In Part I, we described the background of Bedrosian v. United States, 3d Cir., No. 17-3525, in which the CEO of a pharmaceutical company was pursued for willful FBAR penalties. The IRS didn’t go after Arthur Bedrosian for his many years of noncompliance with foreign reporting obligations, but rather for his failure in 2007 to report a second Swiss bank account on that year’s FBAR.
Although all agreed that Bedrosian acted improperly before he had the tax firm correct his filings from 2004 onward, that alone is insufficient for a $1 million penalty. After paying 1% of the IRS assessment ($9,757), Bedrosian then had standing to sue the U.S. government in federal district court for illegally extracting money from him. The IRS counterclaimed for the full willful FBAR penalty.
The trial and post-trial briefs focused on a key issue – was Bedrosian’s violation of his foreign reporting obligations under 31 U.S. Code § 5314 “willful”?
The CEO’s trial
The court denied summary judgment for either side and held a one-day bench trial during which Bedrosian testified at length about the history of his Swiss bank accounts. The main factual dispute was how familiar Bedrosian really was with his reporting requirements and whether or not he was aware that his UBS account had been split in two.
For the IRS to sustain a penalty for willful failure to file a report, it must show that the taxpayer’s deficiencies were done knowingly and recklessly. To make its determination, the court considered a number of factors.
Factors that worked against the CEO
Here are the factors considered by the court that worked against Bedrosian:
- He is a sophisticated businessman who should have known of the need to handle his situation differently
- He admitted that his accountant informed him in the mid-1990s that he was breaking the law by not reporting his foreign account
- He could have easily discovered that his UBS account had been split into two – even though he opted out of receiving paper statements in 1993, he still met periodically with his UBS representative
- Shortly after he signed his 2007 FBAR that omitted the second account, he sent two separate letters to UBS to close two accounts
Factors in the CEO’s favor
Here are the factors that worked in Bedrosian’s favor:
- His original accountant never asked him about foreign accounts, and when he learned about them he told Bedrosian to do nothing
- In 2007, Bedrosian checked the box on his annual income tax return indicating that he had a foreign bank account, that it was located in Switzerland, and he filed an FBAR that year
- He hired lawyers and accountants to take corrective action (by filing amended prior year’s tax returns and FBARs) before UBS gave his information to the IRS and before the IRS commenced its investigation
The fact that Bedrosian fully cooperated with the IRS investigation also had a significant impact on the outcome of his case.
In Part III, we will explain the key questions pondered by the court in its determination of Bedrosian’s “willfulness.”