After the Third Circuit Court of Appeals remanded the case of Bedrosian v. United States[1] to the United States District Court for the Eastern District of Pennsylvania, the District Court concluded that, although the court had originally found Mr. Bedrosian had not willfully failed to report one of his Swiss bank accounts on his FBAR form, when applying the objective standard the appeals panel concluded was the proper standard, that Mr. Bedrosian’s conduct did amount to a willful failure to file the FBAR report.[2]

The difference was significant—if Mr. Bedrosian had willfully failed to report the account, the penalty due would increase from just under $9,800 to just over $1,007,000.  In the original case[3] the District Court had concluded that, based on an analysis of Mr. Bedrosian’s subjective intent, the failure to report the account was not willful.

The opinion notes that the appellate panel outlined the following test to be applied to determine if Mr. Bedrosian’s conduct was not merely negligent, but was willful in this context:

The Third Circuit noted that “a person commits a reckless violation of the FBAR statute by engaging in conduct that violates an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Bedrosian II, 912 F.3d at 153 (quotations omitted). It then referenced the test for recklessness in other tax contexts as the test that should be applied here:

With respect to IRS filings in particular, a person “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 being met] and if (3) he [or she] was in a position to find out for certain very easily.” United States v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994) (quoting United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989)) (alterations in original).

Bedrosian II, 912 F.3d at 153. As this quotation shows, the Third Circuit did not rely on any FBAR precedents. The Third Circuit directed this Court to consider other cases in the taxation realm, which had found that certain taxpayer conduct was “willful” because it satisfied an objective standard of recklessness, as well as cases from other circuits which have applied this test in the FBAR context.[4]

The opinion notes that the Government, in its reply filed for the case on remand, pointed out a number of facts that the Court agreed supported an objective finding that Mr. Bedrosian’s conduct was reckless:

1. Bedrosian’s cooperation with the Government, which this Court emphasized as negating willfulness, began only after he was exposed as having hidden foreign accounts.

2. Shortly after filing the 2007 FBAR, Bedrosian sent two letters to his Swiss bank directing closure of two accounts, but only one of these accounts had been disclosed on his FBAR. The second account was moved to a different Swiss bank and the funds were not repatriated to the United States.

3. Bedrosian does not dispute he saw an article in The Wall Street Journal about the federal government tracing mail coming into the United States and was therefore alerted to the possibility of the United States finding out about his foreign bank accounts if the bank sent information through the mail.

4. Bedrosian’s Swiss accounts were subject to a “mail hold.” He does not dispute the existence of the mail hold or that he signed a form and paid a fee to the bank for this benefit. The Government relies on this point of evidence for the fact that Bedrosian paid a fee for a service, the purpose of which was to prevent correspondence from the foreign bank being tracked by the IRS.

5. Bedrosian also acknowledged that he was aware of the significant amount of money held in his foreign bank accounts.[5]

The opinion also notes the following findings by the Court in its original opinion that, when subjected to the objective test, also provide evidence of a willful failure to report the account:

…(1) the inaccurate form itself, lacking reference to the account ending in 6167, (2) the fact that he may have learned of the existence of the second account at one of his meetings with a UBS representative, which is supported by his having sent two separate letters closing the accounts, (3) Bedrosian’s sophistication as a businessman, and (4) Handelman’s having told Bedrosian in the mid-1990s that he was breaking the law by not reporting the UBS accounts.[6]

The opinion cited the case of United States v. Horowitz [7]as being closest in facts to this case.  The opinion summarized that case as follows:

