Court Revisits Willful Requirement For Enhanced FBAR Penalties

A recent U.S. District court case has again shone a spotlight on the lack of a clear statutory or regulatory definition of “willful” for purposes of applying the more severe penalties for failure to file the FBAR.

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017), the Court denied summary judgments by the both taxpayer and government on the issue of the taxpayer’s culpability in failing to report a Swiss bank account on a timely-filed FBAR.

The FBAR Requirement – A Quick Background

The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.

The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year. The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

For tax years 2016 and onwards, the FBAR due date is April 15th, with a maximum extension of 6 months.

FBAR Penalties

A “non-willful”’ failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year. The IRS has recently stated that these penalties represent maximum amounts and lower penalties may be appropriate depending on the circumstances.

A “willful” failure to file may be subject to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account. In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of willful conduct.

Defining The Term “Willful”

Currently, the Internal Revenue Code and Treasury regulations do not provide guidance for distinguishing willful versus non-willful FBAR filing violations.

In the IRS’s Internal Revenue Manual, the IRS suggests that the term “willful” should carry the same meaning as in the criminal context. It states that, “the test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.” It explains that willfulness is shown by a taxpayer’s knowledge of the FBAR filing requirements and the person’s deliberate choice not to comply with the requirements.

The Internal Revenue Manual also suggests that so-called “willful blindness” may be enough to meet the “willful” standard. The Manual explains that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.”

Courts, however, have generally rejected the stricter “intentional violation” threshold used in the criminal context, and instead employed a broader “reckless violation” threshold for FBAR violations.

The Bedrosian Case

The Bedrosian case involved an individual taxpayer who opened a Swiss bank account with a minimal deposit in the 1970’s. The taxpayer opened a second Swiss bank account around 2005. By then, the two accounts had balances exceeding the $10,000 FBAR filing threshold. The taxpayer did not initially report the two accounts at the advice of the taxpayer’s accountant at the time.

Following the death of the first accountant in 2007, the taxpayer hired a new accountant, who guided Bedrosian in filing the FBAR, but he reported only one of the two accounts. The disclosed account had $240,000, while the undisclosed account had $2.3 million. The taxpayer did not report income earned on either account.

In November 2008, Bedrosian had the Swiss bank close one of the accounts and transfer the account funds to another Swiss bank. He then asked the first Swiss bank to close the remaining account and transfer the funds to a U.S .bank account.

Two years later, in 2010, Bedrosian attempted to rectify his past reporting failures by filing an amended return for 2007 that included the previously unreported income, and an amended FBAR that now included both Swiss bank accounts. The amended return reported approximately $220,000 in income from the Swiss accounts.

In July of 2013, the IRS imposed the enhanced FBAR penalty for willful failure to file in the total amount of $975,789.17. The government and taxpayer each filed motions for summary judgment on the issue of the enhanced FBAR penalty, with the taxpayer claiming a lack of willfulness due to the advice received from his accountants, and the government claiming that there was a lack of evidence supporting the taxpayer’s defense. The Court denied both motions and allowed the issue to proceed to the trial level.

In the decision, the Court noted the lack of a clear definition of the term “willful” in the Code and Treasury regulations. Interestingly, the Court said it was highly skeptical of the notion that the term “willful” should carry the same meaning as in the criminal context (i.e., an intentional violation). Rather, the Court stated, “At this juncture, we need not hold what the appropriate standard of willfulness is, but we note that the jurisprudential trend is towards one that would encompass reckless violation.” It remains to be seen whether at trial, Bedrosian’s actions will be found to have crossed such reckless violation threshold.

Failing to File is a Serious Matter

For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.

The team at Expat Tax Professionals has years of experience helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you for good.

Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

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