I have been keeping readers up to date with the current controversy surrounding imposition of an FBAR penalty for “willful” violations. Here’s an overview of where we are to date.
“Willful” Penalty Ceiling: The Cases So Far
Last year, two district courts had 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.
On July 31st 2018 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 the taxpayer’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.
In very recent cases, two other courts followed Norman. See Kimble v. United States, No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018; I blogged about Kimble here), and United States v. Horowitz, No. PWG-16-1997, 2019 WL 265107, at *3 (D. Md. Jan. 18, 2019).
The Latest Case
We now have another district court rejecting Colliot and Wadhan and permitting the imposition of FBAR penalties up to 50% of the value of the unreported account. In United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019), the Court rejected the argument that the FBAR willful penalty was subject to the $100,000 ceiling based on the pre-2004 statutory amendment on grounds the IRS had not changed its regulations to comport with the new law. I had blogged about the Garrity case earlier in the context of what is meant by “willfulness” for FBAR penalty purposes. A jury determined that Mr. Garrity had “willfully” failed to file the required FBARs, so all that was required was for the taxpayer to pay up. This action in the latest case involving Garrity was initiated by the government to reduce that FBAR penalty to judgment to the tune of $936,691.00. The court permitted the assessment, rejecting the defendant’s arguments about the $100,000 penalty cap.
The Takeaway – IRS Hitting the Penalty Jackpot
The Garrity opinion provides a useful overview of the law and regulations for those who may have an interest in the technicalities and Judge Shea’s reasoning. For the lay person who may not have any such interest, the takeaway is that the cases are gaining momentum to support the imposition of FBAR penalties well above $100,000. The 50% penalty looks like it’s a goldmine “go” for the IRS which appears to be consistently winning the penalty jackpot.
Posted March 8 2019
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