Taxpayer Win: Failure to File Accurate FBAR Deemed Not Willful, Part IV

The story of Arthur Bedrosian, CEO of Lannett Company, Inc., and his Swiss bank accounts shows how a taxpayer’s cooperation with an IRS investigation and the court’s belief in the taxpayer’s honesty can be significant factors in the outcome of an FBAR penalty case.

In Part III, we provided an overview of the IRS’ and taxpayer’s arguments in the matter of Bedrosian v. United States. Here we summarize the court ruling and the potential impact of this case.

The court rules for the CEO

In September 2017, the federal district court ruled in Bedrosian’s favor, holding that the government did not meet its burden of proof in establishing the taxpayer’s willful violation of 31 U.S. Code § 5314. In its opinion, the court distinguished Bedrosian’s behavior with the willful FBAR noncompliance cases raised by his lawyers, such as:

  • Where the taxpayer who was already the target of a larger tax evasion investigation submitted an inaccurate FBAR and continued to mislead the authorities. U.S. v. Williams, 489 F. Appx 655 (4th Cir. 2012).
  • Where the taxpayer who was clearly aware of her duty to report her offshore accounts on her FBAR showed reckless disregard of her reporting obligations and was subsequently convicted of bankruptcy fraud and tax fraud. United States v. Bussell, No. 15-2034, 2015 WL 9957826 (C.D. Cal. Dec. 8, 2015).
  • Where the taxpayer repeatedly lied to the IRS during its investigation and refused to produce requested documents regarding a “carefully planned and complex tax evasion scheme.” U.S. v. McBride, 908 F. Supp. 2d at 1189.

The court was not persuaded by the cases cited by the government because they did not involve FBAR reporting issues and penalty assessments – it clarified that the only issue before the court was to determine whether or not Bedrosian’s failure to file an accurate 2007 FBAR was willful.

In sum, the court found the CEO’s testimony credible and concluded that even if Bedrosian was aware of his second Swiss account when the FBAR was filed, the evidence suggests that he was more negligent than reckless in not reporting it – and negligence is insufficient for a finding of willfulness. Accordingly, Bedrosian was not required to pay the $1 million penalty and the government was ordered to return the $9,757.89 payment he had already made.

Impact of the CEOs case

When Bedrosian was decided this past September, many taxpayers and their attorneys were hopeful that the case might encourage the government to reevaluate its approach and not assume that every FBAR violation is “willful.”

Taxpayers should not assume, however, that the IRS will be dissuaded by the outcome of this case. For one thing, the government has appealed the decision, claiming that the lower court imposed a higher standard of willfulness than the ordinary standard of conduct generally required for the imposition of willful FBAR noncompliance penalties. In addition, we already know that the IRS is ramping up enforcement efforts, and Bedrosian only makes it more likely that the agency will be more thorough in its investigation of the facts required for a case of intentional FBAR noncompliance. Finally, note that Bedrosian’s case was uncommon in two respects: (1) His income tax return for the year at issue was accurate and (2) he did file an FBAR during the year at issue, it just wasn’t complete.

San Francisco Tax Attorneys

The attorneys at Moskowitz, LLP have had tremendous successes in minimizing or eliminating FBAR penalties for taxpayers throughout the United States and abroad through the OVDP, Streamlined Filing Procedures, and through litigation when necessary. If you have not met your offshore tax reporting obligations and/or are under investigation, contact our San Francisco office today.

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