Arthur Bedrosian (“Bedrosian”) has battled the IRS for many years. Although he seemingly won the battle at the federal district court, Bedrosian has been handed several defeats recently, both in the court of appeals and on remand back to the district court. This Insight discusses the Bedrosian saga. We have covered prior Bedrosian FBAR matters in prior posts.
Bedrosian is a successful businessman. Indeed, he rose to the position of Chief Executive Officer (CEO) of a manufacturer and distributor of generic medications. Because his profession often required him to travel overseas, he established foreign bank accounts in Switzerland.
From 1972 through 2007, Bedrosian used an accountant to prepare his income tax returns. But for decades, Bedrosian did not inform his accountant about the foreign accounts. In the mid-1990s, Bedrosian came clean to his accountant, who advised him of his obligation to report the foreign accounts on his tax returns. When Bedrosian questioned the accountant on how to remedy his past failures to report, his accountant advised him to “take no action” and wait until his death. Under Bedrosian’s accountant’s theory, his estate could eventually correct the matter. Accordingly, Bedrosian continued not to report his foreign accounts to the government.
Bedrosian’s accountant passed away. Accordingly, Bedrosian utilized the services of a new accountant to prepare his 2007 return. Unbeknownst to Bedrosian, the new accountant reported on his 2007 return that he had interests in foreign accounts overseas. In addition, Bedrosian’s accountant prepared a 2007 Report of Foreign Bank and Financial Account (“FBAR”). However, the FBAR listed only one of his two UBS accounts—significantly, the missing account had investment assets totaling approximately $2 million.
As time went on, Bedrosian became more concerned about his past failures to report his interests in foreign accounts. He eventually consulted with a tax attorney, who advised him to amend his returns and pay any outstanding taxes. Bedrosian did so.
But in 2011, the IRS notified Bedrosian that his tax returns were under examination. The examination resulted in the IRS asserting over $1 million of willful FBAR penalties against him. In response, Bedrosian paid approximately $10,000 of the willful FBAR penalties and sued for a refund. As is common in these types of suits, the government filed a counterclaim against Bedrosian for the remaining FBAR penalties, or $1 million.
The primary issue in Bedrosian I was what constitutes “willful” conduct. Borrowing on other court decisions, the district court concluded that a taxpayer acts “willfully” for FBAR purposes “when he either knowingly or recklessly fails to file an FBAR.” The district court further concluded that reckless conduct could include “willful blindness.”
Under the willful blindness standard, a taxpayer can be liable if he or she takes deliberate actions to avoid confirming a high probability of wrongdoing. With respect to tax reporting, the government may be able to show willful blindness by offering evidence that the taxpayer made a conscious effort to avoid learning about the reporting requirements.
Based on these definitions, the district court held that Bedrosian had not acted willfully in submitting an inaccurate 2007 FBAR. In so concluding, the district court’s analysis leaned heavily on Bedrosian’s mental state. Specifically, the district court found:
[H]is actions were at most negligent, which does not satisfy the willfulness standard. There is no question that Bedrosian could have easily discovered that what had previously been one UBS account was now two, via the statements he occasionally received from the bank and the meetings he had annually with a [bank] representative. In addition, the fact that he signed his 2007 FBAR two weeks prior to sending two separate letters to [the bank] to close his account sways in favor of an inference that he was aware of the existence of the second account at the time he filed the FBAR. Nevertheless, as discussed below, even if he did know that he had a second account yet failed to disclose it on the FBAR, there is no indication that he did so with the requisite voluntary or intentional state of mind; rather, all evidence points to an unintentional oversight or a negligent act.
The United States appealed Bedrosian I to the Third Circuit Court of Appeals. In that circuit, the United States contended, among other things, that the district court had applied the wrong legal standard for willfulness.
The Third Circuit agreed. Specifically, the Third Circuit concluded that a taxpayer recklessly fails to comply with an IRS filing requirement when he or she: (1) clearly ought to have known that (2) there was a grave risk that the filing requirement was not met and if (3) he or she was in a position to find out for certain very easily.
Based on this standard, the Third Circuit reversed the district court. It found that the district court had improperly focused on Bedrosian’s subjective motivations without also looking to the objective reasonableness standard.
On December 4, 2020, the district court issued its opinion. Under the Third Circuit’s objective standard of recklessness, the district court concluded that it was required to vacate its original judgment. It also supplemented its prior findings of fact, and entered a judgment in favor of the United States.
The district court’s new findings were fatal to Bedrosian. It found that: (1) Bedrosian’s cooperation with the government began only after he was exposed as having foreign accounts; (2) shortly after the 2007 FBAR filing, Bedrosian sent two letters to his bank directing closure of both accounts; (3) Bedrosian did not dispute that he had seen an article in the Wall Street Journal about the government’s tracing of mail coming into the United States; (4) Bedrosian’s bank accounts were subject to a “mail hold;” and (5) Bedrosian acknowledged that he was aware of the significant amounts of money held in his foreign accounts.
The Bedrosian decisions show that even reckless conduct can support the more draconian “willful” FBAR penalty. Accordingly, taxpayers who have failed to properly report their foreign accounts on an FBAR should consult with tax counsel to discuss potential options for coming back into compliance with those reporting obligations. In some cases, the submission of a voluntary disclosure may make sense to limit potential criminal tax liability and civil fraud penalties. The IRS’ voluntary disclosure program is discussed more in our Insights post, The Updated IRS Voluntary Disclosure Program.
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