Page 2 - Federal Courts Disagree On Whether The 50% Willful FBAR Penalty Is Illegal

The 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.
PENALTIES
Evolution of the FBAR Penalty
Nearly 50 years ago, in 1970, Congress passed the Bank Secrecy Act requiring U.S. persons to report their interest in or signatory authority over foreign bank and nancial accounts to the U.S. government by ling a Report of a Foreign Bank and Financial Accounts Report (“FBAR” or FinCEN Form 114).4 Failing to timely le an FBAR, or ling an incomplete or false FBAR, can result in a range of penalties, depending on the level of culpability at issue. If a taxpayer can a rmatively show reasonable cause for failing to le or ling a false FBAR, then no penalty will be imposed, while a negligent violation of the FBAR rules can result in a penalty of up to $10,000 for each failure.5
Seventeen years later, Congress amended the FBAR statute to provide:
(A) Penalty authorized.—The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 ... In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—(I) $100,000, or (II) 50 percent of the amount (of the unreported account)...8
When Congress amended the FBAR penalty statute in 2004 to increase the maximum willful penalty, Treasury did not change its regulation to account for the increase in the statutory maximum penalty, even though Treasury did amend other portions of the regulations after 2004.9 Nevertheless, since 2004, the IRS has taken the position that the 2004 amendment to the statute superseded its 1987 regulation and has assessed and collected numer- ous FBAR penalties equal to 50% of the balance of the unreported account or accounts at issue even though these penalties exceeded the $100,000 limitation in the regulation.
is aggressive approach to FBAR penalties came at a time when the IRS was using the threat of steep civil penalties as part of its plan to drive voluntary compliance and encourage taxpayers to participate in its O shore Voluntary Disclosure Program (“OVDP”). Since 2009, 56,000 taxpayers have made a voluntary disclosure under the OVDP, paying a total of $11.1 billion in back taxes, interest and penalties.10 While many of these taxpay- ers came forward to avoid criminal prosecution, many others likely came forward (and agreed to pay the hefty miscellaneous penalty) in order to avoid the willful FBAR penalties they may have faced outside of the OVDP. While taxpayers challenged FBAR penalties on numer- ous grounds (often arguing that their conduct was not willful), no taxpayer successfully argued that the IRS’s authority to impose penalties was limited by its own regulations—until now.
Recently, three di erent taxpayers have taken the IRS to court and challenged 50% FBAR penalties assessed by the IRS on the grounds that the penalties exceeded the maximum penalty allowed by the FBAR regulations. In all three cases, the amount of the FBAR penalties at issue were within the maximum penalty amount allowed by the FBAR statute. However, the taxpayers argued that the penalties could not stand because they exceeded Treasury’s authority under its own regulation.
A willful FBAR violation can result in even larger mon- etary penalties. e original statute passed as part of the Bank Secrecy Act in 1970 provided the following with respect to the willful FBAR penalty:
e Secretary of the Treasury may impose a civil money penalty on any person who willfully violates or any person willfully causing any violation of any provision of section 5314 ... Maximum amount limitation ... (I) an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation; or
(II) $25,000.6
In 1987, long after the FBAR statute was enacted, Treasury issued regulations stating that
[f]or any willful violation committed after October 26, 1986 ... the Secretary may assess upon any per- son, 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 $25,000.7
26 JOURNAL OF TAX PRACTICE & PROCEDURE
JUNE–JULY 2018