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Court Case Upholds FBAR Willful Violation Penalties Against Pharma Executive

A lengthy litigation over “willful” penalties in failing to file an FBAR has potentially come to a close with adverse results to the taxpayer, and this is a stark reminder how important it is to correct reporting oversights as soon as they are discovered.

On July 22, the Third Circuit issued an opinion upholding the lower district court’s finding on remand that Arthur Bedrosian’s failure was willful and the IRS properly imposed the maximum penalty exceeding $1 million for failure to include a Swiss investment account on his FBAR. The penalty for willful failure is $100,000 or half the assets in the unreported account, whichever is higher.

Bedrosian, a longtime pharma executive and CEO often traveled abroad for business and in the 1970s, he established a Swiss bank account at UBS. In the 1990s, his banker suggested that he would receive 75,000 franks if he were to convert the bank account into an investment account, which resulted in a subaccount to be created in his name. Bedrosian asked the bank to stop his mail as he would periodically meet with his banker. In the 1990s at UBS’ request, Bedrosian closed his accounts and transferred the assets to a different Swiss bank. Throughout the litigation, Bedrosian maintained that the UBS accounts were only one account.

Bedrosian came clean with his accountant in the 1990s about the existence of the Swiss accounts who advised him not to take any action and to let his estate remedy the matter after his death. After his original accountant died, in 200, Bedrosian engaged a new accountant who unbeknownst to him prepared an FBAR for the first time reporting two of the three accounts. In 2008, Bedrosian engaged a tax lawyer who counseled him to amend his returns from 2004 forward to include the Swiss accounts, which he did do. In 2011, Bedrosian was audited by the IRS, through which he cooperated with and was forthcoming. He was assessed penalties in excess of $1 million for his willful conduct of not disclosing his foreign accounts.

This case has a long court history starting with a district court first holding in 2017 that Bedrosian’s actions were at most negligent and did not meet the willfulness standard. The government appealed the district court’s decision to the Third Circuit which in 2018 prescribed a broader willfulness standard of “knowing and reckless conduct” and remanded the case back to the district court. On remand, the district court in 2021 determined that Bedrosian’s conduct was not only reckless to meet the willful standard but was egregious and deliberate and therefore the higher penalty of half the amount of the account was appropriate. The case was then appealed again to the Third Circuit, this time by Bedrosian claiming the district court exceeded the Third Circuit’s remand by finding his negligence to be deliberate. The Third Circuit held that it had placed no restrictions on, and that the district court’s findings were within the spirit of, the remand.

Taxpayers are urged to pay close attention to reporting requirements on their foreign assets. Given the ”willful” standard of the latest Bedrosian decision along with the new funding provided to the IRS for audits and enforcements by the Inflation Reduction Act if passed,  may end up yielding significant tax revenue for the government at a major cost to unwitting taxpayers.

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