Before the Offshore Voluntary Disclosure Program (OVDP), it was rare for a taxpayer to pay penalties when they voluntarily came forward with information regarding their foreign accounts. Most tax practitioners, therefore, recommended that their clients do a “quiet” disclosure, which involved simply amending their previous years’ returns, and paying any tax and interest owed. When the OVDP was first implemented, the IRS warned taxpayers of the possibility of excessive civil penalties and criminal prosecution if they chose the quiet disclosure route instead of participation in the program.
Taxpayers have been wary of the OVDP, though, particularly in years in which it was unclear whether or not they would be liable for more under the terms of the program than they otherwise might owe.
A brief review of the CEO’s case
After many years of noncompliance, Arthur Bedrosian, CEO of Lannett Company, Inc., made a quiet disclosure. It began when his accountant of many years passed away and his new accountant reported one of Bedrosian’s two Union Bank of Switzerland (“UBS”) accounts on his 2007 tax return. At that point, uneasy about his history of nonreporting, Bedrosian consulted with a tax attorney and had an accounting firm correct all his returns from 2004 onward. This was the time of the UBS tax evasion controversy when the Swiss bank was beginning to notify its U.S. customers that their information was being released to the IRS. The IRS investigation into Bedrosian’s activities, however, had not yet commenced.
Bedrosian was audited in 2011 and the IRS went after him not for his many years of noncompliance, but rather for failing to report one of his two foreign accounts on his 2007 FBAR. The IRS assessed him a $1 million penalty under 31 U.S.C. § 5321(a)(5)(C) for willful failure to report the second UBS account in 2007.
Determining the CEO’s willfulness
To determine whether Bedrosian’s 2007 omission of his second Swiss bank account was done with the requisite state of mind to sustain a penalty for willful violation under 31 U.S. Code § 5314, the court posed two questions:
- Is there a legal precedent for a finding of willfulness involving conduct similar to Bedrosian’s?
- Did the IRS sustain its burden of proof in its calculation of the penalty it assessed?
The IRS argued that Bedrosian’s actions constituted either willful or reckless noncompliance with offshore reporting requirements, which carries a penalty of the greater of $100,000 or 50% of the balance in the account at the time (in this case, approximately $1 million). The agency claimed that Bedrosian “took a calculated risk” by not reporting his foreign assets or paying taxes on his foreign income for decades, and only began his disclosures when UBS told him that it was turning over his account information to the IRS. At that point, he reported only his small UBS account ($240,000) and not the larger one ($2.3 million), hoping that the larger account would remain undetected. The IRS concluded that partial compliance does not preclude a finding of willfulness.
Bedrosian’s lawyers, on the other hand, pointed out the “stark contrast” between Bedrosian’s actions and those of other taxpayers who were found to have willfully failed to file their FBARs. They argued that Bedrosian was fully cooperative and straightforward throughout the IRS investigation, that he was not involved in any kind of complex tax evasion scheme, and how his actions – even before his quiet disclosure – was nowhere near the level of “egregious behavior” and “reckless disregard” typical of taxpayers found to have acted willfully.
In Part IV, we will summarize the court’s ruling and the potential impact of this case.