In a recent decision, the United States District Court for the Eastern District of Pennsylvania reexamined the requirements for willful failure to file a TD F 90-22.1, the predecessor to the current FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Surprisingly, unlike prior, precedential FBAR penalty cases, the court concluded that the taxpayer was not “willful” in his failure to report one of his two UBS accounts on a FBAR. Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017)
FBAR Filing Requirement
By way of background, a United States person that has a financial interest in or signature authority over one or more foreign financial accounts must file a FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.
Failure to File FBAR Penalty
A taxpayer’s failure to properly file FBARs subjects that person to penalties. A non-willful failure to file or report a foreign financial account can be subject to a civil penalty of up to $10,000 per account, per year. If, however, the failure to file a report or include a foreign financial account is willful, the civil penalty can be up to the greater of $100,000 or 50% of the balance of each unreported account at the time of the violation, per year. In addition, willful failure to file a FBAR may also expose the taxpayer to criminal prosecution.
What is Willfulness?
The term “willfulness” is not defined in the statute imposing the FBAR filing requirement. Instead, the IRS in its own Internal Revenue Manual has adopted the criminal standard of willfulness for tax crimes set forth in Cheek v. United States, 498 U.S. 192 (1991) (internal quotes omitted) which is a “voluntary, intentional violation of a known legal duty.” As willfulness is a state of mind, it can often be established via circumstantial evidence, as well as through evidence establishing the taxpayer’s willful blindness. To establish a taxpayer’s willful blindness, the government must show that the taxpayer was “subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts.” United States v. Williams, 489 Fed. App’x 655, 658 (4th Cir. 2012). In Bedrosian, however, at the urging of the government, the district court rejected the criminal standard of willfulness, and applied the lesser civil standard, which finds that a person knowingly or recklessly violated the statute without requiring the government prove improper motive or bad purpose. Nonetheless, the court still came to the conclusion that the taxpayer did not satisfy even the lesser standard of willfulness.
Bedrosian Case and Precedent FBAR Penalty Cases
In Bedrosian, the taxpayer was a high ranking executive in the pharmaceutical industry. To accommodate his extensive international travel in the 1970s, he established an account at UBS (Swiss Credit Corporation back then). During the period that his tax returns were prepared by his first accountant (1972-2006), the taxpayer never filed FBARs. When he belatedly advised the accountant of the existence of the UBS account in the 1990s, the accountant told him that he had been breaking the law in not reporting it, but advised him not to start reporting the account because the taxpayer “could not unbreak the law.”
After the first accountant passed away, a second accountant took over in 2007, by which time the taxpayer’s single UBS account had been converted into two accounts. The new accountant advised the taxpayer to file annual FBARs. However, the 2007 FBAR that was filed reported only one of his UBS accounts (with a balance of $240,000) and omitted the other (with a balance of approximately $2 million). A few months after submitting the 2007 FBAR, the taxpayer was notified by UBS that he could no longer keep his funds at that bank. The taxpayer sent two letters to UBS, one for each account, requesting the funds be transferred to another Swiss bank. Unbeknownst to the taxpayer, his information was among the data that was turned over to the IRS by UBS. IRS began auditing the taxpayer’s returns in April 2011.
The district court began its analysis by noting that whether willfulness is present is a question of fact that depends on the taxpayer’s knowledge, intent and state of mind. The court, finding the taxpayer’s testimony to be credible, concluded that the taxpayer in Bedrosian was not willful in his failure to report his larger UBS account on the FBAR. In reaching its conclusion, the court compared the taxpayer’s behavior and circumstances to those of the taxpayers in three precedential FBAR penalty cases: United States v. Williams, 489 Fed. App’x 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah. 2012); and United States v. Bussell, No. 15-2034, 2015 WL 9957826 (C.D. Cal. Dec. 8, 2015). The court found that the taxpayer’s behavior was less egregious than the behavior of the taxpayers in Williams, McBride and Bussell, where willfulness was found. The court indicated that the taxpayer was not willfully blind even though he had affirmatively chosen not to receive regular statements on the UBS accounts, and kept track of the accounts through annual meetings with a UBS banker.
The court found unpersuasive non-FBAR civil willfulness cases cited by the IRS because they – unlike the FBAR penalty cases cited above – did not deal with “the same unique reporting requirements at issue.” In particular, the court declined to infer that the taxpayer was aware of the larger, unreported UBS account and concluded that the government had not established that the taxpayer was anything more than negligent in not finding out about it.
It will be interesting to see if the IRS appeals the district court’s decision to the Third Circuit Court of Appeals and, if so, what the appellate court’s take will be. Meanwhile, the district court’s conclusion in Bedrosian, that the circumstances present in that case were negligent and did not amount to willfulness, is taxpayer favorable, particularly in relation to prior FBAR penalty cases. Unless and until the district court’s decision is reversed on appeal, taxpayers in similar circumstances can use it to support their position that their failure to file FBAR or a complete FBAR was not willful.
Notwithstanding the taxpayer’s success in defeating the FBAR willfulness penalty in Bedrosian, failure to file FBARs is a serious violation of the law. The IRS has established several programs to bring taxpayers into compliance and taxpayers are encouraged to contact tax professionals if they failed to file FBARs.