FBAR Penalty Update

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

The IRS recently succeeded in imposing a hefty penalty against a US taxpayer for failing to report a foreign bank account in the case of Norman v. United States, 183 Fed. Cl. 189 (2018). That penalty was equal to 50 percent of the balance of the taxpayer’s unreported foreign account at the time of the failure. As a brief background, the IRS had assessed a penalty under the Bank Secrecy Act of over $800,000, alleging a willful failure to file a Report of Foreign Bank and Financial Account (“FBAR“) to report a Swiss bank account held by the taxpayer back in 2007. Some months later, the taxpayer contested the assessment with the IRS, and after the penalty was affirmed by the IRS Office of Appeals, the taxpayer filed a complaint with the Court of Federal Claims. After a one-day trial, that court upheld the penalty assessment.

The requirement to file a FBAR is found in 31 U.S.C § 5314. In 1970, Congress enacted the Bank Secrecy Act as a response to the perceived “serious and widespread use of foreign financial facilities located in secrecy jurisdictions for the purpose of violating American law.” That act authorized the Treasury Secretary to prescribe regulations that would implement the Bank Secrecy Act. As a result, the Treasury Secretary enacted a regulation requiring citizens with an interest in, or control over, one or more foreign financial accounts above a certain value to report those accounts on a FBAR. To enforce this regulation, the IRS has the authority to assess significant penalties against those who fail to report their non-US accounts. For willful violations, section 5321(a)(5)(C) provides for a statutory penalty equal to the greater of $100,000 or 50 percent of the account(s) at the time of the violation.

The meaning of the term “willful” has been the subject to significant litigation and dispute in recent years. The Norman court, like others, gave thoughtful analysis to the meaning of the term:

The term “willful” is not defined under the statute. See generally, 31 U.S.C. § 5321. However, the Bank Secrecy Act specifically defines penalties under § 5321 as “civil money penalties.” § 5321(a)(5)(A). Where, as here, “willfulness is a condition for civil liability,” it is “generally taken [] to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57, 127 S. Ct. 2201, 167 L. Ed. 2d 1045 (2007) (citing McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133), quoted in United States v. Williams, 489 Fed. App’x. 655, 658 (4th Cir. 2012). “While the term recklessness is not self-defining, the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Safeco, 551 U.S. at 68 (internal quotation omitted).

 

Specific to FBAR cases, willfulness in the context of violations of § 5321 “may be proven ‘through inference from conduct meant to conceal or mislead sources of income or other financial information,’ and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.” Williams, 489 Fed. App’x at 658 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991).

Additionally, “every federal court to have considered the issue has found the correct standard to be the one used in other civil contexts.” Bedrosian v. United States, No. 2:1 that the taxpayer signed documents opening a numbered Swiss bank account with Union Bank Switzerland, that the taxpayer waived her financial information waived her right to invest in US securities,, and that she was informed by UBS of its cooperation with the United States government and that the taxpayer then closed her account and transferred her funds to wetland and co-. 5-cv-5853, 2017 U.S. Dist. LEXIS 154625 at *3 (E.D. Pa. 2017). A person willfully violates section 5314 when she “either knowingly or recklessly fails to file an FBAR.” Id.; see also United States v. Bohanec, 263 F. Supp. 3d 881, 888-89 (C.D. Cal. 2016) (“[W]illfulness under 31 U.S.C. § 5321 includes reckless disregard of a statutory duty.”). It is therefore the Court’s task to determine whether Ms. Norman knowingly or recklessly failed to file an FBAR in 2007.

The court’s analysis also focused on the fact that the taxpayer failed to apply for acceptance into the IRS’s Offshore Voluntary Disclosure Program, and that the taxpayer instead filed a “quiet disclosure”. The court, noting that it did not find the taxpayers testimony credible, determined that the failure to report the FBAR was indeed willful. The court found that a number of facts supported its conclusion, and based its finding, in part, on familiar case law, stating that:

“[a]t a minimum,” Ms. Norman was “put on inquiry notice of the FBAR requirement” when she signed her tax return for 2007, 10 but she chose not to seek more information about the reporting requirements. the IRS succeeded in imposing a penalty against the taxpayer for failing to report a foreign bank account, 489 Fed. App’x at 659. Although one of the few consistent pieces of Ms. Norman’s testimony was that she did not read her tax return, Trial Tr. 36:1-7; 71:23-25, simply not reading the return does not shield Ms. Norman from the implications of [*195] its contents. See Williams, 489 Fed. App’x at 659 (quoting Greer v. Comm’r of Internal Revenue, 595 F.3d 338, 347 n. 4 (6th Cir. 2010)); United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (same).

The Court finds that Ms. Norman acted to conceal her income and financial information, and also that she either recklessly or consciously avoided learning of her reporting requirements. Therefore, the Court finds that Ms. Norman willfully violated §5314. See Safeco, 551 U.S. at 57.

Having found that the taxpayer’s failure to report the foreign account on a FBAR was “willful,” the court next turned to the validity of the FBAR regulations and specifically addressed the Colliot Decision.

