We had a very interesting case decided May 16 2018 when a district court in Texas granted Dominique Colliot’s motion for summary judgment (United States, v. Dominique G. Colliot). The judgment provided that the IRS acted “arbitrarily and capriciously” and could not assess a “willful” civil FBAR penalty exceeding $100,000 per account even though the law permitted an FBAR penalty assessment of the higher of $100,000 or 50% of the maximum amount in the unreported foreign account.
Major Implications in the FBAR Context
This case is very important for various reasons. Taxpayers who have already paid “willful” FBAR penalties in excess of $100,000 per account have a very strong argument that the excessive amounts should be refunded as they were improperly assessed under the rationale of the Colliot case. Taxpayers who are currently considering OVDP should take this holding into account in the decision-making process, as the penalties for “willful” failures may not be as onerous as previously thought (however, possible criminal sanctions may outweigh this dollar issue. See OVDP FAQ 6 ).
Finally, unless the IRS appeals and wins the case, it seems to me that until appropriate action is taken to amend the relevant regulations, taxpayers have strong ammunition on their side in negotiation of penalties for “willful” FBAR failures. Assuming that FinCEN acts quickly to amend the regulations, it is unclear if they can be promulgated with retroactive effect. I would think not since the court has made clear that due process is a critical element with regard to this regulatory penalty cap and it cannot easily be disregarded.
If you need FBAR help (including a possible refund of FBAR penalty amounts), contact me email@example.com and we will be happy to assist you.
What Happened in Colliot?
The court provided a good summary and I repeat it below. Essentially, while Congress changed the law in 2004 to permit the larger FBAR penalty (i.e., the higher of $100,000 or 50% of the maximum amount in the unreported foreign account), FinCEN did not amend the relevant regulations the IRS is bound to follow and continued to indicate that the maximum civil penalty for willful failure to file an FBAR was capped at $100,000. This was the case even though FinCEN had amended the regulations in other respects as late as 2016.
Bear in mind the parties were not disputing whether Colliot’s FBAR violations were “willful” (this issue seems conceded). Rather they were arguing about the maximum penalty permitted under the law for willful FBAR violations. Here is a summary by the court –
To understand Colliot’s argument, it is first necessary to briefly review the history of the provision used to impose civil penalties upon Colliot, 31 U.S.C. § 532 1(a)(5). A previous version of § 5321(a)(5) allowed the Secretary of the Treasury to impose civil monetary penalties amounting to the greater of $25,000 or the balance of the unreported account up to $100,000. See Resp. Mot. Summ. J. [#57] at 2. A related regulation promulgated by the Department of the Treasury via notice-and-comment rulemaking, 31 C.F.R. § 103.57, reiterated that “[f]or any willful violation committed after October 26, 1986 . . . the Secretary may assess upon any person, a civil penalty . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.” Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987).
In 2002, the Treasury delegated the authority to assess penalties under § 532 1(a)(5) to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). In addition to this delegation of enforcement authority, Treasury Order 180-01 provided that related regulations were unaffected by this transfer of power and should continue in effect “until superseded or revised.” Id. Roughly six months later, FinCEN redelegated the authority to assess penalties under § 532 1(a)(5) and its related regulation, § 103.57, to the IRS. Mot. Summ. J. [#52-5] Ex. E (Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements).
In 2004, Congress amended § 5321 to increase the maximum civil penalties that could be assessed for willful failure to file an FBAR. 31 U.S.C. § 532 1(a)(5); American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). Under the revised statute, the civil monetary penalties for willful failure to file an FBAR increased to a minimum of $100,000 and a maximum of 50 percent of the balance in the unreported account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C).
Despite this change, the regulations promulgated in reliance on the prior version of the statute remained unchanged. Thus, § 103.57 continued to indicate the maximum civil penalty for willful failure to file an FBAR was capped at $100,000. FinCEN subsequently renumbered § 103.57 it is now 31 C.F.R. § 1010.820 as part of a large-scale reorganization of regulatory provisions. It also amended part of the regulation to account for inflation. Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42503, 42504 (2016). FinCEN did not, however, revise the regulation to account for the increased maximum penalty now authorized under § 5321 (a)(5). 31 C.F.R. § 1010.820. Nevertheless, the IRS did not let § 103.57 (now § 1010.820) constrain its enforcement authority, and since 2004, the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000 regulatory cap. Resp. Mot. Summ. J. [#57] at 3.
No Joy For IRS
The court concluded its reasoning by stating that while “§ 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, [it] caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. [citations omitted]. Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot [citations omitted].”
For readers wishing detailed information –
- Colliot’s Motion can be found here.
- The US Response to Colliot’s Motion can be found here; with Colliot’s “offshore” diagram available here.
- Colliot’s Reply can be found here.
- S. Sur-Reply Opposing Colliot’s Motion for Summary Judgment can be found here.
- Court Order Granting Colliot’s Motion for Summary Judgment, here.
- The docket entries in the case are here.
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