FBAR Willful Penalty is not Limited to $100,000 (2018, Updated News)
FBAR Willful Penalty is not Limited to $100,000 (2018, Updated News)
They say hope springs eternal, but all the wishful thinking in the world is not going to cap your willful FBAR penalties at $100,000 at the US Court of Federal Claims, despite what a few District Courts have ruled – simply because of a regulation/statutory technicality (August, 2018).
District Court vs. Court of Appeals
The District Court is where a case is litigated, and while the outcome will impact the parties involved, typically it does not have any significant precedent impact — as it has not been upheld on appeal, and it is localized.
In other words, until the matter is at least decided at the appellate level, other courts and litigants do not have to follow the ruling.
This brings us to some recent issues involving the FBAR, and what the maximum penalty is.
Why Would the Maximum FBAR Penalty be $100,000?
The way the penalty language is written in the code, it conflicts with the regulation (which was not updated to correspond with the increased penalty)
Therefore, an argument can be made that since there is conflicting ambiguity regarding the penalty, that the penalty should be capped at $100,000, in favor or the party who did not write the rule (aka the party being penalized).
*In general, ambiguity is held against the person who authors the document, such as a contract.
As such, a few District Courts have ruled that the maximum willful FBAR penalty (at least for now) should be at $100,000.
Enter the US Court of Federal Claims
In a recent case, Norman, the court ruled exactly how you think the court would rule in a situation in which a mere technicality involving the FBAR may result in the government losing millions, if not billions of dollars in penalties.
As with most rulings, the holding is lengthy, but for those of you concerned about whether or not you can advise your client that willful FBAR penalties are capped at $100,000, the Court of Claims says…no thank you.
A few key takeaways:
- Norman had the opportunity to enter OVDP
- Instead, Norman’s CPA filed a Quiet Disclosure
- Norman was held to be willful
As provided by the holding in part:
Penalties Under 31 U.S.C. § 5321 Before and After 2004
After trial, Plaintiff submitted the decision in Colliot referred to above. Letter, ECF. No. 36 at 1. This decision of the U.S. District Court of the Western District of Texas held that a regulation, 31 C.F.R. 1010.820, under the previous version of the Bank Secrecy Act, which caps penalties under § 5321 at $100,000, was still valid. Plaintiff requests that this court follow the holding in Colliot, and award her the difference between the penalty assessed and this “cap.”
The Court will explain why, contrary to Colliot, the regulation for FBAR penalties set forth under the previous version of the Bank Secrecy Act is no longer valid, by examining the statute before 2004, the amendment made in 2004, and the holding in Colliot.
The Text of § 5321 Before 2004
Prior to 2004, the Bank Secrecy Act allowed imposition of an FBAR penalty only for willful violations of § 5314. 31 U.S.C.S. § 5321(a)(5)(A) (2003) (“The Secretary of the Treasury may impose a civil money penalty on any person who willfully violates or any person willfully causing any violation. . . .”) (emphasis added). Congress capped this penalty by providing that “[t]he amount . . . shall not exceed” the greater of $25,000.00 or the balance of the account, limited to a maximum of $100,000.00. 31 U.S.C.S. § 5321(a)(5)(B) (2003). The regulation guiding enforcement of this provision, 31 C.F.R. 103.57, directly paralleled this language and structure. See 31 C.F.R. 1010.820.1
The Text of § 5321 After the 2004 Amendment
“…However, for willful violations, there is a new maximum penalty provided in § 5321(a)(5)(C). This section states: “the maximum penalty under subparagraph (B)(i) [$10,000] shall be increased to the greater of  $ 100,000, or  50 percent” of the balance of the account. §5321(a)(5)(C)(i) (emphasis added). This provision, therefore, mandates that the maximum penalty allowable for willful failure to report a foreign bank account be set at a specific point: the greater of $100,000, or 50 percent of the account’s balance. This text is unambiguous”
Congress’ Intent in Amending § 5321
In addition to the unambiguous language of the statute, Congress clearly stated its intent to raise the maximum amount of FBAR penalties when it passed the AJCA in 2004. Congress believed that “improving compliance with this reporting requirement is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams.” S. Rep. No. 108-192 at 108 (2003).
