A recent case in the United States District Court for the Eastern District of Pennsylvania has turned the recent tide of IRS victories regarding “willful versus non-willful” intent in FBAR related compliance cases. The unusual non-willful court decision found the US taxpayer was not “willful” when failing to report one of his two Swiss accounts on an IRS FBAR. The case, known as Bedrosian v United States could have substantial impact on many cases involving IRS FBAR audits and cases where the agency asserts “willful” conduct on the part of the taxpayer.
The term “willfulness” has been purposefully left vague in all statutes and internal IRS guidelines associated with FBAR. This provides the agency with wide power to make broad determinations of whether a US taxpayer’s actions and their failure to fully disclose offshore bank accounts, investments and assets rose to the level of a “willful” attempt to evade taxes. Indeed, the IRS’ own internal manuals have adopted the criminal standard of “willful blindness” which was established in a previous case (Cheek v United States). In that case the court defined willfulness as a “voluntary, intentional violation of a known legal duty.” The IRS regularly asserts the US taxpayer “should have known of their responsibilities regarding the reporting of income and all IRS tax forms and reporting requirements.” The subjective failure of a taxpayer is assumed to be an attempt to avoid taxes.
The Bedrosian case found the court rejecting the criminal standard of “willfulness.” The court chose to apply the civil standard, which defines a “person knowingly or recklessly violated the statute without requiring the government (IRS) to prove improper motive or bad purpose.” The should have been an easier task for the IRS but the court determined the agency had not established the taxpayer was “willful” in their attempt to evade taxes, simply negligent in not finding out about the failure to report the account in question.
While this unusual non-willful court decision does not establish a new hard definition of “willfulness” in IRS FBAR cases, it does underscore the vast power of the IRS and the complex legal nature of these cases. If you face an IRS audit, especially if it is related to offshore investments, bank accounts, foreign corporate ownership or FBAR reporting we invite you to contact us for a free consultation at 866-631-3470.