Willful penalty avoided on unreported Swiss bank account
TAX ALERT |
In a recent case, Bedrosian v. United States, the U.S District Court for the Eastern District of Pennsylvania concluded that a taxpayer’s failure to report one of the two Swiss bank accounts he held on his Report of Foreign Bank and Financial Account (FinCen 114 or FBAR) for the tax year in question was not “willful” and therefore, not subject to the more severe willful failure to file penalty.
A U.S. person must file an FBAR to report any foreign account – with a balance of $10,000 or more – in which he or she held an interest in or had signature authority over during the tax year. The penalties for failure to file the FBAR vary, with the severity of the penalty generally dependent upon whether the failure to file was willful or non-willful. A non-willful failure to file results in a penalty of $10,000 per failure, however, if the failure is willful, the penalty increases to the greater of $100,000 or 50 percent of the balance of the account at the time of the violation. Accordingly, the distinction between “willful” and “non-willful” failure to file is significant.
In Bedrosian, the taxpayer had maintained Swiss bank accounts since the 1970’s, however, prior to 2007 had never filed an FBAR. Upon the death of his longtime accountant, the taxpayer – working with a new accountant – filed, for the 2007 tax year, an FBAR reporting one of his two Swiss bank accounts along with a tax return with the box checked indicating that he had an interest in a foreign bank account. During this time, the taxpayer also became aware of the severity of the FBAR reporting requirements and, working with an attorney, took steps to rectify the situation, including amending his tax returns from 2004 on and paying the taxes associated with the gains from his Swiss account. Upon audit of his 2007 tax return, the government assessed a willful failure to file penalty. The taxpayer subsequently initiated legal proceedings in order to obtain a refund for amounts he paid for his alleged “willful” failure to file penalty.
When reviewing the case the District Court stated that willful intent exists if the taxpayer “knowingly or recklessly violated the statute.” The court also maintained that the government’s burden of proof, as with other FBAR “willful” cases, is the lower “preponderance of evidence” standard. Based on the facts and largely credible testimony of the taxpayer, the court concluded that, while the taxpayer may have failed to report one of his Swiss accounts on his 2007 FBAR, there was insufficient evidence to prove that his actions were “willful.” The taxpayer checked the box indicating he held an interest in a foreign account on his 2007 tax return, identified Switzerland as the country in which the account was located, and filed an FBAR reporting one of the two Swiss accounts. The only error made was failing to list the second account, which the court determined was at most “negligent,” but that negligence does not satisfy the willful standard.
While this was a favorable outcome for the taxpayer, it does demonstrate the government’s willingness to pursue willful failure to file penalties for taxpayers failing to meet their FBAR reporting requirements. However, the outcome also showcases that courts may be willing to excuse taxpayers from the more stringent “willful” penalties in cases where the failure was the result of a mere “foot fault” as opposed to a knowing or reckless violation of the statute. While the taxpayer prevailed in litigation, a full and complete disclosure would have avoided all litigation and other costs that the taxpayer will not recover despite his win in court.