Is it Illegal for the IRS to Assess More than $100,000 for a Willful FBAR Violation? by Robert Horwitz
Section 5321(a)(5)(A) provides that the Secretary of Treasury “may impose a civil money penalty” on anyone who violates the FBAR reporting requirements. Originally, the penalty for willful violation was the greater of the amount in the account (not to exceed $100,000) or $25,000. In 2004, Congress amended the FBAR penalty provision to increase the maximum willful penalty from the amount in the account (up to $100,000) to the greater of $100,000 or 50% of the amount in the account. Section 5321(a)(5)(C)(i). Because the penalty is one that the Secretary “may” impose, the amount of the penalty is in his discretion, as long as it does not exceed the statutory maximum.
Since the the penalty can now be up to 50% in the account with no cap, why do I say it may be illegal for the IRS to assess more than $100,000 for a willful FBAR violation? Check the regulations. In 2010, the Treasury issued new Bank Secrecy Act regulations. 31 C.F.R. §1010.820 was issued in 2010 and amended in 2016. It states that the maximum penalty for a willful FBAR violation may not “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.” 31 C.F.R. §1010.820(g)(2). In issuing and amending this regulation long after the willful penalty provision was amended, one might assert that the Secretary exercised his discretion to cap the FBAR penalty at $100,000 per year, regardless of the size in the account.
No one has raised this issue in any FBAR case, but it would be interesting to see how the Government reacts. It would be strange for the Government to challenge its own regulation, especially a regulation issued and then amended years after the underlying statute was enacted. The Government might just concede (though unlikely), or amend the regulation to reflect the new statutory language. Or maybe the Secretary realized all along that a 50% penalty was confiscatory and capped it at $100,000.