In May 2018, the U.S. District Court for the Western District of Texas in U.S. v. Colliot held that the IRS could not assess FBAR penalties in excess of $100,000 based on the regulatory maximum. A recent decision for the case U.S. v. Wadhan in the U.S. District Court of Colorado also came to the same conclusion.
In U.S. v. Wadhan the taxpayers either failed to file or filed inaccurate Forms TD F 90.22-1, Report of Foreign Bank and Financial Accounts, commonly called FBARs, for three years. As a result, the IRS assessed penalties in excess of $100,000 for all three years.
The FBAR penalty statute, 31 U.S.C. section 5321(a)(5), permits the Secretary to impose a penalty of $100,000 or up to 50 percent of the account balance, whichever is greater. However, regulations promulgated under an earlier version of the statute imposed a penalty not to exceed $100,000. The regulations has never been updated to reflects changes in the underlying statute.
Court’s reasoning
The District Court of Colorado expressly stated that its reasoning was in agreement with the Colliot decision – that Treasury had decided in regulations to a cap of $100,000, even though subsequent legislation allowed Treasury to impose a higher penalty. In addition, the Wadhan court provided its own reasoning.
The court determined that the penalty limitation in the regulation was not inconsistent with the statute based on four reasons. First, the statute and regulation were not inconsistent on their face. The statute permited, but did not mandate, a higher penalty limitation at the discretion of the Secretary and therefore the regulation was a subset of penalties imposed by the statute. Second, the straightforward interpretation of the regulation was that the Secretary, while exercising statutorily provided discretion, imposed penalties below the statutory limit, and the lower penalty limit in the regulation complied with the statute. Third, while the penalty maximum in the statute and regulation differed, it could not be argued that the Secretary simply overlooked the difference. The difference existed since 2004, and in that time the Secretary made regular adjustments to the penalty for inflation. Thus, the Secretary was aware of the statutory penalties and continued to limit the imposed penalties to the regulatory maximum of $100,000.
The court also looked at the statutue’s legislative history. Although before reviewing the legislative history, the court noted that it ordinarily does not review a statute’s legislative history. The legislative history for 31 U.S.C. section 5321(a)(5) discussed only nonwillful violations and nothing suggested that the maximum penalties were intended for willful violations, as the IRS argued.
Lastly, the IRS argued that, as shown in the regulation’s preamble, the regulation was never intended to limit the IRS in its ability to impose the maximum penalties authorized. However, the court reasoned that the preamble did not expressly address the scope of the penalties to be imposed, nor could it be fairly understood as directing how regulations would be updated.
Conclusion and analysis
The FBAR penalty section, 31 U.S.C section 5321(a)(5), remains in effect, and the IRS has repeatedly assessed penalties in excess of $100,000. As it was following Colliot, the precedential impact of Wadhan remains unclear. However, with a second district court holding that the maximum allowable FBAR penality is limited to the $100,000 regulatory penalty limitation, taxpayers have an even stronger argument for reducing the assessed penalties to a maximum of $100,000 per year.
RSM US LLP has tax professionals who are experienced in successfully seeking penalty abatement for assessed penalties who are available to assist clients facing penalty assessments.
