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2nd Taxpayer Victory on a FBAR Penalty Case – FBAR Limited to $100M!

2nd Taxpayer Victory on a FBAR Penalty Case – FBAR Limited to $100M!

On May 22, 2018 we posted  A Taxpayer Victory on a FBAR Penalty Case - FBAR Limited to $100M! where we discussed that the IRS had sued a Texas man to collect hundreds of thousands of dollars in unpaid civil penalties, plus interest, for the taxpayer’s allegedly willful failure to report offshore accounts on Foreign Bank and Financial Accounts forms for 2007 through 2010. The Texas federal judge ruled that the Internal Revenue Service went beyond the cap on civil penalties it can assess for undisclosed offshore bank accounts,  rejecting the agency’s argument that regulations limiting the amount are implicitly invalid.

Even Though a Regulation from 1987 Limits the Penalty Cap for Willful Nondisclosure at $100,000, the Agency Had Argued That Congress Made Changes to the Law in 2004 That Gave the IRS the Authority to Exceed That Amount. 

The case was US v. Dominique G. Colliot, case number 1:16-cv-01281, in the U.S. District Court for the Western District of Texas. 

Now a according to Reuters a second district court has determined that, despite a statutory change authorizing higher penalties, IRS couldn't impose penalties, for willfully failing to file a Report of Foreign Bank and Foreign Accounts (FBAR), in excess of the amounts provided in regs that were promulgated before the law change and that haven't been changed to reflect the increase. 

The taxpayers, Mr. and Mrs. Wadhan, failed to file or filed inaccurate FBARs for 2008, 2009, and 2010. IRS assessed penalties of $1,108,645 for 2008, $599,234 for 2009, and $599,234 for 2010.

The taxpayers brought this case, contending that the penalties for years 2008, 2009 and 2010 had to be capped at $100,000. The court held that IRS lacks authority to impose a penalty in excess of $100,000 as prescribed by 31 C.F.R. 1010.820.

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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