The Colliot Decision

The court considered the effect of the Colliot decision on its ruling. See our prior posts on Colliot here. In Colliot, the District Court for the Western District of Texas held that a regulation, 31 C.F.R 1010.820, which capped penalties under section 5321 at $100,000, was still valid, thus limiting a taxpayer’s penalty exposure. The taxpayer requested that the court follow the holding in Colliot. The court, however, rejected this request, holding that the regulation at issue was no longer valid. It’s analysis on this score is set forth below:

Penalties Under 31 U.S.C. § 5321 Before and After 2004

After trial, Plaintiff submitted the decision in Colliot referred to above. Letter, ECF. No. 36 at 1. This decision of the U.S. District Court of the Western District of Texas held that a regulation, 31 C.F.R. 1010.820, under the previous version of the Bank Secrecy Act, which caps penalties under § 5321 at $100,000, was still valid. Plaintiff requests that this court follow the holding in Colliot, and award her the difference between the penalty assessed and this “cap.” The Court will explain why, contrary to Colliot, the regulation for FBAR penalties set forth under the previous version of the Bank Secrecy Act is no longer valid, by examining the statute before 2004, the amendment made in 2004, and the holding in Colliot.

A. The Text of § 5321 Before 2004

Prior to 2004, the Bank Secrecy Act allowed imposition of an FBAR penalty only for willful violations of § 5314. 31 U.S.C.S. § 5321(a)(5)(A) (2003) (“The Secretary of the Treasury may impose a civil money penalty on any person who willfully violates or any person willfully causing any violation. . . .”) (emphasis added). Congress capped this penalty by providing that “[t]he amount . . . shall not exceed” the greater of $25,000.00 or the balance of the account, limited to a maximum of $100,000.00. 31 U.S.C.S. § 5321(a)(5)(B) (2003). The regulation guiding enforcement of this provision, 31 C.F.R. 103.57, directly paralleled this language and structure. See 31 C.F.R. 1010.820.

B. The Text of § 5321 After the 2004 Amendment

The American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004) (“AJCA”) changed the structure of the FBAR penalty provisions, such that § 5321 now raises the maximum penalty for willful violations. In addition, it gives the Treasury Secretary discretion to impose a penalty not just for willful violations, but for any violations. It now states, “the Secretary of the Treasury [**15] may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” § 5321(a)(5)(A) (emphasis added). The statute then provides that the maximum penalty for a violation is usually $10,000. See § 5321(a)(5)(B)(i).

However, for willful violations, there is a new maximum penalty provided in § 5321(a) (5)(C). This section states: “the maximum penalty under subparagraph (B)(i) [$10,000] shall be increased to the greater of [] $100,000, or [] 50 percent” of the balance of the account. §5321(a)(5)(C)(i) (emphasis added). This provision, therefore, 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. This text is unambiguous.
C. Congress’ Intent in Amending § 5321

In addition to the unambiguous language of the statute, Congress clearly stated its intent to raise the maximum amount of FBAR penalties when it passed the AJCA in 2004. Congress believed that “improving compliance with this reporting requirement is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams.” S. Rep. No. 108-192 at 108 (2003). Therefore, Congress used the AJCA to “increase the [previous law’s] penalty for willful behavior,” and create an “additional civil penalty [*196] for a nonwillful act.” H.R. Rep 108-755 at 615 (2004) (Conf. Rep.). “Congress believed that increasing the [previous law’s] penalty for willful non-compliance” would “improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005).

D. The Reasoning in Colliot

 

In Colliot, the district court held that Congress’ amendment to § 5321 in the AJCA did not supersede the regulation promulgated under the statute before amendment. The district court reasoned:

[The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, § 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C).

2018 U.S. Dist. LEXIS 83159 at *5-6 (citations omitted). It is true that the statute vested the Treasury Secretary with discretion to determine a penalty’s amount. However, this statement mischaracterizes the language of § 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.

Crucially, the amended statute dictates that the usual maximum penalty “shall be increased” to the greater of $100,000 or 50 percent of the account. § 5321(a)(5) (C)(i) (emphasis added). Congress used the imperative, “shall,” rather than the permissive, “may.” Therefore, the amendment did not merely allow for a higher “ceiling” on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion. Rather, Congress raised the new ceiling itself, and in so doing, removed the Treasury Secretary’s discretion to regulate any other maximum.

There is no question whether Congress can supersede regulations, only whether Congress did supersede the regulation in this instance. In United States v. Larionoff, 431 U.S. 864, 873, 97 S. Ct. 2150, 53 L. Ed. 2d 48 (1977), the Supreme Court held, “in order to be valid[,] [regulations] must be consistent with the statute under which they are promulgated.” Id., cited with approval in Colliot, 2018 U.S. Dist. LEXIS 83159 at *5. The regulation in question, 31 C.F.R. 1010.820, which guided enforcement of § 5321 before its 2004 amendment, sets the maximum penalty for a willful violation of § 5314 to $100,000.00. However, because § 5321(a)(5)(C)(i) mandates that the maximum penalty be set to the greater of $100,000.00 or 50 percent of the balance of the account, the regulation is no longer consistent with the amended statute. Therefore, 31 C.F.R. 1010.820 is no longer valid. See Larionoff, 431 U.S. at 873.
Although the Court appreciates the district court’s interpretation, this Court is not bound by that interpretation, and will not follow it.

In the end, the court declined to follow the Colliot decision, and imposed a very significant FBAR penalty for the “willful” failure to report a foreign account. The case provides significant insight into the facts that courts consider relevant in the willfulness analysis, and stands as yet another warning of the IRS’s aggressive approach to FBAR penalties.

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