District Court says FBAR Civil Penalties Capped at $100,000

Foreign Nationals & Expats

Houston Tax Attorney

0

District Court says FBAR Civil Penalties Capped at $100,000

A recent decision in an FBAR case (U.S. v. Colliot) in the Western District of Texas might be huge win for taxpayers who have been incorrectly assessed FBAR civil penalties under 31 U.S. Code 5321(a)(5)(C).

Background

In December 2016, the Internal Revenue Service (IRS) initiated a lawsuit to reduce to judgment outstanding civil penalties assessed against Colliot….The penalties were assessed for Colliot’s repeated and willful failures to timely file Form TD F 90-22.1, entitled “Report of Foreign Bank and Financial Accounts” and commonly referred to as an “FBAR,” from 2007 to 2010…For 2007, the IRS assessed penalties of $548,773 for four separate FBAR violations.

Defendant filed a motion for summary judgment arguing that while 31 U.S. Code 5321(a)(5)(C) provides a maximum penalty of the greater of (i) $100,000 or (ii) 50% of the undisclosed foreign accounts, the related regulation, 31 C.F.R. § 103.57 sets a lower ceiling. That regulation allows the assessment of a maximum penalty of the greater of (i) the balance in the account (not to exceed $100,000) or (ii) $25,000.

31 U.S. Code 5321(a)(5)(C) – “FBAR Willful Penalty”

A previous version of § 5321(a)(5)(C) allowed the Secretary of the Treasury to impose civil monetary penalties amounting to the greater of $25,000 or the balance of the unreported account up to $100,000.

In 2004, Congress amended § 5321 to increase the maximum civil penalties that could be assessed for willful failure to file an FBAR. 31 U.S.C. § 5321(a)(5); American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). Under the revised statute, the civil monetary penalties for willful failure to file an FBAR increased to…a maximum of 50 percent of the balance in the unreported account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C).

(5) Foreign financial agency transaction violation.—

(A) Penalty authorized.—
The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—

(i)In general.—
Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

(i) the maximum penalty under subparagraph (B)

(i) shall be increased to the greater of—

(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

(D) Amount.—The amount determined under this subparagraph is—

(i) in the case of a violation involving a transaction, the amount of the transaction, or

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

31 C.F.R. § 1010.820

Despite [the increased FBAR penalty ceiling in 31 U.S.C. § 5321(a)(5)(C)], the regulations promulgated in reliance on the prior version of the statute remained unchanged. Thus, § 103.57 continued to indicate the maximum civil penalty for willful failure to file an FBAR was capped at $100,000.

(g) For any willful violation committed after October 27, 1986, of any requirement of § 1010.350, § 1010.360 or § 1010.420, the Secretary may assess upon any person, a civil penalty:

(1) In the case of a violation of § 1010.360 involving a transaction, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) of the transaction, or $25,000; and

(2) In the case of a violation of § 1010.350 or § 1010.420 involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.

Analysis

Colliot argues the IRS acted arbitrarily and capriciously by assessing penalties against Colliot in excess of those allowed by § 1010.820…In turn, the IRS argues § 1010.820 is inconsistent with the 2004 amendments to § 5321(a)(5)(C) and was therefore implicitly superseded or invalidated by those statutory revisions.

The court sides with Colliot on this issue. It reasons that § 5321 sets the maximum and not the floor for FBAR penalties. The authority to determine the penalty amount is delegated to the Secretary, and that authority is promulgated through IRS regulations. Regulations are presumed valid unless they are shown to be unreasonable or contrary to the provisions of the enabling statute.

Unfortunately for the IRS, there is little reason to believe § 5321(a)(5)(C) implicitly superseded or invalidated § 1010.820. Section 5321(a)(5) sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor…

And § 1010.820—a regulation validly issued by the Treasury via notice-and-comment rulemaking—purports to cabin that discretion by capping penalties at $100,000. 31 C.F.R. § 1010.820. Thus, considered in conjunction with § 5321, § 1010.820 is consistent with § 5321’s delegation of discretion to determine the amount of penalties to be assessed…

In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking…Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot.

Conclusion

It appears to be a situation where the Treasury simply failed to update its regulation. While this case is still in litigation (summary judgement granted in part) and could end up in 5th circuit appeals, it could offer a huge break for taxpayers who’d been assessed FBAR penalties in excess of $100,000 and have been reduced to judgment. This case might provide the basis for a claim for refund.

What should non-compliant taxpayers do?

If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.