

The Third Circuit affirmed a district court's holding that a taxpayer's failure to report his foreign accounts on Financial Crimes Enforcement Network (FinCEN) Forms 114, Report of Foreign Bank and Financial Accounts (FBAR), was willful. However, while it did not agree with the district court that the IRS had proved the amount of the penalty assessed against the taxpayer, the Third Circuit noneffieless upheld the penalty amount because it found the taxpayer's counsel had admitted in the court proceedings that the balance in the taxpayer's undisclosed foreign account was enough to support the penalty assessed.

Background

Arthur Bedrosian is a U.S. citizen who has worked in the pharmaceutical industry since the 1970s. He has been highly successful in his career, rising to the position of CEO of a generic drug manufacturer. In the early 1970s, when he was still a manufacturer's sales representative, he opened a bank account with a Swiss bank that would later become United Bank of Switzerland (UBS). Sometime during 2005, he opened a second account with UBS, although Bedrosian claimed he considered them to be one account. Bedrosian met with a UBS banker once a year to review the accounts' performance. During 2007, the tax year at issue in ftie proceeding, both UBS accounts carried balances of significantly more than $10,000. He closed the accounts at the end of 2008.

Bedrosian did not tell his accountant about the existence of the two accounts until 2006, claiming he had failed to do so because the accountant had never asked about them. The accountant, upon learning of the accounts, told Bedrosian he was and had been required to report on his personal tax returns that he had the foreign bank accounts and fde any FBARs for them. According to Bedrosian, on advice of the accountant, he did not report the accounts on his 2006 personal returns.

Bedrosian's accountant died in 2007 and, working wiffi a new accountant, Bedrosian finally disclosed his foreign accounts on his 2007 tax return and a 2007 FBAR. However, his disclosure in the 2007 FBAR was somewhat less than complete. It listed only one ot the UBS accounts with a balance of $240,000, even though the second account's balance was approximately $2.3 million. He did not report any of the income from the accounts in 2007 on his personal return.

The IRS found out about Bedrosian's account in the 2000s when the U.S. government negotiated an agreement with Swiss banks to provide it account information about their customers. The IRS opened an investigation of Bedrosian in 2011, and eventually the Service assessed the maximum penalty under the Bank Secrecy Act against Bedrosian for willfully filing an inaccurate FBAR: 50% of the balance of the undisclosed account at the time of the violation. The IRS determined die balance in the account at the time of the violation was $1,951,578.34, and it calculated the 50% penalty to be 1975,789.17. Bedrosian initially refused to pay the penalty but eventually did and then filed a refund suit in district court.

The district court sided with Bedrosian. After a one-day bench trial, the court determined that the IRS had failed to prove Bedrosian had willfully filed an inaccurate FBAR. It found that the evidence did not reflect "conduct meant to conceal or mislead or a conscious effort to avoid learning about the reporting requirements." According to the court, Bedrosian was at most negligent.

The IRS appealed the decision to the Third Circuit, which took a more expansive view of the scope of willfulness for an FBAR (Bedrosian, 912 F3d 144 (3d Cir. 2018)), finding that it includes not only knowing but reckless conduct. The court stated that if the IRS 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 (quoting Carrigan, 31 F.3d 130,134 (3d Cir. 1994)). The court was, however, unsure whether the district court had applied the test, so it remanded the case "for further proceedings consistent with our opinion" and for the court to "render a new...