Therefore, Congress used the AJCA to “increase the [previous law’s] penalty for willful behavior,” and create an “additional civil penalty for a non-willful act.” H.R. Rep 108-755 at 615 (2004) (Conf. Rep.). “Congress believed that increasing the [previous law’s] penalty for willful non-compliance” would “improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005).
The Reasoning in Colliot
In Colliot, the district court held that Congress’ amendment to § 5321 in the AJCA did not supersede the regulation promulgated under the statute before amendment. The district court reasoned:
[The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, § 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C).
2018 U.S. Dist. LEXIS 83159 at *5-6 (citations omitted). It is true that the statute vested the Treasury Secretary with discretion to determine a penalty’s amount. However, this statement mischaracterizes the language of § 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.
Crucially, the amended statute dictates that the usual maximum penalty “shall be increased” to the greater of $100,000 or 50 percent of the account. § 5321(a)(5)(C)(i) (emphasis added). Congress used the imperative, “shall,” rather than the permissive, “may.” Therefore, the amendment did not merely allow for a higher “ceiling” on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion…
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.” Id., cited with approval in Colliot, 2018 U.S. Dist. LEXIS 83159 at *5. 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. See Larionoff, 431 U.S. at 873.
“Although the Court appreciates the district court’s interpretation, this Court is not bound by that interpretation, and will not follow it.”
What is the Court of Claims Saying?
The Court of Claims takes the common sense position that the regulation maxing out the penalty at $100,000 was written in accordance with the prior statute. Since the new statute provides that the penalty is $100,000 or 50% Maximum Value, whichever is greater, the former regulation is no longer valid.
This Case shows the Importance of OVDP
Had Norman entered into OVDP, which was OVDI at the time (especially in 2009 when the rules were more lax, aka Pre-FATCA), she would have had a much lower penalty, which would have been capped in accordance with the rules of the program.
OVDP Ends on 9/28; Last Day for Preclearance is 8/24.
We Specialize in OVDP
We have successfully handled a diverse range of OVDP cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Go OVDP
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
Contact us Today; We Can Help.
What is OVDP?
A summary of OVDP follows below:
Offshore does not mean you should be conjuring up visions of resting easy in the Bahamas, or stashing millions in the Caymans. Essentially, from an international IRS tax perspective, it simply means you have money overseas. Whether the money is in a foreign account, overseas, or abroad — it is being held “offshore.”
Therefore, in order to qualify for OVDP you must have unreported assets, income or investments abroad. If you do have offshore assets, income or investments, then you can report them with OVDP — and you can include domestic undisclosed money as well.
But, it is important to keep in mind that you do not get the same protection for your domestic undisclosed money that you receive for your offshore undisclosed money. Moreover, if you do not have any undisclosed offshore money, and all of your unreported money is domestic (located in the United States), you can submit to the IRS Domestic Voluntary Disclosure Program, but not OVDP.
Unfortunately, the IRS Domestic Voluntary Disclosure Program does not provide the same protections and reduced penalty structure as the Offshore Voluntary Disclosure Program.
Voluntary means you are entering the program on your own volition.
Usually, it means that you are not under audit or under examination with the IRS. That is because if you are already under IRS audit or examination and then submit to the program, you are not technically doing so voluntarily. Rather, you are entering the program in response to being audited or examined.
The reason the IRS does not allow you to enter OVDP once you are under audit is because you have a proactive responsibility during an audit or examination to bring these issues to the forefront and explain them to the auditor — even if the auditor did not ask about offshore accounts specifically – but assuming he or she asks about additional income, assets, etc.
When you are under audit or examination you can be subject to excessively high fines and penalties which are mitigated through traditional OVDP. The IRS will not let you out of those penalties (if you are audited) by submitting to OVDP at that time.
By disclosure, the IRS is referring to full disclosure. If you want to voluntarily disclose offshore money, then you have to do a full disclosure and report all of the information you have regarding all of your offshore money abroad.
