FBAR Regulations (2019) – Courts Split on IRS Willful Penalty Maximum
When congress increased the penalties for FBARs (Report of Foreign Bank and Financial Accounts, aka FinCEN 114) – the regulations ‘Regs’ were not updated to coincide with the new law.
Common Questions include:
- What is the FBAR?
- What is a Regulation?
- What is an FBAR Regulation?
- What does the regulation say?
- Are FBAR Willful Penalties capped at $100,000?
- What about the revised FBAR statute?
- What did the court conclude?
While this was probably little more than an administrative exercise that needed to be performed, most federal agencies just cannot seem to get themselves to the gym long enough to complete the task.
Just because a regulation was not updated to coincide with a revised statute does not create a substantive right that would conflict (and undermine) the new law.
But, when you are staring down the barrel of a $1M+ dollar judgment, you do what you can, with what you have.
The conflict was that while the regs capped the penalties at $100,000 (ceiling) per year – the statute did not ($100,000 is the floor).
Relying on the old regulation when a revised statute was written is not a great argument, since the Regs generally do not trump the Statute.
It is generally a failed argument for most litigants.
…Add Mr. Garrity and his estate to that list.
FBAR Regulation or Revised FBAR Statute?
The facts are relatively common in this area of law. An unreported foreign account, in a tax haven, that went unreported for several years.
Basic Summary of Facts
As provided by the Court’s Ruling:
“The United States of America (“the Government”), filed this suit to reduce to judgment a civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr. under 31 U.S.C. § 5321(a)(5).
A jury found that Mr. Garrity had willfully failed to file a Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) in 2005, in violation of 31 U.S.C. § 5314. (ECF No. 179.)
The jury also found that the Government had established the assessed civil penalty ($936,691.00) was equal to 50% of the balance in Mr. Garrity’s account in the year he failed to file the FBAR.
Mr. Garrity passed away on February 10, 2008. The Government brought this action against Diane M. Garrity, Paul G. Garrity, Jr., and Paul M. Sterczala (the Defendants) as fiduciaries of his estate.
Defendants Sought to Reduce the Judgment via Motion
The Defendants filed a motion to alter or reduce judgment. (ECF No. 190.)
They assert that the maximum civil penalty for failure to file an FBAR is $100,000.00 and the current penalty violates the 8th Amendment (Excessive Fines Clause)
The Revised 2004 Statute Abrogated the 1997 Regulation
The court’s position is that if Congress increased the penalty via statute, then that is the new law – and just because the regulation was not updated would not impact the statute’s enforcement.
As provided by Court:
“The Defendants argue that, notwithstanding the statutorily increased penalties, the IRS remains bound by the Treasury regulation promulgated in 1987 under the pre-2004 version of the statute. According to this argument, the maximum penalty for willful FBAR violations is therefore $100,000. See 31 C.F.R. § 1010.820(g)(2).
The Defendants assert that the amended statute establishes a ceiling on civil penalties but not a floor, and that the Secretary of the Treasury has, by retaining the old regulation, categorically established a lower ceiling for such penalties, limiting his own authority to the level set by Congress before the amendment. I disagree.
The plain language of the 2004 amendment demonstrates Congress’s intent to authorize the Secretary to impose higher penalties for willful FBAR violations without the need for additional Treasury regulations, and, as shown below, the old regulation will not bear the freight the Defendants attempt to foist upon it.
There is also no reason to conclude that the Secretary intended categorically to limit his own discretion to impose the higher penalties that Congress authorized
The General Facts Show an Intent to Conceal
The court was also skeptical as to why the account was opened in the first place.
As provided by the court:
They have offered no explanation for why Mr. Garrity opened the foreign account, nor have they identified the source of the money in it.
Further, although the Government was not required to prove that Mr. Garrity engaged in other illicit activity related to his foreign account, there was evidence at the trial that, at the very least, raises serious questions about his and his sons’ activity related to the account.
For example, the account was opened in Liechtenstein under the name of a trust known as a Liechtenstein Stiftung.
In 2008, Liechtenstein was one of three countries identified as tax havens by the Organization for Economic Development and Cooperation. See Jane G. Gravelle, Cong. Research Serv., R40623, Tax Havens: International Tax Avoidance and Evasion 5 (2015).
The Joint Committee on Taxation reported that U.S. citizens frequently utilized trust accounts in Liechtenstein to shield their assets from discovery by authorities and evade taxes. See Joint Committee on Taxation, Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities 41 (JCX-23-09), March 30, 2009.
There was also evidence that Mr. Garrity and his sons made efforts to keep the account’s existence a secret.
Two of his three sons who testified at trial invoked their Fifth Amendment rights as to all questions about the account, including questions about a trip to Liechtenstein to make large cash withdrawals from the account.
The third son testified that, upon flying home from that trip, he gave his cash to his brothers out of concern for U.S. currency transaction reporting requirements, only to recover the cash once they cleared customs. (See ECF No. 196-1 at 2–5.)
While the jury was not required to make any findings about the suspicious efforts to maintain the secrecy of the account, the Defendants have not borne their burden of showing that the violation had nothing to do with criminal activity.
The Court’s Conclusion
In the end, the court was not buying the argument that the old regulation trumps the revised statute.
As provided by the court:
To summarize, the maximum civil penalty for willfully failing to file an FBAR is the greater of $100,000 or 50 percent of the account balance at the time of the violation—in this case $936,691. 31 U.S.C. § 5321(a)(5).
This amount is proportional to the harm caused by Mr. Garrity’s violation.
The Government is also entitled to late payment penalties and interest under 31 U.S.C. § 3717. Accordingly, the Government’s motion to alter judgment (ECF No. 191) is GRANTED and the Defendants’ motion to alter and reduce judgment (ECF No. 190) is DENIED.
The Clerk shall enter judgment for the Plaintiff in the total amount of $1,330,460.50, consisting of the civil penalty of $936,691, interest of $56,252.78, and a late payment penalty of $337,516.72
Safely Get Into IRS Offshore Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
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