In Bedrosian v. United States, Dep’t of the Treasury, IRS, No. 15-5853, 2017 U.S. Dist. LEXIS 56535 (E.D. Pa. Apr. 13, 2017), Arthur Bedrosian opened a bank account at UBS in Switzerland in the early 1970s, and for years, he did not tell his accountant about his accounts. He did finally tell his accountant about his Swiss accounts in the 1990s, but the accountant told him that he had been breaking the law for the past 20 years and to just leave it alone because the damage was already done. Based upon that advice, as well as his fear that he would be penalized for his years of noncompliance, Bedrosian did not report his Swiss accounts on his tax returns until 2007.
Bedrosian filed his tax return for 2007 that reflected, for this first time, that he had a Swiss bank account, and he answered “yes” to question 7a asking whether he had a foreign financial account. Bedrosian also filed an FBAR for the first time in 2007, but critically, he only reported one of this two Swiss accounts. Bedrosian reported the account, which had assets totaling $240,000, and he left off his 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 tax return.
Sometime after 2007, Swiss bank UBS told Bedrosian that it would provide his account information to the United States government. Bedrosian then filed an amended tax return for 2007 to report the income he had earned from his Swiss accounts, and he also filed an amended FBAR for 2007 and reported both UBS accounts. Although he took this corrective action before the IRS began its audit, he did not do so until after the IRS discovered the existence of the two Swiss accounts.
The IRS audited Bedrosian and ultimately proposed a penalty for willfully failing to file an FBAR for 2007. The proposed penalty was $975,789.17, 50% of the maximum value of the account ($1,951,578.34) and the largest penalty possible.
Bedrosian filed suit in federal district court, and the crux of the case was Bedrosian’s level of culpability in failing to file an FBAR for one of his two Swiss bank accounts in 2007; that is, did he act willfully or non-willfully.
Bedrosian argued that in order to sustain a willful FBAR penalty, the government must apply the same standard for the civil penalty as it does in criminal cases, and show that his actions amount to a “voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 U.S. 192, 201 (1991).
The court rejected Bedrosian’s argument and concluded that willful intent is satisfied by a finding that Bedrosian recklessly violated the statute. The court said that the determinative issue was Bedrosian’s intent and that was an inherently factual question. What Bedrosian knew regarding his reporting requirements and when? The court found that the information Bedrosian’s accountant provided to him and what exactly Bedrosian did with that information, if anything, was relevant to a determination of Bedrosian’s intent.
The case currently is pending before the court.