Case: United States v. Bedrosian, 42 F.4th 174, 2022 WL 2899266 (3rd Cir. July 22, 2022), en banc reh'g denied (Sept. 27, 2022), pet. for cert. filed (Dec. 29, 2022), aff'g 505 F.Supp.3d 502, 2020 WL 7129303 (E.D. Pa. 2020), on rem'd from 912 F.3d 144 (3rd Cir. 2018)
Analysis: Mr. Bedrosian, the petitioner, held two foreign bank accounts at UBS in Switzerland. The petitioner initially disclosed one of his offshore accounts on the required Foreign Bank Account Report (FBAR) form, but not the other. Instead of participating in the IRS’ Offshore Voluntary Disclosure Programs to disclose this noncompliance, 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. 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 and 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 Sept. 27, 2022. A petition for writ of certiorari was filed and docketed on Dec. 29, 2022.
Tax practitioners should monitor this matter, as the decision will provide guidance as to what the proper standard of review is 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. The Supreme Court granted certiorari and recently heard oral arguments on Nov. 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 essentially 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 resolutions in disclosure cases, reducing compliance costs, and unburdening an already-taxed IRS.
Rita Ryan, J.D., LL.M. leads Wolf’s International Tax Services Practice, where she focuses on tax planning and compliance for international holdings. Ryan has extensive experience advising clients on the tax aspects of cross-border business activities, structuring international investments, and the United States compliance obligations relating to these activities and investments for both entities and individuals. Ryan also works with other tax professionals as a trusted advisor to identify necessary reporting, advise on filings, or review work papers and prepared forms to ensure accuracy in this evolving international compliance landscape.