Where Is the Limit on Penalties for Willful FBAR Violations?

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A recent decision of the United States Court of Appeals, Federal Circuit holds that the pre-2004 regulation limiting willful FBAR penalties to a maximum of $100,000 is not applicable.  As many tax practitioners know, 31 U.S.C. § 5314(a) requires taxpayers who have accounts with foreign financial institutions, specifically any person with a financial interest in or signature authority over foreign financial accounts with aggregate value of over $10,000 at any time during the calendar year, to disclose such interests to the United States government.  Taxpayers meet their reporting obligation by filing a Report of Foreign Bank and Financial Account (“FBAR”).  Pursuant to 31 U.S.C. § 5321(a)(5)(A), the IRS may impose civil penalties for failing to file an FBAR.

Norman v. United States involved a school teacher who opened a foreign bank account with the Swiss bank, UBS, in 1999.  Norman v. United States, 942 F.3d 1111, 1113 (Fed. Cir. 2019).  She had opened what is colloquially known as a “numbered account” that only lists the account number on account statements rather than the holder’s name or address. Id.  The balance in the account ranged between $1.5 million and $2.5 million from 2001 to 2008.  Id.  Norman failed to file FBARs in all years, including 2007 (the year at issue in the case).  Id. at 1114.  Numerous facts indicated that her failure to file the FBARs was willful, and, as a result, the IRS imposed a penalty of $803,530 against Norman pursuant to 31 U.S.C. § 5321(a)(5)(C).

Prior to 2004, § 5321 limited penalties for willful violations of § 5314 to a maximum of $100,000. Id. But Congress amended § 5321 in 2004 to impose a $10,000 maximum penalty for non-willful violations of § 5314 and a maximum penalty for willful violations of § 5314 to the greater of $100,000 or 50% of the balance in the account or accounts at the time of the violation.  See 31 U.S.C. § 5321(a)(5)(C); Id.

Norman argued that an IRS regulation issued in 1987 (and that was still on the books) limited any penalty for a willful failure to file an FBAR to $100,000 despite the amended statute. Norman, 942 F.3d at 1114 (citing 31 C.F.R. § 1010.820(g) (2010)).  In other words, she argued that the IRS could, by its own discretion, place a lower cap on the maximum amount of penalties for willful violations of § 5314. Id. at 1117.

The court ultimately disagreed with Norman and upheld the entire $803,530 penalty against her.  Id. at 1118.  Specifically, the court held that the 1987 regulation set forth “a maximum willful FBAR penalty that [wa]s inconsistent with the maximum penalty mandated by statute.”  Id. at 1117.  While it is true that the IRS has the discretion to impose a penalty in a particular case pursuant to 31 U.S.C. § 5321, the court held that the statute does not authorize the IRS “to set a penalty cap on all cases that is different than the penalty cap Congress mandated.”  Id. at 1118.  The case is yet another blow for taxpayers and upholds the IRS’s authority to impose willful FBAR penalties equal to 50% of the account(s) in violation.

Practitioners should note that the willful FBAR penalty has yet to be challenged as an unlawful excessive fine pursuant to the Eighth Amendment of the Constitution. Norman raised the argument, but the court declined to rule on Norman’s Eighth Amendment challenge as it was “untimely.”  Id. at 1118.

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