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

The IRS aggressively pursues taxpayers for FBAR noncompliance, but in this case it may have overreached its boundaries.

CEO takes bad advice

Arthur Bedrosian is currently Chief Executive Officer of Lannett Company, Inc., a manufacturer and distributor of generic medications. In the early days of his career (1970s) he frequently traveled to Europe, and found it convenient to open an account at Swiss Credit Corporation, which was later acquired by Union Bank of Switzerland (“UBS”). Bedrosian didn’t tell his accountant about his Swiss bank account until the 1990s, at which time he was informed that he was breaking the law by not reporting it on his U.S. tax returns. However, instead of properly advising him to come into compliance, Bedrosian’s accountant suggested that since he “could not unbreak the law” he should continue to not report the Swiss bank account and let his estate deal with the ramifications when he died. Bedrosian took his advice.

In the meantime, Bedrosian received a loan from UBS and his account was changed to an investment account which effectively created a second account at the institution. When Bedrosian’s accountant passed away in 2007, he found someone new who reported the existence of a foreign bank account on Bedrosian’s income tax return and also filed an FBAR for him. The FBAR, however, listed only the smaller of Bedrosian’s two Swiss bank accounts, valued at approximately $240,000 – it did not list the other $2.3 million account.

CEO comes clean

Bedrosian was growing increasingly concerned with his history of nonreporting. His personal lawyer referred him to a tax attorney who advised him to come into compliance. In 2008, UBS informed Bedrosian that he would have to close his accounts with them and transfer his assets to a different Swiss bank, which he did.

This was the time of the IRS pursuit of UBS, which ended in U.S. taxpayer account information being transferred to the U.S. government.

Around the time that UBS began notifying its customers that it was compelled to hand over their account information to the IRS, Bedrosian hired an accounting firm to correct his tax returns from 2004 onward – these amended returns fully reported all his foreign income, and Bedrosian duly paid all U.S. taxes due. Missing FBARs were also prepared, that reported both Swiss accounts.

The IRS still comes calling…

In April 2011, Bedrosian received notice that the IRS would be auditing his tax returns. He was initially assessed a fine of around $10,000 under 31 U.S.C. § 5321(a)(5)(B)(i) for non-willful failure to report the second Swiss account in 2007. However, before finalizing the closing agreement in 2013, one of the IRS agents was replaced and the new agent decided to assess a willful noncompliance penalty of $975,799 – 50% of the account balance at the time of the violation per 31 U.S.C. § 5321(a)(5)(C).

Bedrosian made a partial payment of $9,757 and then initiated an action in federal district court. The government counterclaimed for $1,007,345.

In Part II, we will discuss the Bedrosian trial and briefs.

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