Page 3 - Federal Courts Disagree On Whether The 50% Willful FBAR Penalty Is Illegal

Two Federal District Courts Hold that the 50% FBAR Penalty Is Illegal
In Colliot,11 the United States brought suit against Colliot to collect willful FBAR penalties for 2007 and 2008 of $548,772 and $196,082, respectively.12 Colliot led a motion for summary judgment arguing that the penal- ties were improper because they exceeded the $100,000 penalty cap provided in 31 CFR §1010.820. Speci cally, Colliot argued that the penalties were arbitrary and capri- cious because they did not accord with the limit set forth in the government’s own regulation. e IRS argued that they were not bound by the limited penalty allowed for by the regulation because the statute at issue had been amended after the regulation was issued and thus superseded and invalidated the regulation.
e Court agreed with the taxpayer and held that a penalty in excess of $100,000 was illegal. e Court ruled that the 2004 amendment to the statute did not invalidate or supersede the 1987 regulation because, on its face, the regulation was not inconsistent with the revised statute. According to the Court, the 2004 version of the statute merely authorizes a maximum penalty while allowing the IRS the discretion to impose lower penalties. In other words, the regulation’s exercise of discretion in limiting imum penalty to $100,000 was merely that, an exercise of discretion granted by statute, and did not result in any inconsistency with the new statute. e court stated that, when “considered in conjunction with §5321, §1010.820 is consistent with § 5321’s delegation of discretion to determine the amount of penalties to be assessed.”13
e Court summarized its conclusion as follows:
In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. [] Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemak- ing. [] Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capri- ciously when it failed to apply the regulation to cap the penalties assessed against Colliot.
A second Federal District Court agreed with the Colliot decision in Wadhan.14 In Wadhan, the IRS sued Wadhan to collect FBAR penalties of $1,108,645.41 for 2008, $599,234.54 for 2009, and $599,234.54 for 2010. Because these penalties exceeded the $100,000 cap set
forth in §1010.820, Wadhan argued that the penalties sought by the IRS must be capped at $100,000 per year. e Court agreed that the willful FBAR penalty must be capped at $100,000 and noted that its reasoning was “congruent” with that of the Colliot court. In addition to generally following Colliot’s reasoning, the Wadhan Court stressed that the 2004 version of the statute did not require the government to impose the higher penalties allowed under the statute and that “there is nothing in the legislative history o ered by the IRS that suggests that Congress intended to limit the discretion of the Secretary to determine what penalties should be imposed.”15 us, the penalty cap in the regulation did not con ict with the amended statute which simply allowed the IRS to impose higher penalties.
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According to the Court, because the regulation is not in con ict with the statute, the regulation is valid and the IRS is bound by the $100,000 cap in the regulation. e Court also noted that the di erence between the penalty cap in the statute and the cap in the regula- tion has existed for 14 years, yet the Secretary never amended the regulation to allow for a higher penalty cap and “[t]his suggests that the Secretary was aware of the penalties available under 31 U.S.C. §5321(a)(5)(C) and elected to continue to limit the IRS’ authority to impose penalties to $100,000 as speci ed in 31 C.F.R. §1010.820.”16
Finally, the Court dismissed the government’s argu- ment that the legislative history of the 2004 statu- tory amendment weighed in favor of finding that the regulation was invalid. First, the Court noted that it only considers legislative history when a statute is
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Until this con ict among the
courts is resolved, taxpayers with unreported foreign assets must carefully evaluate their options and the risk of large FBAR penalties, their risk of criminal prosecution, and the risk that other penalties can be imposed by the IRS, including penalties for failing to le Forms 8938, 5471 and 3520.