Federal Courts Disagree On Whether The 50% Willful FBAR Penalty Is Illegal

BRYAN C. SKARLATOS is a Partner and MICHAEL SARDAR is an Attorney at the law rm of Kostelanetz & Fink, LLP in New York, New York.
Penalties
Federal Courts Disagree on Whether the 50% Willful FBAR Penalty Is Illegal
By Bryan C. Skarlatos and Michael Sardar
Imagine a situation in which Congress passed a statute establishing civil penal- ties for certain conduct, including the maximum penalty that may be imposed for such conduct, and delegated enforcement of the statute to a federal agency. What if the federal agency issued a regulation stating the maximum penalty the agency would impose under the statute and then Congress later amended the statute to increase the maximum penalty the agency could impose, but the agency never changed its own self-limiting regulation? Would the agency be bound by its regulation, or could it ignore the regulation and impose the higher penalties authorized under the new statute?
Apparently, the answer to this question depends on who you ask. ree Federal District Courts have addressed this issue in the context of penal- ties for willful failure to le Foreign Bank and Financial Accounts Reports (“FBARs”). Two Federal District Courts have held that the Department of Treasury (“Treasury”) cannot ignore its own regulation and impose penalties higher than the ones provided for by its regulation simply because Congress authorized higher FBAR penalties by statute. In Colliot1 and Wadhan,2 the Internal Revenue Service (the “IRS”) sued to enforce FBAR penalties equal to 50% of the balance in unreported foreign accounts against taxpayers who failed to le FBARs. Both courts held that the IRS was limited to enforcing a penalty of only $100,000 per unreported foreign account because that is the limit set out in 31 CFR §1010.820, even though Congress subsequently enacted 31 USC §5321(a)(5)(C) allowing penalties of up to 50% of the balance in unreported foreign accounts for a willful failure to le an FBAR. In contrast, the Court of Federal Claims has ruled in Norman3 that the regulation limiting the penalty to $100,000 is invalid and that the IRS can assert the maximum 50% penalty allowed by the statue.
e IRS has vowed to appeal Colliot and Wadhan and to litigate this issue in other courts around the country. e outcome of these cases could either con- rm or undermine the IRS’s practice over the past decade of using the threat of potentially crushing 50% FBAR penalties to force settlements in FBAR and foreign account-related audits.
JUNE–JULY 2018
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