A district court has held that the monetary limit on the penalty for willfully failing to file a Report of Foreign Bank and Foreign Accounts (FBAR) is an annual one. The court found that, in reaching this conclusion, it was not required to consider the ongoing split of court opinions in previous cases about whether the limit on the penalty is defined by statute or reg.
Background on FBAR Penalties
Under 31 USC 5314(a) and 31 C.F.R. 1010.350, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. The penalty for violating the FBAR requirement is set forth in 31 USC 5321(a)(5). 31 USC 5321(a)(5)(A) provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of 31 USC 5314(a). The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC 5321(a)(5)(B)(i)) The maximum penalty amount for a willful violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. (31 USC 5321(a)(5)(C), 31 USC 5321(a)(5)(D))
The penalty amounts described above reflect a 2004 law change that increased the maximum civil penalties that can be assessed for willful failure to file an FBAR. Before that change, the maximum penalty was $100,000. Regs that were promulgated before the statutory increase continue to reflect the former $100,000 maximum (as opposed to the "greater of $100,000 or 50%..."). (31 C.F.R. 1010.820(g))
Differing Court Opinions on FBAR
There is now disagreement amongst district courts as to whether the 2004 statutory amendment invalidated the $100,000 cap established by 31 C.F.R 1010.820. Among the courts that have held that the statutory amendment merely increased the maximum but did not require IRS to in any case impose the maximum, and thus held that the limit contained in the reg was the maximum penalty that IRS could impose, were Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834, and Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208.
Facts of this FBAR Case
The taxpayer, Mr. Shinday had foreign bank accounts for which he was required to file an FBAR, and for which he didn't file an FBAR, for 2005 through 2011. The balances in those accounts, for 2005 through 2011, varied from approximately $380,000 to $1,031,548.
IRS assessed willful FBAR penalties against Shinday for the tax years 2007 to 2011. The aggregate amount of these penalties was $257,888, which represented 25% of the combined 2006 year-end balance of Shinday's foreign bank accounts, which equaled $1,031,548. This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011.
Shinday argued that IRS's claim to reduce Shinday's penalty assessments to judgment must be dismissed because IRS assessed penalties which exceeded the $100,000 penalty cap established by 31 C.F.R. 1010.820. Relying on Colliot and Wahdan, Shinday contended that 31 C.F.R. 1010.820's cap controls because it is consistent with 31 U.S.C. 5321, the statute under which it was issued.
Court OKs IRS calculation. The court approved IRS's calculation.
The court said that neither of the cases cited by Shinday supported his position. In Colliot, the court found that IRS could not assess FBAR penalties exceeding the $100,000 cap promulgated under 31 C.F.R. 1010.820, but that court only considered FBAR penalties that exceeded $100,000 in a given year. Similarly, the court in Wahdan concluded that IRS "is not empowered to impose yearly penalties in excess of $100,000 per account".
The court here said that the facts of Colliot and Wahdan were thus inapposite to this case because the five penalties assessed against Shinday were individually all less than $100,000. Although in the aggregate the penalties against Shinday totaled $257,888, the yearly, individual penalties were each approximately $51,578. Each time Shinday willfully failed to timely file an FBAR, IRS assessed a penalty. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from Shinday' failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011.
Finally, the court noted that, in arriving at its decision, it did not need to reach the issue of whether 31 USC 5321 invalidates the Department of Treasury's implementing regs, because there was no year in which Shinday was penalized more than $100,000.