A U.S. district court recently held in U.S. v. Shinday, et al., that the monetary limit on the penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) is an annual one. The court found that, in reaching this conclusion, it wasn’t required to consider the ongoing split of court opinions in previous cases about whether the limit on the penalty is defined by statute or regulations.
Every U.S. citizen who has a financial interest in, or signature or other authority over, a financial account in a foreign country is required to report the account to the IRS annually on an FBAR. The Secretary of the Treasury may impose a civil monetary penalty on any person who violates this law or causes a violation. The maximum penalty depends on whether the violation was willful or nonwillful. For a willful violation, the maximum penalty is the greater of $100,000 or 50% of the balance in the account at the time of the violation. For a nonwillful violation, the maximum penalty is $10,000. These penalty amounts reflect a 2004 law change that increased the maximum civil penalties that can be assessed for willful failure to file an FBAR. Before that change, the maximum penalty was $100,000. Regulations that were put into effect before the statutory increase, however, continue to reflect the former $100,000 maximum (as opposed to the “greater of $100,000 or 50% …”).
Split among courts
There’s now disagreement among U.S. district courts as to whether the 2004 statutory amendment invalidated the established $100,000 cap. Colliot and Wadhan are two of the court decisions that have held that the statutory amendment merely increased the maximum but didn’t require the IRS to impose the maximum and, thus, that the $100,000 limit was the maximum penalty that the IRS could impose.
In Shinday, the taxpayer had foreign bank accounts for which he was required to file an FBAR, but for which he didn’t file one for 2005 through 2011. The balances in those accounts, for 2005 through 2011, varied from approximately $380,000 to $1,031,548.
The IRS assessed willful FBAR penalties against the taxpayer for the tax years 2007 to 2011. The aggregate amount of these penalties was $257,888. That figure represented 25% of the combined 2006 year-end balance of his foreign bank accounts, which equaled $1,031,548. This total was then divided equally to apply penalties evenly for each year starting in 2007 and ending in 2011.
The taxpayer argued that the IRS’s claim to reduce his penalty assessments to judgment must be dismissed because the IRS assessed penalties that exceeded the established $100,000 penalty cap. Relying on Colliot and Wahdan, he contended that the established cap applies because it’s consistent with the statute under which it was issued.
The U.S. District Court for the Central District of California said that neither of the cases cited by the taxpayer supported his position. In Colliot, the court found that the IRS couldn’t assess FBAR penalties exceeding the $100,000 cap, but that court considered only FBAR penalties that exceeded $100,000 in a given year. Similarly, the court in Wahdan concluded that the IRS “is not empowered to impose yearly penalties in excess of $100,000 per account.”
The court here said that the facts of Colliot and Wahdan were immaterial to this case because the five penalties assessed against the taxpayer were individually all less than $100,000. Although, in the aggregate, the penalties against him totaled $257,888, the yearly, individual penalties were each approximately $51,578. Each time the taxpayer willfully failed to timely file an FBAR, the IRS assessed a penalty. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from his failure to file FBAR reports in 2007, 2008, 2009, 2010 and 2011.
Finally, the court noted that, in arriving at its decision, it didn’t need to broach the issue of whether the statute under which the cap was issued invalidates the U.S. Department of the Treasury’s implementing regulations. This is because there was no year in which the taxpayer was penalized more than $100,000.
We Can Help
If you have a financial interest in, or signature or other authority over, a financial account in a foreign country, it’s critical that you comply with FBAR filing requirements. As you can see, failure to comply can trigger penalties — especially if the compliance violation is determined to be willful. We can help. Contact our Elliott Davis International Practice with any questions.