Interesting Cases: Courts Hold FBAR Penalties Cannot Exceed Reg Cap

Mars, the Red Planet. Pic Courtesy;

I believe the planet Mars is at its closest to us since 2003, it will not be not be this close to us again until 2035. I have been trying to locate Mars every night this past weekend but the skies have been cloudy unfortunately. This event is called "opposition" when the Sun and Mars are on either side of our planet Earth. 

Most US citizens with foreign bank accounts and the US government are in similar opposition (cheesy analogy, I know) most of the time. Maintaining and reporting of these accounts are time consuming and arduous. If you are regular readers of my blog, you know the requirements to file and declare your foreign bank accounts. If you need a brief refresher, please read this post

The penalties for non-disclosure of your foreign bank accounts are significant. Civil penalties for non-willful violation are up to $10,000 per violation and willful violation can range up to greater of $100,000 or 50% of the account balance at the time of violation. 

These penalties are after a law change that happened in 2004 which increased the maximum penalties for willful failures. Before the law change, the maximum penalty that could be assessed was $100,000. These regs have now been renumbered and amended to index for inflation. (31 C.F.R 1010.820(g))

There were 2 Court cases, one in May 2018 {U.S. v. Colliot, (DC TX 05/16/2018) 121 AFTR 2d 2018-775} and another recently in July 2018 {Waldhan, (DC CO 07/18/2018) 122 AFTR 2d 2018-5060} where the Court held that the INternal Revenue Service lacks the authority to impose a penalty in excess of $100,000 as prescribed by 31 C.F.R. 1010.820. 

In each of the cases, the taxpayers had failed to file or filed inaccurate FBARs for tax years before 2010. The IRS had imposed total penalties in excess of $100,000 in each case. 

The taxpayers argued that the assessments were improper because the IRS' authority was limited by 31 C.F.R. 1010.820(g). 

The Courts after delving on the differences in the penalty caps in the statute and the regs, said that the Secretary limited the penalties that the IRS could impose to $100,000 in exercise of statutory discretion. They said that it cannot be assumed that the Secretary could have simply overlooked these differences (between the statute and the regs) for 14 years. Therefore the Secretary elected to continue to limit IRS' authority to impose penalties to $100,000 as specified in 31 C.F.R. 1010.820 even though penalties are avialable under 31 U.S.C. 5321(a)(5)(C)

The Court concluded that "although IRS believes that it is empowered by 31 U.S.C. 5321 to act, it is not. It is empowered by the Secretary who has discretion to determine what penalties are imposed. 1010.820 remains in effect until amended or repealed."

Note: The Supreme Court, on the other hand, has recently declined to hear a Ninth Circuit decision upholding a more than $1 million FBAR penalty based on a $2.4 million unreported account.

Consult with a tax professional for your unique needs and make sure your questions are answered. Please read my disclaimer here. If you have any more questions regarding this or other tax matters, all of my contact information is on my website,   



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