The court said that both the pre-2004 version and the current version of 31 U.S.C. 5321 specifically grant the Secretary discretion to assess penalties. Both versions state that the Secretary “may assess” the described penalties. The statutory language is clear, and there is nothing in the legislative history offered by IRS that suggests that Congress intended to limit the discretion of the Secretary to determine what penalties should be imposed.
For a statute to supersede a reg, it has to be clearly inconsistent with the reg. IRS argued that the different penalty caps in 31 U.S.C. 5321 and 31 C.F.R. 1010.820(g) demonstrate an inconsistency such that the statute trumps the reg. The court said that it was unpersuaded for several reasons:
First, the statute and the reg are not inconsistent on their face. The statute sets a higher cap than does the reg; the penalty cap in the reg is, in essence, a subset of the penalties that could be imposed under the statute. The statute does not mandate imposition of the maximum penalty, but instead gives the Secretary discretion to impose penalties below the statutory cap. This means that compliance with the lower cap set in 31 C.F.R. 1010.820(g) also complies with 31 U.S.C. 5321.
Second, there is a simple and straightforward interpretation that gives coherent meaning to both the statute and the reg in the exercise of statutory discretion, the Secretary limited the penalties that IRS could impose to $100,000 (plus the amount adjusted for inflation).
Third, although the penalty caps in the statute and reg differ, one cannot assume that the Secretary simply overlooked the difference between them. The difference has existed since 2004 essentially 14 years. During that time, the Secretary made regular adjustments to another reg, 31 C.F.R. 1010.821, that adjusted penalties to account for inflation. Among the penalties affected by this reg is that created by 31 U.S.C. 5321(a)(5)(C), for which the inflationary increases have been made at least five times in the last eight years, but at no time was the listed penalty cap raised above $100,000. The periodic revisions of the inflationary calculation required focus on the penalty cap, but it was never changed to comport with 31 U.S.C. 5321(a)(5)(C). This suggests that the Secretary was aware of the penalties available under 31 U.S.C. 5321(a)(5)(C) and elected to continue to limit IRS's authority to impose penalties to $100,000 as specified in 31 C.F.R. 1010.820.
Finally, IRS's reliance upon legislative history is misplaced. IRS argued that Congressional intent, as evident from the legislative history for the 2004 amendment to 31 U.S.C. 5321(a)(5)(C), shows that Congress intended the statute to supersede 31 C.F.R. 1010.820. The court then noted that, ordinarily, it does not resort to legislative history unless the text of a statute is ambiguous. And it said that there is no apparent ambiguity in 31 U.S.C. 5321(a)(5)(C) — it simply changed that maximum penalty that could be imposed.
The court went on to say that, even assuming that such legislative history is relevant, it does not support IRS's argument. The Senate Report discusses threats arising from offshore accounts in the context of adding civil penalties for non-willful violations, but there is no discussion about willful violations. Willful violations are mentioned only in the Conference Report, which states only that the increase in penalties is based on a Senate amendment and that the committee accepted the amendment. See H.R. Rep. No. 108-755 at 615 (2004) (Conf. Rep.). Although Congress favored higher penalties for FBAR noncompliance, there is nothing here that suggests that Congress believed that the maximum penalties for willful violations should be mandatorily imposed.
In conclusion, the court said 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."
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