Court of Claims Rejects Colliot & Wadhan: Willful FBAR Penalty Not Limited to $100,000

August 7, 2018

On July 27, 2018 we posted 2nd Taxpayer Victory on a FBAR Penalty Case - FBAR Limited to $100M! where we discussed US v. Dominique G. Colliot, case number 1:16-cv-01281, in the U.S. where a District Court for the Western District of Texas how that the maximum FBAR penalty was limited to $100,000 a year.

We also discussed that 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 in United States v. Wadhan, D. Colo. Dkt 17-CV-1287 Dkt Entry 5

Now on July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty.

.
Congress’ Intent in Amending § 5321 The court stated that:

"In addition to the unambiguous language of the statute, Congress clearly stated its intent to raise
the maximum amount of FBAR penalties when it passed the AJCA in 2004. (emphasis added) ... “Congress believed that increasing the [previous law’s] penalty for willful non-compliance” would “improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005)."

The Reasoning in Colliot The court went on to state that:

"In Colliot, the district court held that Congress’ amendment to §5321 in the AJCA did not supersede the regulation promulgated under the statute before amendment. The district court reasoned: [The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, §5321(a)(5) vests the Secretary of the Treasury with discretion to determine the
amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C). 2018 U.S. Dist. LEXIS 83159 at *5-6 (citations omitted).

It is true that the statute vested the Treasury Secretary with discretion to determine a penalty’s amount. However, this statement mischaracterizes the language of § 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004. Crucially, the amended statute dictates that the usual maximum penalty “shall be increased” tothe greater of $100,000 or 50 percent of the account. § 5321(a)(5)(C)(i) (emphasis added). Congress used the imperative, “shall,” rather than the permissive, “may.”

Therefore, the amendment did not merely allow for a higher “ceiling” on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion. Rather, Congress raised the new ceiling" itself, and in so doing, removed the Treasury Secretary’s discretion to regulate any other maximum."

Finally, the court ruled that:

There is no question whether Congress can supersede regulations, only whether Congress did supersede the regulation in this instance... The regulation in question, 31 C.F.R. 1010.820, which guided enforcement of § 5321 before its 2004 amendment, sets the maximum penalty for a willful violation of § 5314 to $100,000.00. However, because § 5321(a)(5)(C)(i) mandates that the maximum penalty be set to the greater of $100,000.00 or 50 percent of the balance of the account, the
regulation is no longer consistent with the amended statute. Therefore, 31 C.F.R. 1010.820
is no longer valid.
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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Court of Claims Rejects Colliot & Wadhan: Willful FBAR Penalty Not Limited to $100,000