Jul 19, 2017
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The Internal Revenue Service was handed a defeat with respect to its ability to assess some penalties with respect to late filed FinCEN Form 114, “Report of Foreign Bank and Financial Accounts.” In the case of United States v. Colliot (W.D. Texas, Austin Division, Case No.: AU-16-CA-01281-SS) the court ruled in favor of Ms. Colliot. The case revolved around the ability of the IRS to impose FBAR penalties in excess of US $100,000. The potential imposition of significant FBAR penalties has been one of big hammers the IRS has used in its ongoing efforts to combat tax evasion.
FBAR civil penalties are imposed under Title 31 of the United States Code of Federal Regulations (“C.F.R.”) Chapter X Subpart H §1010.820. The provision states:
(“g) For any willful violation committed after October 27, 1986, of any requirement of § 1010.350, § 1010.360 or § 1010.420, the Secretary may assess upon any person, a civil penalty: …
(2) In the case of a violation of § 1010.350 (Reports of foreign financial accounts) or § 1010.420 (Records to be made and maintained by persons having financial interests in foreign financial accounts) involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, 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.”
The penalties, as outlined in the instructions to Form 114 state, “A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.”
At issue was whether the IRS had the ability to issue a willful violation penalty in excess of the $100,000 minimum. Given the current language of the regulations, the court ruled that it could not. On page 5 of the Order the Court states:
“In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass ‘n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to ‘use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance’). 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 capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be ‘in accordance with law’); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) (‘[A]n agency must abide by its own regulations.’) (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)).
If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321 (a)(5) ‘s maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.”
While this is a win for the taxpayer, the IRS believes the judgement to be error. Further, what happens when a government loses a case? They change the law. In this case, they update the Regulations.
The moral of the story is that if you have not (yet) properly disclosed all of your foreign financial accounts to FinCEN you need to do so while the various IRS voluntary disclosure programs are still in effect. Even a US $100,000 penalty is too much.
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