Court of Federal Claims Says FBAR Penalties Can Exceed $100,000

In a recent case, the Court of Federal Claims disagreed with two district courts that decided earlier in 2018 that the civil penalties for willfully failing to file a “Report of Foreign Bank and Financial Accounts” (FBAR) must be capped at $100,000.

The Claims Court determined that the Treasury Regulation that provided the $100,000 maximum penalty is invalid because it is not consistent with the relevant statute.

 

Background

Statute and Regulations

Every U.S. person who has a financial interest in, or signature authority over, a foreign financial account in excess of $10,000 must file an FBAR to report the account to the Internal Revenue Service (IRS).[1]

The maximum civil penalty for a non-willful failure to file is $10,000[2] (adjusted for inflation). The maximum civil penalty for a willful failure to file “shall be increased to the greater of” $100,000 or 50% of the balance of the account at the time of the violation.[3]

The above penalties reflect amendments to the statute made by Congress when it passed the American Jobs Creation Act of 2004 (AJCA). AJCA increased the maximum penalty for a willful failure to file from $100,000 to “the greater of $100,000 or 50% of the account balance.” The relevant regulations were promulgated before this amendment, and although they have been renumbered and amended to account for inflation, they continue to reflect the earlier $100,000 maximum willful penalty.[4]

 

Previous District Court Cases

In May 2018, a Texas district court ruled that the maximum civil penalty for willfully failing to file an FBAR was the $100,000 maximum penalty provided for in the regulations.[5] In its ruling, it held that the existing regulation[6] can be applied consistently with the statute,[7] and therefore that the amendment to the statute increasing the maximum penalty did not implicitly invalidate or supersede the regulation.

In July, a Colorado district court came to the same conclusion, ruling that both the pre-amendment version and the current version of the statute specifically grant the Secretary discretion to assess penalties because they state that the Secretary “may assess” penalties.[8]

 

Claims Court Findings

The Court of Federal Claims disagreed with the two district courts and found that the regulation was invalid, as it was inconsistent with the relevant statute.[9] The court focused on the fact that in the amended statute, Congress used the imperative “shall” rather than the permissive “may” in stating that the maximum penalty “shall be increased” to the greater of $100,000 or 50% of the account balance.[10] The court ruled that with this wording, Congress raised the maximum penalty itself and removed the Secretary’s discretion to provide for a different maximum penalty.

The court also said that “in order to be valid, regulations must be consistent with the statute under which they are promulgated.” Because the regulation’s maximum penalty of $100,000 is inconsistent with the statute’s maximum penalty of the greater of $100,000 or 50% of the account balance, the regulation is no longer valid, and the statute’s maximum penalty applies. In addition, the court said that Congress “clearly stated its intent to raise the maximum amount of FBAR penalties when it passed the AJCA in 2004.”

Unlike the prior district court cases, the court ruled against the taxpayer and found that the FBAR penalties could exceed $100,000 in accordance with the statute, despite the $100,000 maximum penalty provided in the regulation.

 

Looking Forward

For the past few months, following the earlier district court rulings capping the FBAR willful penalty at $100,000, it appeared as though taxpayers with unreported foreign accounts had an opportunity to come into compliance with their FBAR reporting without fear of penalties over $100,000.

This could have opened the door for certain taxpayers who are currently participating in the IRS’s Offshore Voluntary Disclosure Program (OVDP) to opt out of the program if their penalty inside the OVDP would have exceeded $100,000.

Other taxpayers who have not yet disclosed their foreign accounts may have been more inclined to do so if they knew their maximum penalties would be limited to $100,000. So-called “quiet disclosures” also would have become less risky, since a taxpayer who was caught simply filing amended tax returns and late FBARs (and not entering the OVDP or Streamlined programs and paying relevant penalties) would also have a maximum $100,000 penalty rather than the 50% of the value of the account penalty.

With the most recent ruling stating that the maximum penalty is the statutory penalty of the greater of $100,000 or 50% of the account balance, momentum has shifted back toward using the formal IRS programs, which are made more attractive as potential penalties increase. Taxpayers who were considering opting out of the OVDP, or taking other action based on the previous district court rulings, may need to reconsider and potentially wait for the issue to be answered in the courts, perhaps even by a final ruling by the Supreme Court.

In the meantime, other factors are creating incentives for some taxpayers to move quickly to take advantage of current IRS programs while they are still available. The OVDP is set to close effective September 28, 2018, removing the best option for taxpayers who are concerned about criminal liability. While the Streamlined Procedures will remain open for now, updates or changes to the current programs may be coming later this year, perhaps including combining the domestic and foreign versions and increasing the penalties.

With the maximum FBAR penalty issue undecided, taxpayers who are still waiting to come in from the cold may wish to get into the current versions of the OVDP or Streamlined while they still can.

 


[1] 31 USC 5314(a) and 31 C.F.R. 1010.350.

[2] 31 USC 5321(a)(5)(B)(i).

[3] 31 USC 5321(a)(5)(C), 31 USC 5321(a)(5)(D).

[4] 31 C.F.R. 1010.820(g).

[5] Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834.

[6] 31 C.F.R. 1010.820(g).

[7] 31 USC 5321(a)(5).

[8] Wadhan, (DC CO 7/18/2018) 122 AFTR 2d 2018-5208.

[9] Norman, (Ct Fed Cl 7/31/2018) 122 AFTR 2d ¶ 2018-5089.

 

[10] 31 USC 5321(a)(5)(C)(i).