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Court Holds FBAR Penalty Over $100,000 Is Illegal by Robert S. 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). Based on the statute, the IRS has routinely imposed FBAR penalties equal to 50% of the high balance in the taxpayer’s offshore accounts, sometimes for several years.  As a result, taxpayers have been faced with millions of dollars in FBAR penalties.

Along with a handful of other commentators, I had pointed out that these confiscatory penalties violate a Treasury regulation issued after sec. 5321(a)(5(C)(i) was amended.  That regulation, 31 C.F.R. sec. 1010.820, provides that the maximum FBAR penalty is $100,000.  See “Is it Illegal for the IRS to Assess More than $100,000 for a Willful FBAR Violation?” posted November 17, 2017.

On May 16, 2018, a District Court held that a willful FBAR penalty of over $100,000 was illegal.  United States v. Colliot, Docket No. 1:16-cv-01281 (W.D. Tex.). The Government sued Mr. Colliot to collect FBAR willful penalties assessed against him for 2007, 2008, 2009 and 2010. The penalties assessed were $548,773 for 2007 and $198,082 for 2008. The penalties for 2009 and 2010 were smaller. Mr. Colliot moved for summary judgment on the ground that the IRS improperly assessed penalties of over $100,000 in violation of the regulation. The Government opposed the motion on the ground that regulation was invalidated by the statute. The Court disagreed.

The Court found that there was “little reason to believe” the statute “implicitly superseded or invalidated” the regulation. The maximum penalty is discretionary and the regulation, issued by notice-and-comment rulemaking, “is consistent with § 5321’s delegation of discretion to determine the amount of penalties to be assessed.”  The regulation was neither unreasonable nor contrary to the provisions of the statute. As a result the IRS acted “arbitrarily and capriciously” when it when it assessed penalties in excess of the regulatory cap.

The Court left open the issue of the appropriate relief in this situation: could the IRS still collect up to $100,000 per year if it proved willful violations or was the entire penalty invalid?

This case is a significant victory for taxpayers.  Persons who did not go into the Offshore Voluntary Disclosure Program and are facing 50% penalties have a new weapon to defeat the IRS. The Government will have to consider whether it wants to appeal the decision or just promulgate a new regulation that authorizes a penalty of up to 50% of the maximum balance in the undisclosed offshore accounts.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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 https://www.taxlitigator.com


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