Yearly Archives: 2018

On December 20, 2016 we posted Recklessness = Willful Failure ToFile FBAR For Partial Disclosure in OVDP Filings? where we discussed that a district court had found that the taxpayers' failure to timely file a Foreign Bank and Financial Accounts Report (FBAR) was willful where, among other things, they stopped employing a bookkeeper or keeping any books after opening a foreign bank account and made several misrepresentations under penalty of perjury when they applied to participate in IRS's Offshore Voluntary Disclosure Program (OVDP).

The taxpayers were Mr. and Mrs. Bohanec and Mr. Bohanec owned a camera shop in California. The Bohanecs arranged with Leica, a German camera manufacturer, to become an exclusive Leica dealer. Commissions for international sales were deposited into an account at UBS AG in Switzerland in the Bohanecs' name.

On Jan. 6, 2010, the Bohanecs executed an application to participate in the OVDP. The Bohanecs' application, submitted under penalty of perjury, represented that the "original balance and all funds deposited into the Swiss UBS account were after-tax earnings from our camera business." On May 19, 2011, the Bohanecs executed and filed FBARs and federal income tax returns for 2003, 2004, 2005, 2006, 2007, and 2008.
While those FBARs included the UBS account, they did not include the Austrian or Mexican accounts. The Bohanecs were ultimately rejected by IRS for the OVDP. In June 2013, IRS assessed a penalty of approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and IRS filed suit. 

The District Court found that Bussell had willfully failed to file a FBAR, granting partial summary judgment to IRS, but reducing the fine. U.S. v. Bussell, DC CA 12/8/2015, 117AFTR 2d 2016-439. The court rejected all the various arguments offered by the taxpayer, including that the fine was excessive and violated treaty provisions.

• The district court was not persuaded by the taxpayer's argument that the fine was excessive under the Eight Amendment because the offense was solely a reporting offense, not a serious crime.
• The court reasoned that while the taxpayer's offense, tax evasion, was not as serious as some crimes that ultimately trigger civil forfeiture actions, it clearly fit into the class of persons targeted by the Bank Secrecy Act, namely those evading taxes through the use of offshore bank accounts.
• Further, the district court found that the taxpayer had not carried her burden to show that the money at issue was derived from a lawful source, which would trigger stronger Eight Amendment protections.

After weighing the factors relevant to the an excessive fines inquiry, the district court concluded that IRS's assessment raised some Eighth Amendment concerns because the assessment exceeded the maximum penalty set out in the applicable criminal and civil statutes. The maximum authorized penalty for a willful criminal FBAR violation was a five year sentence and a $250,000 fine. (31 U.S. Code § 5322(a)) The taxpayer's FBAR penalty was $1,221,806, which was almost five times the maximum amount allowed in the criminal statute. The district court decreased the penalty imposed from $1,221,806 to $1,120,513, which represented the maximum amount permitted under the applicable civil statute.

The district court also rejected the taxpayer's vague assertion that IRS illegitimately obtained information concerning her Swiss Account from the Swiss government. She contended that, pursuant to the treaty between the U.S. and Switzerland, the U.S. could only receive information from the Swiss government pertaining to tax violations. However, the district court concluded that the instant case was clearly a tax collection case, and it was unclear how IRS's conduct ran afoul of the treaty.

Bussell appealed the district court's decision and while she admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised several arguments on appeal; the Ninth Circuit Court of Appeals affirmed the district court, rejecting all the arguments offered by the taxpayer. 

Bussell then petitioned the Supreme Court to review the Ninth Circuit's decision. She argued (1) that the Eighth Amendment prohibition against excessive fines did not allow a forfeiture of half of an account's value (in this case, more than $1 million) merely because of a failure to report the account; and (2) that the treaty between the U.S. and Switzerland on dual taxation, which was restricted to disclosure of tax information, couldn't be used to obtain information for non-tax uses, such as the existence of a foreign account held in violation of FBAR.

On Apr. 30, 2018, the Supreme Court refused to review the Ninth Circuit's decision. Accordingly, that decision is now final.

Source:
Thomson Reuters Tax & Accounting News



On March 7, 2018 we posted 1st Taxpayer Victory in a "Willful" FBAR Penalty Case! where we discussed that on September 20, 2017, the Eastern District of Pennsylvania issued an important taxpayer friendly opinion regarding the "willfulness" standard in FBAR penalty matters. 

