Recently, the United States District Court for the District of Connecticut in United States v. Garrity ruled in favor of the Government in a case where the Government assessed $936,691 in civil penalties against the estate of Paul G. Garrity, Sr. for willful failure to file a Report of Foreign Bank and Financial Accounts (commonly known as FBAR). This ruling adds to government wins in three other recent cases, United States v. Horowitz (D.Md. 2019), Kimble v. United States (Fed. Cl. 2019), and Norman v. United States (Fed. Cl. 2018).
Previously, the Bank Secrecy Act provided that a civil penalty for willful failure to file an FBAR could not exceed $100,000 per violation. The Secretary of the Treasury was then delegated the authority to assess civil monetary penalties, “on any person who willfully violates any provision of section 5314,” the code section directing the Secretary to require individuals to file an FBAR. In 2004, Congress amended the civil penalties for failure to file an FBAR and increased the penalty for willful failure to file to the greater of $100,000 or 50 percent of the balance of the account in the year for which the report was due. 31 U.S.C. section 5321(a)(5)(c). Congress also added a penalty for non-willful violations limited to $10,000. However, the Treasury did not promulgate updated regulations to reflect the increased willful penalty or new non-willful penalty. This inconsistency has lead to a split in court rulings over whether the $100,000 penalty limitation for willful failure to file is still in place.
The nearly $1 million amount sought by the government in Garrity equals 50 percent of the late Paul G.Garrity Sr.’s foreign account balance. The defendants asserted that the maximum civil penalty for failure to file an FBAR is $100,000, and that, alternatively, the penalty was disproportionate to the harm caused by Mr. Garrity’s failure to report FBAR and, therefore, violated the Eighth Amendment.
Two district courts in the cases Colliot and Wahdan, reasoned that the 2004 amendments gave the Department of Treasury discretionary authority to impose a bigger penalty, but determined that Congress did not mandate a higher maximum penalty. However, the district court in Garrity, similar to the Court of Federal Claims in Norman, rejected the defandants’ reasoning and stated that, “[t]he plain language of the 2004 amendment demonstrates Congress’s intent to authorize the Secretary to impose higher penalties for willful FBAR violations without the need for additional Treasury regulations.” The court also determined that the penalty was not unconstitutionally excessive.
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. RSM US LLP has tax professionals who are experienced in successfully seeking penalty abatement for assessed penalties, and who are available to assist clients facing penalty assessments.