A recent federal court decision may stand existing FBAR litigation on its head. The Colliot decision—issued out of the District Court for the Western District of Texas—offers a new take on “willful” FBAR penalties. And the government doesn’t like it.
The defendant, Colliot, argued that the IRS acted “arbitrary and capriciously” in assessing penalties against him that exceeded those allowed under 31 C.F.R. § 1010.820, an administrative regulation. Colliot argued that, in doing so, the IRS acted in a manner that was “not in accordance with the law.” The regulation (§ 1010.820), which predates notable changes to the governing statute, purports to cap willful FBAR penalties at $100,000. The IRS, however, has maintained that § 1010.820 was implicitly repealed by the 2004 congressional enactment of 31 U.S.C. § 5321(a)(5)(C). That enactment increased the potential civil monetary penalty for a willful failure to file a FBAR 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.
Suit to Reduce FBAR Assessment to Judgment
In Colliot, the IRS initiated a lawsuit to reduce a FBAR assessment to judgment. The IRS had previously “assessed” FBAR penalties against Colliot for willful failures to file FBAR forms. The IRS had assessed penalties for four separate FBAR violations related to 2007 and four additional penalties for the 2008 year, as well as separate and smaller penalties for 2009 and 2010. But because FBAR penalties are not Title 26 penalties, the government cannot use the summary collection tools offered by the tax code, and instead often must go to the trouble of bringing a lawsuit in order to reduce its assessment to judgment in order to open the door to more flexible collection avenues.
The Legal Framework and Background
The Colliot court reviewed the legal framework and historical development of the statutory and regulatory provisions at issue. Its summary is worth repeating in full:
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. § 5321(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. 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 § 5321(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 § 5321(a)(5) and its related regulation, § 103.57, to the IRS.
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. § 5321(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.
Having framed the issue, the court explained that under 5 U.S.C. § 706(2), a court must hold unlawful and set aside agency actions which are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” In reviewing the development of the provisions at issue, the court found that “there is little reason to believe § 5321(a)(5)(C) implicitly superseded or invalidated § 1010.820,” as the IRS argued. “Section 5321(a)(5), the court found “sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor.” “Instead,” it found, “§ 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).” And §1010.820 purports to set a ceiling on that discretion by capping penalties at $100,000.
The Colliot decision stands in contrast to a number of earlier, pro-government FBAR decisions. For prior resources on such cases and FBAR litigation generally, see, e.g., How the FBAR’s “Willfulness” Element Has Recently Evolved, Former University Professor sentenced to Prison for Hiding over $220 Million in Offshore Accounts—Pays $100 Million to Resolve FBAR Penalties, Litigating FBAR Penalties: The Burden of Proof and the Meaning of Willfulness, IRS Required to Return FBAR “Penalty:” Penalty was “Illegally Exacted”. Whether it will become a trend or an outlier remains to be seen. But one thing is certain: It is unlikely to be ignored. The Colliet decision marks an important taxpayer victory and is likely to alter litigation-hazard calculus in the FBAR penalty context.