IRS Wins Fight to Exclude Its Own Position on the Willfulness Standard from Court

We previously wrote about a taxpayer that was fighting a civil penalty for failing to timely file under U.S. Foreign Bank Account Reporting (FBAR) laws. In 2010, Arthur Bedrosian decided that he wanted to come into compliance with regard to a 2007 obligation requiring him to disclose his interest in a foreign bank account under the FBAR laws. Through a series of unfortunate events, it appears that Bedrosian was denied entry into a voluntary disclosure program (described below) and was assessed a willful failure-to-file penalty. In other words, the IRS determined that Bedrosian’s failure to disclose his interests in his foreign bank account was willful.

FBAR laws require taxpayers to report their interest in foreign bank accounts that reach a balance of $10,000 or more at any point in a tax year. Those who fail to do so face penalties and can even be sent to jail.

At trial (Bedrosian, Arthur v. United States et al.; No. 2:15-cv-05853), Bedrosian argued that IRS procedures, actions, analyses, and viewpoints should be admitted into evidence to help prove that his actions were not willful. Alternatively, he argued that he was not given the opportunity to fight the assessment of the willful penalty. The IRS opposed Bedrosian’s motion, taking the position that the Service’s position as to what is willful conduct and what is not or how the IRS initially analyzed Bedrosian’s situation was not relevant to the case at hand.

In ruling for the IRS, the District Court for the Eastern District of Pennsylvania found that the proper standard of review for an IRS assessment is de novo, or in other words, the court would consider the assessment without taking into consideration any findings by the IRS. The Court cited several cases that involved civil penalties that were reviewed de novo and reasoned that the thought process/internal analysis/or investigation of and by the IRS was not relevant as it was the Court’s duty to determine whether the taxpayer’s conduct was willful. Finally, the Court disagreed with Bedrosian with regard to his opportunity to be heard, stating that he has had every opportunity to prevent evidence in the District Court.

The question as to whether a taxpayer’s failure to file an FBAR was willful has been a tough one to answer, even for the most experienced tax practitioners. The Department of Justice and IRS have failed to provide a definitive definition of willfulness and seems to have lowered the bar as to what constitutes willfulness in the FBAR arena. The civil penalty for willfully failing to file an FBAR is 50% of the high-balance of the account at issue for each year that the account went undisclosed, which many view as excessive or even draconian. Additionally, the willful failure to file an FBAR can yield criminal charges and a federal prison sentence, if convicted.

 

What To Do If You Have An Undisclosed Account

If you have a foreign bank account that you have not yet disclosed to the federal government, it is in your best interest to consult with an experienced tax attorney. An attorney that has dealt with international tax compliance issues such as FBAR obligations is the best resource to help you come into compliance and reduce the potentially life-altering consequences of getting caught.

The Offshore Voluntary Disclosure Program (OVDP) basically provides taxpayers with a history of FBAR noncompliance and what could be deemed to be evaded income tax because of apparent badges of fraud in a client fact pattern and foreign income went unreported, to avoid a criminal prosecution even where their actions were blatantly willful. Under the terms of the OVDP an applicant discloses information about their financial affairs (including the foreign bank account(s) at issue and any unreported foreign income), files all missing foreign information returns and agrees to pay a penalty, back-taxes, and interest. In exchange, the IRS and DOJ won’t pursue criminal charges against the taxpayer. The OVDP isn’t for everyone and only an experienced international tax attorney that is additionally properly trained in criminal tax law is qualified to make a determination if a tax crime has been committed and has the attorney client privilege necessary to protect the client’s constitutional rights where a client has exposure to prosecution for tax crimes. Lastly, the OVDP has a catch: taxpayers may not be allowed to participate if the IRS is already investigating the taxpayer for any reason and thus there is time pressure in make a decision to enter into an OVDP or not.   You must get to the government before they get to you!

A better option where a taxpayer’s foreign noncompliance is analyzed by an experienced International Criminal Tax Defense Attorney and found to have been non-willful, is a Streamlined Voluntary Disclosure and where there has additionally been no unreported foreign income and only foreign information returns are missing with reasonable cause, the noncompliance can be cured by filing the missing information returns coupled with a penalty abatement request without civil or criminal penalties.   

The Tax Attorneys, CPAs and EAs at the Tax Law Offices of David W. Klasing have extensive experience representing taxpayers from all walks of life in a myriad of tax situations, including FBAR compliance. There is a considerable amount of confusion out there for a taxpayer who is looking to get right with the government. Don’t let the threat of hefty civil penalties or potential federal prison sentences keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation and start getting the restful sleep you deserve.

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Here is a link to our practice overview video on foreign income and information non-compliance.