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Court Slams IRS: Can’t Assess More Than $100,000 “Willful” FBAR Penalty

The Internal Revenue Service (IRS) must be fuming over the recent court decision in United States v. Colliot (W.D. Texas, Austin Division, Case No. AU-16-CA-01281-SS).  The case was initiated by the US Government to reduce to judgment outstanding civil penalties assessed against Ms. Colliot for her “repeated and willful failures to timely file” an FBAR for the years 2007-2010.

“Willful”  FBAR Penalty Cannot Exceed $100,000

Ms. Colliot argued that the IRS cannot assess a “willful” penalty in excess of $100,000 even though the relevant statute permits a penalty assessment of the higher of $100,000 or 50% of the maximum amount in the unreported foreign account.  The court provides an excellent summary of the historical changes to the relevant FBAR statute and implementing Treasury regulations, and those with an interest should definitely read the court order.

As relevant to the Colliot matter, the statute had been amended by Congress in 2004 and permitted the “higher of” assessment for willful FBAR penalties, thereby eliminating the prior $100,000 cap on such assessments.  Under the new law, the civil monetary penalty for a “willful” failure to file an FBAR was increased from the minimum penalty of $25,000 to $100,000 and, in addition, if it would result in a higher penalty, IRS was permitted to assess the penalty based on 50 percent of the highest balance in the unreported foreign account at the time of the violation.

The Court agreed with Ms. Colliot, granting her motion for summary judgement.  (As an aside, summary judgment generally is a device used during civil litigation proceedings to expeditiously resolve a case without the necessity of holding a full trial.  A judge will grant summary judgment when there is no dispute about the material facts in the case and the party is entitled to the judgment “as a matter of law.”)

The Colliot Win

So why did Ms. Colliot win?  The law had been amended by Congress in 2004 and her violations pertained to the tax years 2007-2010, clearly subject to the revised FBAR statute.

In Colliot, summary judgment was granted because the Treasury regulations were not updated to reflect the new statute which permitted a higher penalty by allowing an assessment of 50% of the highest account values.  The regulations were promulgated in reliance on the prior version of the statute and had remained unchanged, according to the court, continuing “to indicate the maximum civil penalty for willful failure to file an FBAR was capped at $100,000.”  The focus of the court’s disposition of the case was that the IRS had abused its discretion in assessing FBAR penalties exceeding $100,000 since it had left the implementing Treasury regulations unchanged.

The Court neatly summarized its holding on page 5 of the Order:

“In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which 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. See Perez v. Mortgage Bankers Ass ‘n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to ‘use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance’). 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. 5 U.S.C. § 706(2) (requiring agency action to be ‘in accordance with law’); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) (‘[A]n agency must abide by its own regulations.’) (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)).

fn 3  If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321 (a)(5) ‘s maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.”

FBAR Penalty Landscape in Shakeup Mode!

This is a major case and should be followed carefully by all those with an interest in FBAR matters. Surely the IRS will not let this case stand. In its latest FBAR case, Kimble v. United States about which I blogged last week (here), the Government asserted that Colliot was incorrectly decided. (The Government brief in Kimble is here.)

It should be noted that the Court declined Ms. Colliot’s request that the Court dismiss the entire action “with prejudice”.  This means the case was not dismissed permanently. A case dismissed “with prejudice” is “done and dusted”, and can’t be brought back to court. Here, the case was not so dismissed and the court ordered “the parties [to] provide additional briefing on the appropriate next steps….”

Surely the case has an impact on pending FBAR penalty assessments and their concomitant negotiations!  We know that since 2004, the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000 regulatory cap. If the Colliot decision is ultimately upheld, I wonder if affected taxpayers can sue for a refund of “willful” FBAR penalties that were improperly imposed in the past?

On June 14, the Government filed an Additional Memorandum in Colliot.  It can be found here.  IRS is clearly trying to limit the fall out caused by the court’s Colliot holding.

More to come on this matter, so watch this space!

For further information:

  • Colliot’s Motion for Summary Judgment, here.
  • US Government Response to Ms. Colliot’s Motion, here, with a Government diagram, here.
  • Colliot’s Reply, here.
  • US SurReply, here.
  • Court Order Granting Ms. Colliot’s Motion for Summary Judgment, here.

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