Below are some facts included in the civil complaint:
- On or about December 16, 1999, the Wahdans opened a bank account with UBS AG. The account was located in Geneva, Switzerland. That amount was approximately equal to $2,520,000.
- The funds were approximately 1/3 savings or family wealth, and 2/3 revenues from their Colorado business.
- On or about January 22, 2003, the Wahdans opened a second account at UBS.
- On or about September 19, 2005, the Wahdans opened another account at UBS.
- With respect to each of the UBS accounts, the Wahdans instructed UBS not to send them any correspondence in the United States regarding the account, but instead to retain it in Switzerland.
- With respect to each of the UBS accounts, the Wahdans waived their right to invest in U.S. securities. By waiving that right, the Wahdans avoided the possibility that income in the accounts (and thus the accounts’ existence) would be reported to U.S. taxing authorities.
- The Wahdans frequently structured their purchase of cashier’s checks in order to avoid financial reporting requirements.
- The government filed a John Doe summons to UBS to obtain information on U.S. clients of UBS.
- The Wahdans did not enroll in the voluntary disclosure program.
- The Wahdans did not return the form permitting UBS to disclose their identities to the United States.
- On or about June 24, 2009, Said Wahdan instructed UBS to liquidate all the positions in the UBS ‘036 account, informing UBS that they would come and personally pick up the checks.
Subsequently the Wadhans’ 2008 and 2009 federal income tax returns were selected for audit.
- The Wahdans checked the “No” box in response to a question asking whether they had, during each calendar year, an interest in or signature authority over a financial account in a foreign country
- The Wahdans did not report any income from the foreign accounts on their originally-filed federal income tax returns for 2008 and 2009.
- The Wadans failed to file Report of Foreign Bank and Financial Accounts (FBARs) for 2008, 2009, and 2010.
There were numerous attempts to prevent the discovery of the foreign accounts (indicative of willfulness). Accordingly the government sought to reduce to judgment $4,225,479.32 in penalties and interest against Urayb Wadhan and $4,303,603.39 against Said Wadhan.
FBAR willful penalty
Internal Revenue Code § 5321(a)(5)(C) permits the assessment of civil penalties for willful failure to file an FBAR up to:
(I) $100,000, or
(II) 50 percent of the undisclosed account.
Under this code section, the amount could exceed $100,000 per account.
However, the Treasury regulation 31 CFR §1030.820 states that the penalty may not exceed $100,000 per account.
The Department of Treasury has the power to create rules and regulations to enforce the laws that Congress sets forth in the Internal Revenue Code. Typically regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). With public input through written comments and public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD).
The Internal Revenue Code often has reporting and penalty amount that are different than those contained in the respective regulation, usually by design. For example, IRC 6038D requires a Form 8938 filing where the aggregate maximum balance of the foreign accounts exceeds $50,000 but the regulation provides a higher limit (“or such higher dollar amount as the Secretary may prescribe“). Curiously, IRC 5321(a)(5)(C) does not seem to include similar language allowing the Treasury to prescribe a different penalty amount under that section. However, under 5321(a)(5)(A), it states that the Treasury “may impose” the prescribed penalties.
The court, similarly to Colliot, finds that the “may impose” language sets the outer limit for FBAR willful penalties, and as long as the regulation is not inconsistent with that language (i.e., imposes greater penalties than the statute allows), the regulation is proper exercise (albeit likely unintended) of the Treasury’s discretion to impose penalties below the statutory cap.
Below are some key points from the opinion.
For a statute to supersede a regulation, it has to be clearly inconsistent with the regulation. The IRS argues that the different penalty caps in 31 U.S.C. § 5321 and 31 C.F.R. § 1010.820(g) demonstrates an inconsistency such that the statute trumps the regulation. United States v. Larionoff, 431 U.S. 864, 873 (1977). The Court is unpersuaded for several reasons…
First, the statute and the regulation are not inconsistent on their face…
Second, there is a simple and straightforward interpretation that gives coherent meaning to both the statute and the regulation — in the exercise of statutory discretion, the Secretary limited the penalties that the IRS could impose to $100,000 (plus the amount adjusted for inflation)…
Third, although the penalty caps in the statute and regulation differ, one cannot assume that the Secretary simply overlooked the difference between them. The difference has existed since 2004 — essentially 14 years. During that time, the Secretary made regular adjustments to another regulation, 31 C.F.R. § 1010.821, that adjusted penalties to account for inflation.
Finally, the IRS’ reliance upon legislative history is misplaced. The IRS argues that congressional intent as evident from the legislative history for the 2004 amendment to 31 U.S.C. § 5321(a)(5)(C) shows that Congress intended the statute to supersede 31 C.F.R. § 1010.820. The Court pauses to note that, ordinarily, it does not resort to legislative history unless the text of a statute is ambiguous. Mohamad v. Palestinian Auth., 566 U.S. 449, 458 (2012). There is no apparent ambiguity in 31 U.S.C. § 5321(a)(5)(C) — it simply changed that maximum penalty that could be imposed.
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:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.