Executive Appeals to Supreme Court a $1 Million IRS Penalty for Not Disclosing a Foreign Bank Account

Executive Appeals to Supreme Court a $1 Million IRS Penalty for Not Disclosing a Foreign Bank Account
The Internal Revenue Service (IRS) building is seen in Washington on Sept. 28, 2020. Erin Scott/Reuters
Matthew Vadum
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A businessman who was fined almost $1 million for failing to report a foreign bank account is asking the Supreme Court to review the ruling by a lower court.

The appeal comes after the Biden administration’s attempts to strengthen IRS enforcement efforts became an issue in the midterm congressional elections. The Inflation Reduction Act, which President Joe Biden signed into law in August, allocated almost $80 billion to the IRS over the coming 10 years to hire an extra 87,000 agents. Democrats say the IRS has long been underfunded, but Republicans say the extra money will be used to harass taxpayers. Republicans, who will become the majority in the U.S. House of Representatives next week, have vowed to rescind the funding.

Arthur Bedrosian, a generic drug manufacturing executive, is asking the Supreme Court to take a look at a ruling by the Philadelphia-based U.S. Court of Appeals for the 3rd Circuit that found he willfully failed to submit a Foreign Bank and Financial Accounts (FBAR) form regarding an old Swiss bank account. The 3rd Circuit ruled against Bedrosian on July 22 and denied a request for rehearing on Sept. 27.

The petition (pdf) in the case, Bedrosian v. United States, court file 22-598, was docketed Dec. 29.

Bedrosian’s attorney is Ian Comisky of Fox Rothschild LLP in Philadelphia.

“We believe our position merits review and the Supreme Court should clarify the law for alleged willful FBAR violations,” Comisky told The Epoch Times by email on Dec. 30.

The law states that any “U.S. person” with a financial interest in or signature or other authority over a foreign bank account holding more than $10,000 must report that account to the U.S. Department of the Treasury using an FBAR form. The financial penalty is limited to $10,000 if the failure to report was not willful. If the failure is deemed willful, the person may be fined the greater of $100,000 or 50 percent of the account balance at the time of the violation. A fine may be imposed for each year a violation took place, according to court papers.

In his petition, Bedrosian is asking the Supreme Court to decide what “it means to ‘willfully’ violate the FBAR statute in a civil case.”

The 3rd Circuit misinterpreted precedent, Bedrosian argues in his petition. The appeals court wrongly equated “willfulness” with “objective recklessness, importing a standard from a civil tax penalty statute into the FBAR context.”

The 3rd Circuit found that Bedrosian’s behavior was willful but did not accept that the IRS had proved it assessed the correct penalty. Despite this, the circuit court upheld the penalty figure because it determined that Bedrosian’s counsel had admitted that the amount of money in the undeclared foreign account was large enough to justify the penalty that was assigned, according to a summary by The Tax Adviser, a trade publication.

The account in question was opened in the 1970s with a financial institution that would later become UBS. Bedrosian opened another account with UBS but treated the two accounts as one account, closing them in 2008. He did not let his accountant know about the accounts until 2006, saying the accountant had never asked about them. In 2007, the tax year in question, the accounts held well over $10,000.

The accountant told his client to file FBAR reports and Bedrosian did so in 2007. But Bedrosian reported only one of the accounts, which had a balance of $240,000, even though the second account held about $2.3 million. He did not report income from the account on his personal return in 2007.

The IRS began investigating Bedrosian in 2011 after the agency reached an agreement with Swiss banks to hand over customer information. The IRS found the account balance was $1,951,578.34, and it calculated the applicable 50 percent penalty to be $975,789.17. Bedrosian paid the penalty and then sued the IRS for a refund.

The federal district court ruled in Bedrosian’s favor, finding the IRS had not proven the taxpayer had acted willfully in filing an inaccurate FBAR, and that at worst, he was negligent. The 3rd Circuit disagreed, according to The Tax Adviser.

The Epoch Times reached out to the U.S. Department of Justice for comment but had not received a reply as of press time.

The Supreme Court heard oral arguments in another FBAR-related case Nov. 2, as The Epoch Times reported.

Businessman Alexandru Bittner said he was unaware he was required to file the tax form reporting the several foreign accounts he held. He later filed the documentation and was initially fined $50,000, but the IRS increased the fine to $2.72 million. The tax agency took the position that even though he failed to file five annual forms on time, Bittner had violated the law a full 272 times—once for each account that wasn’t reported in each of those five years and fined him $10,000 for each unreported account.

It is unclear when the Supreme Court, which is falling behind in its work, will render a judgment in the Bittner case. It is unusual that as this calendar year draws to an end, the high court has not issued opinions in any cases formally argued before it in the new term that began Oct. 3.