Thursday, July 22, 2021

Increased Willful FBAR Statutory Penalty Overrides Prior Regulations Maximum $100,000 Per Account Penalty


On August 12, 2019 we posted DC Magistrate Ruled That Willful FBAR Regulations are Invalid, where we discussed that on
 July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty and that another DC court has also rejected Colliot & Wadhan and concluded that the Willful FBAR Penalty Not Limited to $100,000 in Rum, (DC FL 8/2/2019) 124 AFTR 2d ¶2019-5113

Here again the Second Circuit in Kahn, (CA 2 7/13/2021) 128 AFTR 2d ¶2021-5043, affirmed a district court decision and has held that statutory changes that increased the penalty for willful failure to file an FBAR applied, and prior regs which are still codified in the Code of Federal Regulations, imposing a smaller penalty did not.

In general, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a FinCEN Form 114 - Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

Under 31 USC § 5321(a)(5)(C), as amended in 2004, the maximum penalty for the willful failure to failure to file an FBAR is the greater of $100,000 (adjusted for inflation) or 50% of the aggregate balance in the accounts that should have been reported in the FBAR at the time of that failure.

But a final reg, reflecting the statutory penalty amount in effect prior to the 2004 amendment, issued by the Treasury in 1987, says that the maximum penalty was merely $100,000 per account. (31 CFR §1010.820(g)(2)) This reg is still codified in the Code of Federal Regulations.

District courts in Texas and Colorado have held that, in view of the Treasury's failure to update the regs, penalties couldn't be imposed in excess of the amounts provided for in regs issued before the 2004 law change authorizing higher penalties. (U.S. v. Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834; U.S. v. Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208)

The Court of Appeals for the Federal Circuit has disagreed and held that the amendment to the statute superseded the regs which were thus no longer valid. (Norman, (CA Fed Cir 2019) 124 AFTR 2d 2019-6595) Connecticut and Pennsylvania district courts have also held that the penalty cap in the 2004 amended statute is the correct limitation. (U.S. v. Garrity, (DC CT 2019) 123 AFTR 2d 2019-941; U.S. v. Collins, (DC PA 2021) 127 AFTR 2d 2021-854)

A district court ruled that the penalty limitation provided in the 1987 reg was superseded by the 2004 statutory amendment increasing the penalty maximum.

The Court of Appeals for the Second Circuit affirmed the district court's decision. The Circuit Court said that the language of the 2004 amended statute was clear and thus the 1987 reg was not in harmony with the statute. Thus the reg does not apply any more. It cited Iglesias, (CA 2 1988) 61 AFTR 2d 88-1264 ("[a] regulation which does not" implement "the will of Congress as expressed by the statute" and instead "operates to create a rule out of harmony with the statute, is a mere nullity.").

Have Undeclared Income from an Offshore Bank Account?
 
 
Been Assessed a 50% Willful FBAR Penalty?
 

 
Contact the Tax Lawyers at 
Marini& Associates, P.A. 
 
 
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www.TaxAid.com or www.OVDPLaw.com
 
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