Claims Court: FBAR willful failure reg is invalid
August 3, 2018--Norman, (Ct Fed Cl 7/31/2018) 122 AFTR 2d ¶ 2018-5089
Coming to the opposite conclusion from that reached by two district courts in 2018, the Court of Federal Claims has held that, as a result of a statutory change that increased the amount of penalties for willfully failing to meet the Report of Foreign Bank and Foreign Accounts (FBAR) requirements, a reg that doesn't reflect that increase is invalid. The court also determined that the taxpayer's failure was in fact willful.
Under tax law, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. The penalty for violating the FBAR requirement depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. The maximum penalty amount for a willful violation "shall be increased to the greater of $100,000 or 50% of the balance in the account at the time of the violation".
In May of this year, a Texas district court held that the reg can be applied consistently with the law, and thus the reg has not been implicitly invalidated or superseded. The court therefore limited the penalty to the $100,000 limit in the reg. (Colliot, (DC TX 2018) stating the IRS can'timpose FBAR penalties over regulatory cap. And, in July of this year, a Colorado district court came to the same conclusion. Wadhan, (DC CO 7/18/2018). The Colorado court said that both the pre-2004 version and the current version of specifically grant the Secretary discretion to assess penalties. Both versions state that the Secretary “may assess” the described penalties.
The court took note of Colliot and said that it was wrongly decided and that the reg was invalid.
Crucially, the court said, the amended statute dictates that the usual maximum penalty " shall be increased" to the greater of $100,000 or 50% of the account. 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.
The court said that "in order to be valid, regs must be consistent with the statute under which they are promulgated." Because the amended statute mandates that the maximum penalty be set to the greater of $100,000.00 or 50% of the balance of the account, the reg is no longer consistent with the amended statute.
The court also said 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." Congress believed that "improving compliance with this reporting requirement is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams." (S. Rep. No. 108-192 at 108 (2003))
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