Another Court Holds Regulation Limits FBAR Willful Penalty and Other Recent FBAR News by Robert S. Horwitz
What is the Potential Maximum Willful FBAR Penalty? In the wake of United States v. Colliot, here, another district court recently held that the regulation at 31 CFR §1030.820 limits the maximum willful penalty. In United States v Wadhan, here, (D. Colo. July 18, 2018), the Wadhans had one account at UBS. They closed the UBS account in 2008 and had the funds transferred to multiple accounts in Jordan. They did not file an FBAR for 2008. They filed FBARs for 2009 and 2010. The FBARs did not list all their offshore accounts and for the ones listed the reported maximum account balance was “over $10,000.” The 2008 penalty was for 50% of the maximum amount in the UBS account. For both 2009 and 2010, the IRS assessed a $599,234.54 penalty equal to 50% of the maximum amount in the largest account. It also assessed multiple penalties of $100,000 for each of the other accounts.
Relying on 31 CFR §1030.820, the Wadhans moved for judgment on the pleadings, which the court treated as a motion for summary judgment. Holding that the IRS “is not empowered to impose yearly penalties in excess of $100,000 per account,” the court granted the motion.
In granting the motion, the court rejected the Government’s assertion that the 2004 amendment to 31 USC §5321(a)(5)(C), which increased the maximum FBAR penalty from $100,000 to 50% of the maximum balance in the account at the time of the violation, superseded the regulation. First, both pre- and post-amendment versions of subsection (a)(5)(C) give the Secretary discretion to assess the FBAR penalty. Second, the regulation is not inconsistent with the statute, since the regulation can be interpreted as an exercise of the Secretary’s discretion to limit the penalty. Third, since 2004 the Secretary has made at least five adjustments to penalties under 31 CFR §1010.821 but never increased the $100,000 cap. Finally, the court rejected the Government’s argument that the 1987 preamble to the predecessor of §1010.820, which states that Treasury intended to enforce the Bank Secrecy Act “to the fullest extent possible” without any “safe harbor,” does not indicate that it intended that the regulation would automatically incorporate any changes to §5321.
Note that the IRS assessed only one penalty for 2008, but penalties for each account for 2009 and 2010. Will the Government move for reconsideration on the ground that it is entitled to penalties of $100,000 for each account that was open in 2008? It has filed a motion asserting it can do so in Colliot. The statute provides that the Secretary “may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” Note the singular “a civil penalty” which can be imposed on “any person” who violates any provision of the section, not a penalty for each violation. It does not provide a penalty for “each violation.”
The Balance in the Account at the Time of the Violation? A second point relating to the 2008 penalty: even if the regulation did not limit the penalty, shouldn’t the maximum penalty for the UBS account have have been the greater of zero or $100,000? Under §5321(a)(5)(D), the amount is determined by “in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.” Emphasis added. The violation occurs on the date the FBAR was filed or was due to be filed. On June 30, 2009, the UBS account balance was zero. Nonetheless, the IRS often assesses penalties based on the maximum account balance during the year for which the report is due, not for the balance on the due date of the FBAR.
An example of the IRS assessing willful penalties that are less than 50% of the maximum balance during the year is the recent decision in United States v. Markus, Civil No. 16-2133 (RBK/AMD) (D. N.J., July 17, 2018). The defendant served as an Army engineer deployed in Iraq. For several years he oversaw an oil pipeline project. He received bribes from several businessmen in exchange for confidential bid information. He placed some of the bribes in an in Egypt. The rest he deposited in three accounts in Jordan. He filed an FBAR for 2008 reporting only one of the accounts in Jordan. He did not file FBARs for 2007 or 2009.
In 2012, Markus pled guilty to one count of wire fraud and one count of willfully failing to file an FBAR for 2009. In April 2014, the IRS assessed the following FBAR willful penalties:
Year Bank Balance Penalty
2007 Egypt Bank $299,250 $100,000
2007 Jordan I $744,854 $372,427
2007 Jordan II $90,000 $45,000
2008 Egypt Bank $364,950 $100,000
2009 Egypt Bank $400,000 $218,225
2009 Jordan III $680,000 $6,362
Four days before the statute of limitations expired, the Government filed a suit to reduce the FBAR assessments to judgment. After discovery, it moved for summary judgment. Markus, who represented himself, raised only legal arguments in his opposition and did not refute the Government’s factual assertions. Based on Markus’ criminal conviction and his filing an FBAR for 2008, together with his deposition testimony, the court found that Markus willfully failed to file FBARs for 2007 and 2009 in order to hide his taking bribes. Since the regulation limiting the maximum penalty was not raised in the motion or opposition, the court did not address the issue. The court made one modification to the penalties: because the evidence establish that the maximum balance in the Egyptian account was $400,000 in 2009, it reduced the penalty for that year from $218,225 to $400,000.
One peculiarity is that while two accounts had maximum balances of over $200,000 in 2007 and Jordan account III had a balance of $680,000 in 2009, Markus was assessed a 50% penalty for only one account for 2007. The penalty for 2009, $6,362, was less than 1% of the maximum balance. No explanation is given, although it should be noted that according to the court Markus transferred $580,000 from Jordan account III to an account in the U.S. in 2009.
Further FBAR news: Internal Revenue Manual 126.96.36.199.5.1 states that for purposes of the FBAR penalty “willful” is a “voluntary, intentional violation of a known legal duty.” A Chief Counsel Technical Advice Memo, here, was recently released that states that “willful” is not limited to voluntary and intentional violations but also includes violations due to “willful blindness” and “reckless disregard.” The TAM also stated that the Government’s burden of proof is by a preponderance of the evidence and not by clear and convincing evidence.
For more information please contact ROBERT S. HORWITZ – firstname.lastname@example.org or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.