In Horowitz, the Court found several circumstances which warranted a finding of willfulness. First, the Court explained that the defendants knew their interest income from domestic bank accounts was taxable and that their foreign income was taxable, and it would make no sense to conclude that foreign interest was not taxable. 978 F.3d at 89-90. Next the Court found that the foreign account was set up with “‘hold mail’ service, which the bank knew would and did assist U.S. clients in concealing assets and income from the IRS.” Id. at 90. Even though defendants denied requesting this service, the Court noted they would have become aware of it. Id. The Court also noted that the amounts in the account were significant and thus not “susceptible to being overlooked.” Id. Lastly, the Court noted that they answered “no” to a question on their tax returns asking whether they had a foreign bank account. Id. Even if they did not review the returns, they signed them “representing to the IRS, under the penalties of perjury, that the returns were accurate.” Id.[8]

The court goes on to compare the cases as follows:

In Horowitz, the Fourth Circuit found that even if the Horowitzes were not aware of the FBAR reporting requirement, based on their knowledge of taxes on interest income, it did not make sense for them to conclude that their foreign accounts would not be taxed. Here, Bedrosian knew about the FBAR requirement because his prior accountant told him about it. The Fourth Circuit also noted that the Horowitzes used “hold mail” service, as did Bedrosian. The Horowitzes had a significant amount of money in their accounts, which the Court found meant the accounts were not easily overlooked. The amount in their account was comparable to the amount in Bedrosian’s accounts (around $1.6 million compared to around $1.9 million). Lastly, the Fourth Circuit found that even if the Horowitzes did not review their taxes, they signed them and were thus representing their answers to the government under penalty of perjury. Bedrosian also claims to not have reviewed his FBAR closely, but he like the Horowitzes signed the form.[9]

Not having reviewed the return is not a defense for Mr. Horowitz’s failures to report the account.  The opinion continues, noting that such a failure demonstrated a level of recklessness that indicates willfulness objectively given his general awareness of what his income level was, as well as the value of his investment accounts:

While the majority of cases applying the recklessness test do not concern FBAR filings, they emphasize the importance of how an individual’s general awareness of a business’s operations can impact the analysis of willfulness when it comes to evaluating their actions. These cases generally suggest that when a taxpayer is responsible for reviewing tax forms and signing checks, the taxpayer is responsible for errors that would have been apparent had they reviewed such forms and checks closely. In this instance, if Bedrosian had looked at the forms he signed, it is reasonable to conclude that he should have noticed the amount stated for the accounts was not accurate. On the 2007 FBAR, the box indicating that there is less than one million dollars in his account is checked. During trial, the following exchange occurred:

Q. Your UBS accounts had more than $10,000 in them in 2007?

A. Oh, absolutely. Yes.

Q. In fact, you knew that your 6167 account had over 1 million dollars in it?

A. I’m sorry, you keep confusing me with the account number, but a 236.167, yes, had over a million dollars in it. That was the main account.

Even if Bedrosian did not know that there were two accounts, the stated amount should have prompted him to investigate further, which he could have done easily by contacting the bank. Further, based on Third and Fourth Circuit precedent, claiming to not have reviewed the form does not negate recklessness. Thus, the Court can infer that Bedrosian had reason to know of his second overseas account and that he did not disclose it.

Of importance here as well are the undisputed facts that Bedrosian received advice from his tax preparer that he was breaking the law by not reporting his overseas bank accounts and that he was a sophisticated and successful businessman. Bedrosian knew or should have known the form which he signed was inaccurate.[10]

Thus, the Court concluded that Mr. Bedrosian did willfully fail to report the account, with the impact that the penalty he owes would increase by nearly $1 million.

[1] We had discussed the original opinion that found there was no willfulness when it was published in 2017.  See Ed Zollars, CPA, “Taxpayer Found Not to Have Willfully Filed Erroneous FBAR Report,” Current Federal Tax Developments website, September 24, 2017, https://www.currentfederaltaxdevelopments.com/blog/2017/9/24/u120i95gywykw2uwy6mmnkflsj921m

[2] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[3] Bedrosian v. United States, No. 15-5853, 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017)

[4] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[5] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[6] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[7] United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020)

[8] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[9] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)

[10] Bedrosian v. United States, Case No. 2:15-cv-05853, (E.D. Pa. Dec. 4, 2020)