In Bedrosian v. United States, Case No. 2:15-cv-05853-MMB (E.D. Pa., Sept. 20, 2017), the court held that the government had not met its burden in proving that Bedrosian had willfully violated FBAR reporting requirements. This opinion could have a major effect on future IRS decisions in the offshore compliance arena and may cause some taxpayers, to seek a more aggressive approach in addressing prior non-compliance.

However now according to Law360, The U.S. government has urged the Third Circuit to reverse a Pennsylvania federal judge’s decision to let a pharmaceutical CEO avoid a nearly $1 million tax penalty over an undisclosed Swiss bank account, arguing the lower court wrongly raised the bar for showing willful conduct. 

U.S. District Judge Michael M. Baylson in September had found that Arthur Bedrosian, the CEO of generic drug maker Lannett Co., may have been negligent when he failed to report a Swiss bank account with UBS that held roughly $2 million to the Internal Revenue Service in a 2007 Foreign Bank and Financial Accounts form. However, Judge Baylson stopped short of concluding that Bedrosian willfully skirted the reporting requirements and accordingly ordered the government to return the 1 percent partial penalty payment he had made.

In pressing the Third Circuit to reverse and remand Judge Baylson’s decision, the government on said the willfulness standard in civil cases only required knowing or reckless conduct, not subjective bad intent. The district court strayed from this benchmark by not judging willfulness based on Bedrosian’s knowledge of his FBAR violation, but by his intent to do wrong, according to the government.

The question of whether a taxpayer willfully avoided filing an FBAR form, or just didn’t know about the reporting requirements, can make a substantial difference in the civil penalties the IRS ultimately assesses. In Bedrosian’s case, he was hit with a maximum penalty of nearly $1 million, or 50 percent of the undisclosed account.

After Bedrosian sued to claw back his nearly $10,000 partial penalty payment, the federal Zovernment lodged counterclaims for full payment of the penalty, plus interest.

Following a one-day bench trial, Judge Baylson on Sept. 20 found that the evidence against the CEO, including the inaccurate FBAR form itself and the fact that he may have known about the account he didn’t disclose, didn’t clear the bar to show a willful violation of reporting requirements.

The district court’s reliance on this and other cases as the minimum threshold for finding willfulness was an incorrect assumption, the government said Tuesday.

The district court compared Bedrosian’s conduct to situations where individuals used Swiss banks to carry out complex tax avoidance schemes, the government said, noting that Judge Baylson ultimately concluded that Bedrosian’s behavior was less “egregious,” and therefore not willful.

“The district court erred in concluding that because Bedrosian’s conduct was not as egregious as the conduct in those cases, he should not be liable for a willful FBAR penalty,” the government said. 

According to court papers, after the accountant learned in the 1990s that Bedrosian had used the account since the early 1970s, he advised his client to ultimately “just leave it alone because the damage was already done” and that the situation would be resolved automatically one way or the other when Bedrosian died.

The government also noted that after Bedrosian’s accountant died, the CEO did not mention his Swiss bank account to his new accountant, who prepared a 2007 tax return and FBAR for Bedrosian, disclosing only the smaller of two UBS accounts, which had about $240,000 in it.

“Bedrosian professed to have simply signed and filed his FBAR notwithstanding that he had no idea how his accountant knew to prepare an FBAR or what it included, and notwithstanding that the filing constituted his first disclosure following decades of willfully violating the law,” the government said. “This cavalier disregard of his legal obligation to fully disclose his foreign accounts was reckless.”

Have Undeclared Income from an Offshore Bank Account?

 

 

Been Assessed a 50% Willful FBAR Penalty?

 

 

Contact the Tax Lawyers at 

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According to Forbes, not even 1,500 highly compensated tech employees at the IRS could keep the website running on Tax Day, the most important day of the year for taxpayers and the IRS.

Although tax season is busy throughout March and April, it all comes down to one day. This year, on April 17, when millions of taxpayers tried to file their 2017 tax returns on IRS.gov, they were halted by a system-wide computer failure, receiving the following notice:

“Planned outage: April 17, 2018 – December 31, 9999… We apologize for any inconvenience. Note that your tax payment is due although IRS Direct Pay may not be available.”

How could the website go down on the biggest day of the year? It certainly wasn’t for a lack of payroll.

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