Houston Tax Attorney Blog
Houston Tax Attorney
It is not clear as to what level of conduct justifies the imposition of the $100,000+ foreign bank account reporting (“FBAR”) civil tax penalty. In Bedrosian v. United States, No. 15-5853 (E.D. Pa. 2017), the court considered whether reckless conduct is sufficient given the facts presented in the case.
The FBAR Civil Tax Penalty
The FBAR rules require U.S. citizens to report a financial interest in, or signature or other authority over, a bank, securities, or another financial account in a foreign country. If the account exceeds $10,000 in value, the penalty is $10,000 for non-willful violations and $100,000+ for willful violations. This begs the question as to what conduct is willful for the FBAR penalty.
Willful Includes Reckless Conduct
As noted by the court in Bedrosian, there is no clear guidance that answers this question (“Authorities ranging from various federal courts, the Internal Revenue Manual, and the Office of Chief Counsel for the Internal Revenue Service reach different conclusions about the level of intent necessary to satisfy the willfulness requirement”).
The taxpayer in Bedrosian cited the criminal penalty standard, which is a “voluntary, intentional violation of a known legal duty.” The court noted that the standard for the civil tax penalty is something less, suggesting that reckless conduct can satisfy the willful requirement for the FBAR civil penalty.
Is Following the Advice from a Tax Preparer Reckless?
There are several other cases that are very similar to this case. In those cases, the decision as to whether the conduct was reckless came down to whether the taxpayer was credible, his lack of knowledge genuine, and that he did not make other omissions or false statements in trying to report or resolve the FBAR penalties. It also helps if the taxpayer came forward to report the foreign account prior to the IRS finding out about the account.
The Bedrosian is somewhat unique in that the taxpayer claimed that his tax return preparer had advised him not to report the foreign account as the “damage had already been done.” This was a reference to the foreign account not previously having been reported. When the tax return preparer died and was replaced by a new tax return preparer, the taxpayer and his new tax return preparer reported one of the taxpayer’s two foreign accounts. The IRS then obtained information about the accounts from the foreign bank and notified the taxpayer of this. The taxpayer cooperated with the IRS in its investigation of the penalty and the IRS initially decided to close the case without imposing FBAR penalties. The IRS ended up imposing FBAR penalties when a new IRS agent was assigned to work the case.
The court did not decide whether this conduct was reckless as the case was presented on summary judgment. The court concluded that there were factual issues that did not warrant dismissing the case on summary judgment.
Cases like the Bedrosian case help define the conduct that is reckless for purposes of the FBAR penalty. Given that there is no clear definition of what conduct qualifies, this is a case that we will have to watch to see how the court or jury decides the issue.