I have been keeping readers up to date with the current controversy surrounding imposition of an FBAR penalty for “willful” violations. Two courts have limited the FBAR “willfulness” penalty to $100,000 because the Department of Treasury did not update the relevant regulations to match the statute as revised by Congress in 2004. Essentially the dispute in both cases revolved around the interplay between the statutory and regulatory law. You can read my blog posts on these two decisions (the Colliot case) here and ( the Wadhan case) here.
New Case: Norman v. United States
On July 31st in Norman v. United States (Ct. Fed. Cl. Dkt 15-872T; 7/31/18), here, the US Court of Federal Claims rejected the premise of the Colliot holding and permitted the IRS’ higher penalty assessment based on 50% of the value of Ms. Norman’s unreported foreign accounts. Pertinent to the court’s holding was that the relevant statute “mandates” the higher penalty. This essentially took away the argument advanced in Colliot (and Wadhan) regarding the IRS’ discretion as evidenced by its regulations, to impose penalties below the statutory cap of 50% of account value for willful violations.
The court stated:
“There is no question whether Congress can supersede regulations, only whether Congress did supersede the regulation in this instance. In United States v. Larionoff, 431 U.S. 864, 873 (1977), the Supreme Court held, ‘in order to be valid[,] [regulations] must be consistent with the statute under which they are promulgated.’ [citations omitted]. The regulation in question, 31 C.F.R. 1010.820, which guided enforcement of § 5321 before its 2004 amendment, sets the maximum penalty for a willful violation of § 5314 to $100,000.00. However, because § 5321(a)(5)(C)(i) mandates that the maximum penalty be set to the greater of $100,000.00 or 50 percent of the balance of the account, the regulation is no longer consistent with the amended statute. Therefore, 31 C.F.R. 1010.820 is no longer valid [citation omitted]. Although the Court appreciates the district court’s interpretation [Colliot], this Court is not bound by that interpretation, and will not follow it.” (emphasis added).
Whether Ms. Norman will appeal the decision remains to be seen. Orders and judgments from the Court of Federal Claims can be appealed to the US Court of Appeals for the Federal Circuit (which is conveniently located in the same building as the Court of Federal Claims).
Reckless Disregard is Enough to Prove “Willfulness”
Aside from its holding that the revised FBAR statute overrides the older regulations, the court noted that “reckless disregard” is enough for upholding the FBAR willfulness penalty. This is a disturbing trend being seen in more and more FBAR penalty cases. I have blogged about this trend here.
The Norman court stated:
“The Court finds that Ms. Norman’s repeated and admitted lack of care in (1) filing inaccurate official tax documents without any review, (2) signing foreign banking documents without any review, and (3) later providing false sworn statements both to the IRS and to this Court, both with and without review, reaches the standard of reckless disregard for the law required to constitute a willful violation…”
Higher Stakes
In sum, the stakes are getting higher and higher for noncompliant taxpayers. There are now various recent FBAR court decisions favoring the IRS in all critical areas surrounding imposition of the “willful” FBAR penalty. These are (i) a relaxed and lower standard for the quantum of evidence required to be shown by the IRS to win an FBAR “willful” penalty case, (ii) relaxed standards as to what must be demonstrated to prove an FBAR violation was “willful” and (iii) now, the issue of the permissible maximum penalty amount where the sky’s the limit.
Published August 6, 2018
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