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Three federal district courts have said the IRS is breaking its own rules by imposing penalties beyond a Treasury Department regulation. But the federal Court of Claims says a 2004 law raised the maximum willful FBAR penalties. That decision could cost U.S. taxpayers hundreds of thousands of dollars. But did the court consider all the issues?
This is the third in a four-part blog series on the maximum willful FBAR penalties. The first 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. The last post made the case for lower willful FBAR penalties, and reviewed two tax court decisions that favored the lower limits. This post will review a Court of Federal Claims case that went the other way. The next will explain what all this means to taxpayers facing willful FBAR penalties in the future.
The first decisions reconciling the 2004 American Jobs Creation Act and the Secretary of Treasury's regulation setting the maximum willful FBAR penalties came out of the federal district courts. But when a the Federal Court of Claims considered the issue, the judge came to a different decision.
This blog has already reviewed the case of Norman v United States. In that case, Ms. Norman was assessed a willful FBAR penalty of $803,530.00 for failing to file a Report of Foreign Bank and Financial Account (FBAR) disclosing her Swiss bank account in 2007. The previous post discussed the court's finding that Ms. Norman had willfully and recklessly failed to file her FBAR. After finding Ms. Norman's testimony about not knowing or understanding FBAR penalties was not credible, the court went on to consider the correct maximum willful FBAR penalties in the case.
Ms. Norman's attorneys submitted a copy of United States v Colliot to the court for consideration. In that case the U.S. District Court for the Western District of Texas in Austin determined that an older treasury regulation capped the maximum willful FBAR penalty at $100,000. Norman asked the federal Court of Claims to do the same, which would have saved her over $700,000 in tax penalties.
But unlike the district courts, the federal Court of Claims said the 2004 statute "now raises the maximum penalty for willful violations." This new law superseded and replaced the existing regulation which limited penalties to $100,000.
The court acknowledged that the statute gave the Secretary of Treasury discretion to impose FBAR penalties on any person who violates it. But where Colliot found a way to read the statute and regulation together, the Norman court said the two were contradictory.
To support its position, the court looked at the language of the amended statute, which said "the maximum penalty under subparagraph (B)(i) $10,000 shall be increased to the greater of $100,000 or 50 percent" of the balance of the account. It called this modification a "mandate" and said the prior regulation was "no longer consistent with the amended statute."
The difference between the Colliot and Norman courts seems to be in the way they read one key part of the 2004 statute: “the maximum penalty … shall be increased.” The Norman court ruled this referenced an intended increase over the older version of the law (which had a maximum penalty of $25,000). It said this language necessarily increased the maximum willful FBAR penalty from $25,000 to $100,000.
But the 2004 amendment also added a non-willful penalty with a maximum of $10,000. In another reading of the statute, it is that non-willful penalty that “shall be increased” when the IRS or the court finds a willful violation has occurred. Under this reading, the Secretary of Treasury retains the discretion to impose both willful and non-willful penalties up to their respective maximum limits. Some tax law commentators believe that this interpretation – the one that can be inferred from Colliot, is more in keeping with both the language of the statute and the legislative intent behind the amendment.
The difference between the way the Colliot court and the Norman court read the 2004 statute may seem like semantics. But the maximum willful FBAR penalty under the new statute is up to 50% of the balance in each account that was not reported. For taxpayers with large financial investments overseas, that could easily amount to hundreds of thousands of dollars in FBAR penalties every year. And that makes it worth the time to make the argument.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding maximum willful FBAR penalties, contact Joe Viola to schedule a free consultation.