Why Courts Rule FBAR Penalties Can Exceed Regulatory Maximum

Why Courts Rule FBAR Penalties Can Exceed Regulatory Maximum

Courts Rule FBAR Penalties Can Exceed Regulatory Maximum

Why Courts Rule FBAR Penalties Can Exceed Regulatory Maximum: When it comes to willfulness and the FBAR, courts across the nation have been leaning in favor of the Internal Revenue Service in only having to show reckless disregard in order to prove a willful FBAR violation occurred. This sets defendants up to be at increased risk for significantly high FBAR penalties — in situations in which the defendant Taxpayer had no actual intent to avoid reporting. In order to defend against the amount of penalty, some Taxpayers have taken the position that the regulation trumps the statute (the latter which was updatedto increase the penalty) — and therefore, willful FBAR penalties should be limited to $100,000 per year. Most courts, including the recent decision in US v Gill have rejected this defense — but let’s take a look at the difference between the FBAR penalty regulation vs updated statute:

31 C.F.R. §1010.820(g)(2) Willful FBAR Regulation

      • (g) For any willful violation committed after October 27, 1986, of any requirement of § 1010.350, § 1010.360 or § 1010.420, the Secretary may assess upon any person, a civil penalty:

        • (1) In the case of a violation of § 1010.360 involving a transaction, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) of the transaction, or $25,000; and

        • (2) In the case of a violation of § 1010.350 or § 1010.420 involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.

What does this mean?

It means that the regulation provided for transactions involving violations of certain code sections, there would a maximum of $100,000 penalty. Section 1010.350 refer to foreign accounts.

31 CFR § 1010.350 Foreign Accounts

  • 1010.350 Reports of foreign financial accounts.
      • (a) In general

        • Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form.

        • See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.

31 USC 5322 FBAR Penalties

31 USC 5321 refers to willful violations for noncompliance with reporting foreign accounts.

As provided by IRC 5321:

  • (C) Willful Violations
      • —In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

      • (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

      • (I) $100,000, or

      • (II) 50 percent of the amount determined under subparagraph (D), and (ii) subparagraph (B)(ii) shall not apply.

What does this mean?

The Regulation currently on the books refers to the prior statute, which limited the penalty to $100,000. The willful FBAR penalty statute was updated in 2004, and changed the law, so that willful FBAR violations are $100,000 or 50% maximum value — whatever is higher. Some Taxpayers have sought to argue that the prior regulation should trump the current statute, but most courts have disagreed, stating that:

  • Later-in-time rule favors the revised/updated statute; and
  • Regulation was for the prior statute and is inapplicable under the current rules.

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