The Case(s) for Lower Willful FBAR Penalties
Not disclosing your foreign bank accounts to the IRS can quickly become a costly mistake. But has the IRS been imposing penalties for failure to file FBAR forms that are even higher than it should? There is a case to be made for lower willful FBAR penalties based on regulations set by the Secretary of Treasury decades ago.
The last blog post laid out the dispute over whether the 2004 American Job Creation Act or an earlier Treasury Department regulation sets the top limit on IRS penalties for non-disclosure of foreign assets. This post will make the case for lower willful FBAR penalties, and review two tax court decisions that favored the lower limits. Future posts will review a Court of Federal Claims case that went the other way, and explain what all this means to taxpayers facing willful FBAR penalties in the future.
United States v Colliot Raises the Issue of Regulation vs Law
In December 2016, the IRS issued willful FBAR penalties against Dominique Colliot based on her failure to file FBAR forms in 2007 through 2010. The penalties were for $548,773 in 2007; $196,082 in 2008, and smaller amounts in 2009 and 2010. Ms. Colliot did not dispute that she had the foreign bank accounts, or that she failed to file FBARs. Instead, she and her attorneys got creative. They said that the IRS had incorrectly assessed willful FBAR penalties higher than allowed by the Secretary of Treasury's regulation.
On May 16, 2018, the U.S. District Court for the Western District of Texas in Austin issued its order, which reviewed the history of the Bank Secrecy Act and the Secretary of Treasury's regulations:
- That the Bank Secrecy Act originally only allowed willful FBAR penalties up to $25,000 or the balance of the account up to $100,000.
- That the Treasury regulation echoed that language, authorizing penalties "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."
- That the 2004 American Jobs Creation Act created non-willful FBAR penalties and increased the maximum willful FBAR penalties to $100,000 or up to 50% of the balance of the unreported account.
- That the Treasury regulation was never changed to reflect the new statute.
It then evaluated whether, as the IRS claimed, the 2004 amendments implicitly superseded or invalidated the existing regulation and created a new framework for willful FBAR penalties.
The court found in favor of the lower willful FBAR penalties. It found that the 2004 amendments raised the ceiling for IRS penalties, but it did not set a floor. The Secretary of Treasury still has discretion to determine the amount of any penalties up to that new higher limit. As the Colliot court saw it, the regulation puts an additional limit on that discretion, capping penalties at $100,000. Since the regulation has not been amended or repealed, it is still binding on the IRS.
United States v Wadhan Reads Law and Regulation Together to Set Lower Willful FBAR Penalty Limit
Two months later, on July 18, 2018, the U.S. District Court for the District of Colorado issued a similar opinion. In United States v Wadhan, the couple had multiple overseas bank accounts, but failed to file FBARs for 2008 - 2010. In many cases, the IRS had issued flat penalties of $100,000. But for three violations, the penalties were far higher: $1,108,645.41 in 2008; $599,234.54 in 2009; and $599,234.54 in 2010. The Wadhans argued these FBAR penalties needed to be capped at $100,000 under the regulation.
As with Colliot, the Wadhan court found that the regulation survived the 2004 amendments. The court emphasized that the two could be read together, since the statute gave the Secretary permission to assess FBAR penalties ("may assess") and does not limit the Secretary's ability to impose less than the full amount allowed under the statute. The amount authorized by the regulation is essentially a subset of the larger penalties permitted (but not required) under the 2004 law.
The Wadhan court also emphasized that the regulation isn't simply a hold-over from an older time. Over the 14 years since the law was amended, the Secretary has made regular adjustments to another part of the regulation to adjust penalties based on inflation. At any time, the Secretary could have amended the regulation further to make it line up with the new statute's language. Instead, the Secretary "elected to continue to limit the IRS' authority to impose penalties to $100,000."
United States v Garrity Shows Regulation Applies Even After Trial on Willfulness
Earlier this year, in United States v Garrity, the United States District Court for the District of Connecticut decided the defendant's willful FBAR penalties could be imposed based on recklessness, rather than direct intent to avoid paying taxes. But after the ink was dry, Garrity's attorneys filed a post-trial motion to limit the willful FBAR penalty to $100,000. The motion shows that even when it is the court, rather than the IRS that has the final word on willfulness, the regulation setting lower willful FBAR penalties may still apply.
These three opinions show there is a strong case to be made for lower willful FBAR penalties. The Secretary of Treasury's regulation remains in force until it is amended or repealed. Only a superseding statute can override the Secretary's discretion. For at least these three tax courts, that hasn't happened. And that could mean lower penalties for taxpayers.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding how to argue for lower willful FBAR penalties, contact Joe Viola to schedule a free consultation.