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Is there a Ray of Light in Willful FBAR Cases, or Am I Just a Cockeyed Optimist? by ROBERT S. HORWITZ

The Second Circuit recently joined the Fourth (United States v. Horowitz), Eleventh (United States v. Rum) and Federal Circuits (Norman v. United States) in holding that the 1987 regulation setting the maximum penalty for willful FBAR violations at $100,000 was invalid due to the 2004 statutory amendment that provides that Treasury may impose a maximum willful penalty in an amount equal to the greater of $100,000 or 50% of the aggregate amount in the accounts at the time of the violation.  But given that there was one dissent, I see that as a good sign in a generally bleak environment for people who are assessed willful FBAR penalties.

The case is United States v. Kahn, Dkt. No. 19-3920, 2021 WL 2931305 (July 13, 2021).  The parties in district court stipulated to the facts:

  • Harold Kahn had two accounts in Switzerland, each of which had more than $100,000;
  • He willfully failed to file an FBAR for 2008 that was due on June 30, 2009;
  • On that date, the aggregate balance in the accounts was $8,529,456;
  • The IRS assessed a $4,264,728 willful FBAR penalty against him for 2009; and
  • Kahn died after the penalty was assessed.

The United States sued the estate to reduce the assessment to judgment.  Cross motions for summary judgment were filed with the only issue being whether the 1987 Regulation, 31 C.F.R. §1010.820(g) limited the amount that could be assessed to a maximum of $100,000 per account, for a total of $200,000.  The district court ruled for the United States and a divided panel of the Second Circuit affirmed.

The majority began its analysis with a little bit of history.  In 1986 Congress enacted a civil monetary penalty for willful failure to file an FBAR.  The amount of the penalty that could be imposed was the greater of $25,000 or the “amount in the account (not to exceed $100,000) at the time of the violation.”  In 1987, Treasury promulgated the Regulation, which repeated the statute almost verbatim.

In 2002, Treasury gave FinCen authority to implement and administer the Bank Secrecy Act, including the promulgation and amendment of regulations “in effect or in use on the date of enactment of the USA Patriot Act of 2001, [which] shall continue in effect …  until superseded or revised….”  In 2003, FinCen delegated to the IRS authority to enforce the FBAR provisions, but not to promulgate or amend the regulations.

In 2004, Congress amended the FBAR penalty provisions at 31 U.S.C. §5321(a)(5) to add a nonwillful penalty and increase the maximum willful penalty that may be imposed to the greater of $100,000 or 50% of the amount in the account at the time of the violation.   The position of the Estate was that the 2004 statute was not inconsistent with the 1987 Regulation and, therefore, the Regulation remained in effect.  The majority did not buy this argument.

According to the majority, the 2004 amendment did not authorize the Secretary to set a maximum willful penalty level, since that was set by Congress.  The Secretary’s authority to issue regulations doesn’t mean that a regulation can be issued that contradicts a statutory provision.  Noting that the language of §5321(a)(5)(B) states that the Secretary may impose a non-willful penalty not to exceed $10,000 while §5321(a)(5)(C) states the maximum penalty under subparagraph (B)(i) shall be increased to the greater of $100,000 of 50% of the amount in the account, the majority stated that the use of “shall” in a statute is “mandatory.”  Thus, while the Secretary has the discretion in any given case to impose a penalty below the maximum, it does not mean the 1987 Regulation can forbid a penalty as high as the maximum set by the 2004 amendment.  As a result, the Regulation and the 2004 amendment do not “harmonize.”

The 1986 statute’s penalty was “plainly amended” in 2007 and a regulation that contravenes the statutory language is invalid.  Even where the regulation is not technically inconsistent with the statutory language, it is invalid if it is “fundamentally at odds with manifest Congressional design.”  That design was to increase the maximum penalty that could be imposed for a willful FBAR violation.  The majority thus said it wouldn’t read the 2004 amendment as being rendered superfluous by the 1987 Regulation.

According to the majority, Treasury has a “relaxed approach” to amending regulations to track the Code.  Since the 1987 Regulation does not implement Congress’s will as expressed by the 2004 amendment, it is “a mere nullity.”  The majority rejected the Estate’s argument that the rule of lenity applies so that any ambiguity should be read in its favor, stating that there was no ambiguity in the 2004 amendment regarding the maximum willful penalty.  The Second Circuit thus affirmed the district court.

Circuit Judge Menashi dissented.  Before getting to his dissent, let us analyze the language of §5321(a)(5)(B) and (C), which provides in pertinent part:

(B) Amount of penalty. —

(i) In general. — Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

*****

(C) Willful violations. — In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

                                    (I) $100,000, or

(II) 50 percent of the amount determined under subparagraph             

As I interpret this provision, for purposes of a willful violation the maximum penalty that the Secretary may impose shall not exceed the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.  It is left to the Secretary’s discretion on the amount of a willful penalty as long as it does not exceed the statutory cap.  So let us turn now to the dissent.

Judge Menashi begins by quoting Ft. Stewart Schs. v. Fed. Lab. Reels. Auth., 495 U.S. 641 (1990): “It is a familiar rule of administrative law that an agency must abide by its own regulations.”  According to the dissent, this principle (termed “the Accardi principle”[1]) requires that the district court be reversed.  The reason: while the governing statute authorizes penalties greater than $100,000, “it nowhere mandates that the Secretary impose a higher fine.”  Since the regulation and the statute don’t conflict, the Treasury must adhere to the regulation, which was issued following notice and comment rule making.

The dissent notes that the Accardi principle applies in the tax context as well as the non-tax context.  The regulation limits the amount of the maximum willful penalty to the greater of the amount in the account (not to exceed $100,000) or $25,000.  There is nothing in the 2004 amendment that conflicts with the regulation.  The statute provides that the Secretary “may impose a penalty” and in the case of a willful violation, the maximum amount of the penalty is the greater of $100,000 or 50% of the maximum amount in the account at the time of the violation.  The imposition of any penalty and the maximum amount of any penalty is left to the Secretary.  Thus, the Secretary can promulgate a regulation establishing a maximum penalty at anywhere from zero to the statutory maximum. 

Contrary to the majority, there is no requirement that the Secretary ensure that violators are exposed to a maximum penalty of up to 50% of the account balance.  Further, nothing in the statute “manifests a Congressional purpose to suspend the rule that an agency may constrain its discretion through regulation.” 

The dissent points out that the cases relied on by the majority were all pre-Chevron and under Chevron if the text is clear, then extra-textual evidence (such as legislative history) is not to be considered.  The statutory language gives the Secretary “discretion to impose any penalty beneath the statutory language and contains no language indicating that this discretion is constrained.”  It is thus improper to read such constraints into the statute or to ignore the Accardi principle.

The dissent concluded that Treasury can amend its regulation if it desires a different outcome and that, in affirming the district court, the majority “departs from basic administrative law and unjustifiably accommodates the Treasury’s relaxed approach to amending its regulations.”  [Internal quotation marks and citation omitted.]

For several years, I have been advocating that the regulation in question limits the maximum penalty and that if the Treasury doesn’t like the result it can easily fix it.  It was heartening to read an opinion (even if a dissenting one) that agrees.

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions.


[1] After United States ex.rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954), which established the principle that federal agencies must abide by their regulations, rules and procedures.

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