Federal District Court Holds that FBAR Penalties in Excess of $100,000 is Unlawful

Recently, the U.S. District Court for the Western District of Texas in U.S. v. Colliot, determined that an individual who repeatedly failed to timely file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, could not be penalized in excess of the $100,000 regulatory maximum even though the relevant statute allows higher penalties.

The IRS assessed penalties for willful failure to timely file FBARs from 2007 to 2010. The individual had four separate FBAR violations in 2007, and the associated penalties totaled $548,773. In 2008, the individual had an additional four FBAR violations and was assessed penalties of $196,082. The IRS assessed smaller penalties in 2009 and 2010.

The court reviewed the history of the relevant statutory and regulatory guidance. Currently, 31 U.S.C. section 5321(a)(5) provides that the penalty for an individual who willfully fails to file an FBAR is the greater of $100,000 or 50 percent of the balance in the unreported account at the time of the violation. A previous version of 31 U.S.C. section 5321(a)(5) authorized a penalty for an individual’s failure to file an FBAR of $25,000 or the balance of the unreported account up to $100,000. It was under that version of the statute that the Department of Treasury issued the current regulations.

The relevant regulation, now at 31 C.F.R. section 1010.820, provided that the penalty for “any willful violation…[that] the Secretary may assess upon any person [is]…not to exceed the greater of the amount (not to exceed $100,000) equal to the balance of the account at the time of the violation, or $25,000.” The regulation was issued through notice-and-comment rulemaking.

In 2004, the current version of 31 U.S.C. section 5321(a)(5) was passed by Congress, but the promulgated regulation remained unchanged and continued to cap the civil penalty for failure to file an FBAR to $100,000.

The taxpayer argued, and the court agreed, that the IRS acted arbitrarily and capriciously in assessing penalties in excess of the regulation, while the IRS argued that the regulation was inconsistent with the statutory change that occurred in 2004, thereby invalidating the regulation.

The court determined that the current version of 31 U.S.C. section 5321(a)(5) did not override the regulation and thus the regulation’s cap was still valid. The court reasoned that the penalty statute created a ceiling for a willful violation’s potential penalty, but that Treasury could limit the penalty further. As a result, the court held that the regulation can be applied consistently with the current version of the statute and the statute’s 2004 change did not invalidate the regulation. More importantly, the court stated that to Treasury must use the same notice and comment procedure to eliminate the $100,000 regulatory cap. As a result, the court held the penalty for a willful violation for failure to timely file an FBAR is limited to $100,000 by 31 C.F.R. section 1010.820.

Conclusion and analysis

Notwithstanding the result in this case, the FBAR penalty statute, 31 U.S.C. section 5321(a)(5), remains in effect, and states that the penalty for an individual who willfully fails to file an FBAR is the greater of $100,000 or 50 percent of the balance in the unreported account at the time of the violation. As the court mentions in the text of the case, “the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000,” in accordance to that provision. At least in this instance, the court limited the assessed penalty to the regulatory maximum.

This case is very important for various reasons: Taxpayers who have already paid “willful” FBAR penalties in excess of $100,000 per account have a very strong argument that the excessive amounts should be refunded as they were improperly assessed under the rationale of the Colliot case.  Taxpayers who are currently considering OVDP should take this holding into account in the decision-making process, as the penalties for “willful” failures may not be as onerous as previously thought (however, possible criminal sanctions may outweigh this dollar issue. See OVDP FAQ 6 ).

Finally, unless the IRS appeals and wins the case, it seems to me that until appropriate action is taken to amend the relevant regulations, taxpayers have strong ammunition on their side in negotiation of penalties for “willful” FBAR failures.  Assuming that FinCEN acts quickly to amend the regulations, it is unclear if they can be promulgated with retroactive effect.

With so many assessments in excess of the regulatory maximum, including appellate court decisions upholding penalties well in excess of $100,000, (see U.S. v. Bussell, 120 AFTR 2d 2017-6379), it is unclear whether the Colliot case will have precedential value. However, individuals now have a new arrow in their quiver to try and reduce any assessed penalties for a willful failure to file of an FBAR.