Courts At Odds Over Willful FBAR Penalty Limit
When taxpayers are caught late filing the FBAR, the IRS will assess penalties based on whether it thinks the individual’s conduct was willful or non-willful. The difference in penalty regimes are starkly different, but the IRS places limitations on the FBAR penalties in either case.
Interestingly, when it comes the willful FBAR penalty, the law is somewhat unclear as to the penalty limit. For this reason, courts have taken opposing positions, as we’ll describe below.
But first, a quick introduction to the FBAR and the penalty regimes.
FBAR – A Quick Introduction
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year. The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
The FBAR due date is April 15th, with a maximum extension of 6 months.
A non-willful failure to report foreign bank accounts can result in a civil penalty of up to $10,000 per account per year (adjusted for inflation).
When it comes to a willful failure to file, things get a bit murky with respect to the civil penalty limit and here’s why:
The current regulation on the books (31 C.F.R. Section 103.57) states:
“For any willful violation . . . the Secretary may assess upon any person, a civil penalty . . . 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.”
However, subsequent FBAR provisions enacted by statute in 2004 (by the American Jobs Creation Act) increased the willful FBAR penalty to the greater of $100,000 (adjusted for inflation) or 50% of the highest balance in the account during the tax year at issue (which can be significantly higher). Thus, while the regulation has a hard cap at $100,000, the statute has no such limit.
Taxpayers defending against willful FBAR penalties in court have recently utilized this discrepancy to argue that since the regulation has not been amended, the lower penalty limit imposed by the regulation should apply. So far, courts have been split in addressing this argument.
Courts At Odds Over Penalty Limit
Recently, two district courts, to the surprise of many, sided with the taxpayers and limited the FBAR penalty to the regulatory limit of $100,000.
The U.S. District Court for the Western District of Texas in Austin, in United States v. Colliot (2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018)), reasoned that while the 2004 ACJA raised the penalty limit by statute, the Secretary of Treasury still had the discretion to determine the amount of any penalties up to that new higher limit set by statute. Meaning, the regulation, as it stands, puts an additional limit on the statutory limit, capping willful the FBAR penalty at $100,000. Since the regulation has not been repealed or amended, it is still binding on the IRS.
The U.S. District Court for the District of Colorado, in United States v. Wahdan (325 F.Supp.3d 1136 (2018)) ruled similarly in favor of the taxpayer. The Court determined that the penalty limitation in the regulation was not inconsistent with the statute, and that the Secretary of the Treasury was aware of the penalties enacted by statute but continued to limit the FBAR penalties to the regulatory maximum of $100,000. Thus, the regulation should continue to control the penalty limitation.
In the most recent case tackling this issue, the Court of Federal Claims in Norman v. United States (Ct. Fed. Cl. Dkt 15-872T 2018) held in favor of the IRS in stark contrast to the previous two district court decisions. The Court concluded that the higher statutory penalty limit should be applied for willful FBAR violations, quoting the amended statute as dictating that the usual maximum penalty “shall be increased” to the greater of $100,000 or 50 percent of the account. It further reasoned that there is no question that Congress can supersede regulations, which it apparently did in the case of the FBAR penalty limit. As such, the regulation is no longer consistent with the amended statute and is therefore invalid.
What This Means For U.S. Expats
These recent FBAR decisions demonstrate the potential severity of FBAR penalties and the willingness of the IRS to take the issue all the way through the court system in order to impose the highest possible penalty under the law.
These cases also show that not filing the FBAR is a misstep that can quickly get out of hand if not dealt with properly. For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience with FBAR fillings and helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case.
By Joshua Ashman, CPA & Nathan Mintz, Esq.