Page 4 - Federal Courts Disagree On Whether The 50% Willful FBAR Penalty Is Illegal

PENALTIES
unclear and that the statute at issue was not ambigu- ous. Second, the Court noted that, even if it were to consider the statute’s legislative history, such history did not “suggest[] that Congress believed that the maximum penalties for willful violations should be mandatorily imposed.”17
One Federal Court Holds that the 50% FBAR Penalty Is Legal
Shortly after Colliot and Wadhan were decided, the Court of Federal Claims decided differently on the same issue. In Norman,18 the Court sided with the IRS and ruled that the 2004 amendment to the FBAR statute had in fact invalidated the 1987 regulation. The Norman Court acknowledged that both the original version of the statute and the 2004 version use the term “may” when authorizing the Secretary to impose the penalty, but focused on the fact that the 2004 statute states that the maximum penalty “shall” be increased. The Court reasoned that the use of the term “shall” in the amended statute “mandates that the maximum penalty allowable for willful failure to report a foreign bank account be set at a specific point: the greater of $100,000, or 50 percent of the account’s balance.”19 Because the 2004 statute sets a maximum penalty that is higher than the maximum penalty in the regulation, the Court held that the regulation was “no longer consistent with the amended statute” and was thus “no longer valid.”20
Conclusion
e di erence between the Colliot and Wadhan decisions on the one hand, and the Norman decision on the other hand, appears to be based on the di erent ways in which the Courts approached the issue of statutory construction to analyze whether the amended statute con icts with the regulation. e Colliot and Wadham Courts focused on the broader statutory scheme that provides Treasury with discretion to determine the amount of the penalty. In the context of this broader statutory scheme, it is pos- sible to read the regulation in which Treasury exercised its discretion to cap the willful FBAR penalty at $100,000 in a way that is consistent with the amended statute, which gave Treasury authority to impose a penalty up to 50% of foreign account. In contrast, the Norman Court focused on the speci c language of the statute and held that the statutory language stating that the maximum FBAR penalty shall be 50% of the foreign account is inconsistent with the language of the regulation which states that the maximum FBAR penalty that Treasury will impose is $100,000.
Until this con ict among the courts is resolved, taxpay- ers 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 pen- alties can be imposed by the IRS, including penalties for failing to le Forms 8938, 5471 and 3520. ese deci- sions may become even more complex when the OVDP expires on September 28, 2018, and it could take years for the issue to wind its way through the Courts of Appeals.
ENDNOTES
1 Colliot, No. AU-16-CA-01281-SS, 2017 WL 6348129 (W.D. Texas. Dec. 11, 2017).
2 Wadhan, No. 17-CV-1287-MSK, 2018 WL 3454973 (D. Colo. Jul. 18, 2018).
3 Norman, No. 15-872T, 2018 WL 3629293 (Fed. Cl. Jul. 31, 2018).
4 31 US Code §5314; 31 CFR §1010.350.; Form FinCen 114.
5 31 USC §5321(a)(5)(B). The penalty for non-willful violations applies only to FBAR violations occur- ring after October 22, 2004 (i.e. FBARs due on or after June 30, 2005). Prior to October 22, 2004, no penalty existed for non-willful violations. 31 USC §5321(a)(5)(B)(ii).
6 31 USC §5321(a)(5)(C), prior to amendment by P.L. 108-357, §821(a).
7 31 CFR §103.57.
8 31 USC §5321(a)(5)(C).
9 See 31 CFR §1010.820.
10 IRS News Release IR-2018-52, March 13,
2018, available at www.irs.gov/newsroom/ irs-to-end-offshore-voluntary-disclosure- program-taxpayers-with-undisclosed-foreign- assets-urged-to-come-forward-now.
11 Colliot, No. AU-16-CA-01281-SS, 2017 WL 6348129 (W.D. Texas. Dec. 11, 2017).
12 Colliot, No. AU-16-CA-01281-SS, 2017 WL 6348129 (W.D. Texas. Dec. 11, 2017).
13 Colliot, No. AU-16-CA-01281-SS, 2017 WL 6348129
(W.D. Texas. Dec. 11, 2017).
14 Wadhan, No. 17-CV-1287-MSK, 2018 WL 3454973
(D. Colo. Jul. 18, 2018).
15 Wadhan, No. 17-CV-1287-MSK, 2018 WL 3454973
(D. Colo. Jul. 18, 2018).
16 Wadhan, No. 17-CV-1287-MSK, 2018 WL 3454973
(D. Colo. Jul. 18, 2018).
17 Wadhan, No. 17-CV-1287-MSK, 2018 WL 3454973
(D. Colo. Jul. 18, 2018).
18 Norman, No. 15-872T, 2018 WL 3629293 (Fed. Cl.
Jul. 31, 2018).
19 Norman, No. 15-872T, 2018 WL 3629293 (Fed. Cl.
Jul. 31, 2018).
20 Norman, No. 15-872T, 2018 WL 3629293 (Fed. Cl.
Jul. 31, 2018).
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