A second Foreign Bank and Financial Accounts Report (FBAR) penalty case is seeking a writ of certiorari to address the standard of review for the determination of willfulness in the FBAR penalty space.
Background
Mr. Bedrosian, the petitioner in this matter, held two foreign bank accounts at UBS in Switzerland. He initially disclosed one of his offshore accounts on the required form, but not the other. Instead of participating in the Internal Revenue Services’ (IRS) Offshore Voluntary Disclosure Programs to disclose this non-compliance, Mr. Bedrosian filed a quiet disclosure by amending and filing prior tax returns and FBAR forms back to 2003; the amended filings included the previously omitted account. Mr. Bedrosian paid all back taxes and penalties associated with these amendments.
The IRS rejected the quiet disclosure and notified Mr. Bedrosian of its intent to audit his returns. The original IRS agent assigned to the investigation was satisfied that Mr. Bedrosian did not act willfully in his failure to disclose the second UBS account and intended to close the matter without penalty assessment. Before the case was closed, however, a new IRS agent was assigned and determined that Mr. Bedrosian acted willfully. The agent assessed a penalty of $975,789, representing 50% of the undisclosed account balance.
Mr. Bedrosian filed a complaint in district court and a one-day bench trial was held to determine if Mr. Bedrosian acted “willfully” in failing to disclose the second UBS account on his 2007 FBAR. The district court ultimately ruled in the petitioner’s favor, concluding that he did not willfully violate the FBAR statute (Bank Secrecy Act). The district court found that the petitioner’s conduct was “unintentional” and “at most negligent.” The government appealed.
On the initial appeal, the Third Circuit held that “the usual civil standard of willfulness applies for civil penalties under the FBAR statute” and that this includes “both knowing and reckless conduct.” Unsure of the standard used by the district court to evaluate the evidence, the Third Circuit vacated the judgment and remanded for further proceedings.
Though it did not receive any additional evidence, the District Court reversed holding that Mr. Bedrosian had willfully violated the FBAR statute. Mr. Bedrosian appealed; both the decision and penalty were upheld. Mr. Bedrosian moved for a hearing en banc and his petition was denied on September 27, 2022. A petition for writ of certiorari was filed and docketed on December 29, 2022.
What this Means for Taxpayers
Tax practitioners should keep an eye on this matter as the decision will provide guidance on the proper standard of review for determining willfulness in the FBAR penalty space. As elaborated in the petition filed, the question becomes whether willfulness under 31 U.S.C. § 5321(a)(5)(C) should be determined according to a subjective, rather than objective, standard that focuses on an individual’s knowledge and intent in failing to disclose a foreign account.
Should certiorari be granted in this matter, this will be the second case focused on FBAR penalties to be heard by the U.S. Supreme Court. As previously discussed in a 2022 FBAR Penalty case, the U.S. Supreme Court granted certiorari and heard oral arguments on November 2, 2022 in Bittner v. U.S.
Bittner seeks to address “whether a violation under the Bank Secrecy Act is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported.” A decision is still pending.
Both cases seek to cool IRS enforcement action and make this previously painful FBAR penalty landscape more palatable. Pending the outcome in both matters, taxpayers would face less draconian penalties leading to faster resolution in disclosure cases, reducing compliance costs, and unburdening an already taxed IRS.
The International Tax Team at Wolf & Company will continue to monitor news releases in this space and provide updates as these matters progress.
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