It does not matter if the money was held in an account within a branch or institution that went out of business. It also does not matter that your money is being held in an anonymous account that you firmly and wholeheartedly believe can never be discovered.
Rather, from the IRS’ perspective, when it is time to disclose – you must perform a full disclosure and report all of the information — no matter how low the chances that the IRS could ever discover the information, account information, investments or income otherwise.
OVDP is an approved IRS program. There are specific time requirements and reporting disclosures that must be done according to OVDP milestones. If you fail to meet these milestones timely, the IRS can remove you from the program, which now means the IRS has at least some specific information regarding your offshore finances, and can now enforce incredibly high fines and penalties against you.
Worse yet, you no longer have the protection of OVDP.
How Does an OVDP Case Work?
OVDP Phase 1
The person submits a preclearance letter. It typically takes the IRS 30 to 45 days to respond to the letter. After around 45 day you will learn whether you have been accepted or rejected into OVDP. Despite what some inexperienced attorneys will tell you online, not everyone gets accepted. And if an attorney has told you that everyone always gets accepted, than they have not been practicing in this area of law long enough – especially with the introduction of FATCA.
OVDP Phase 2
The applicant has 45 days to submit the initial disclosure to the IRS. It is a relatively detailed breakdown of the different accounts, transfers, opening and closing of the accounts, and related information. It is not as detailed as preparing and submitting IRS forms and schedules such as general FATCA Reporting, FBAR, 3520, 5471, 8621, 8865, 8938 — but it is still relatively comprehensive, and more detailed than it had been in years past, especially pre-FATCA.
OVDP Phase 3
Presuming that the applicant is accepted, the applicant then has 90 days to submit the full disclosure, including all necessary FBARs, schedules, penalty competitions, legal arguments for mitigation of penalties, etc. Depending on the specific facts and circumstances of your case (numerous PFICs, Foreign Mutual Funds, ETFs, etc.), it may take longer for you to compile the information or prepare the necessary documents. The IRS routinely grants extensions to file.
We know…it seems nuts to acquiesce to the IRS before they have even found you, audited you, or examined you — and allow the IRS to issue penalties against. You may instead also consider submitting an IRS Quiet Disclosure in hopes that you can fly below the radar without getting caught.
Quiet Disclosure is a horrible idea, and here’s why:
First, a quiet disclosure may lead you to jail or prison. For a comprehensive case study on how IRS required disclosure of offshore money can go wrong, please refer to our prior blog page on Quiet Disclosure, Criminal Investigations & Prison.
Second, if the IRS audits or examines you before you enter the program, you may be subject to incredibly high fines and penalties, which are detailed below:
The reason why it is so important to disclose before the IRS finds you, is because the IRS has taken to issuing gargantuan penalties against individuals whose issues seem relatively minor (Read: is the world going to explode because Marty didn’t report his foreign account?)
When it comes to penalties, the IRS has extreme leeway. On the one hand, if a person can show reasonable cause, then often times penalties will be waived. On the other hand, the IRS has the right to issue penalties which can reach 100% value of the foreign account in a multi-year audit scenario (noting, that up until recently the IRS issued 300% penalties for unreported FBARs, when a person was found to be willful and penalized at 50% within the 6-year SOL).
The following is a summary of penalties as published by the IRS:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Who Do We Represent?
While each fact pattern and set of circumstances are different and unique, there are many types of individuals who fall into different categories of individuals who we represent often for OVDP.
Some of the more common examples include:
- Individuals who knowingly did not report their foreign accounts;
- Individuals who did not tell their CPA about their foreign accounts;
- Individuals or businesses that stash income overseas;
- Individuals who knowingly did not file a requisite FBAR or 8938; or
- Individuals or Foreign Businesses that are otherwise out of compliance
Golding & Golding – Experienced OVDP Attorneys
There is a lot of mis-information and fear mongering online regarding offshore disclosure. There are also several “newbie attorneys” who do not have any real experience with offshore disclosure, and simply regurgitate information they find on the IRS website, claim it as their own — and try to sell clients with artificially reduced fees when they have no real experience.
We know this because many OVDP clients have come to us after having a horrible experience with one of these other Attorneys.