Coming to the opposite conclusion reached by two district courts, the U.S. Court of Federal Claims has held that a reg is invalid if it doesn’t reflect a statutory increase in the penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR). The court also determined that a taxpayer’s failure was willful.
Under tax law, every U.S. person that has a financial interest in, or signature authority over, a foreign financial account must file an FBAR each year. The penalty for violating that requirement depends on whether the failure was nonwillful or willful. The maximum penalty for a nonwillful violation is $10,000. For a willful failure, the maximum penalty under the U.S. Code is increased to the greater of $100,000 or 50% of the balance in the account at the time of the violation.
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 the change, the maximum penalty was $100,000. Regs that were promulgated before the statutory increase continue to reflect the former $100,000 maximum (as opposed to the “greater of $100,000 or 50%…”), even though these regs have since been renumbered and amended to account for inflation.
In May 2018, a Texas district court held that the reg can be applied consistently with the law, and thus the reg hasn’t been implicitly invalidated or superseded. The court limited the penalty to $100,000, stating that FBAR penalties can’t exceed the regulatory cap (Colliot, DC TX 2018).
In July 2018, a Colorado district court came to the same conclusion. The Colorado court said that both the pre-2004 version and the current version of the reg specifically grant the Treasury Secretary discretion to assess penalties. Both versions state that the Treasury Secretary “may assess” the described penalties (Wadhan, DC CO 7/18/2018).
Facts of the recent case
In the case at hand, the taxpayer had money in a Swiss bank account in 2007 and failed to file a timely FBAR.
She also didn’t apply for the IRS’s Offshore Voluntary Disclosure Program (OVDP). Instead, she filed a “quiet disclosure” through her Swiss accountant. She argued that she hadn’t willfully failed to file an FBAR. She testified that she’d learned of her duty to report from her mother in 2009 and that she relied on her accountant to properly apply for the OVDP at that time. However, the accountant only filed the quiet disclosure.
Note: The IRS will close the current OVDP on September 28, 2018.
To apply to the OVDP, a taxpayer must specifically inform the IRS of a desire to participate by letter or telephone. If the taxpayer qualifies, the taxpayer’s FBAR penalties can be reduced to 20% (rather than 50%) of the account balance.
The IRS has said that taxpayers filing a quiet disclosure “should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.” Quiet disclosures are made by filing amended tax returns and FBARs and paying related tax and interest for previously unreported offshore income, without otherwise notifying the IRS or admitting any guilt.
Reg is invalid
The court took note of Colliot and said that it was wrongly decided.
Crucially, the court noted that, in the amended statute, Congress used the imperative “shall be increased,” rather than the permissive “may.” Thus, the amendment didn’t merely allow for a higher ceiling on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion. Rather, Congress raised the ceiling itself and removed the Treasury Secretary’s discretion to regulate any other maximum.
The court said that, for regs to be valid, they “must be consistent with the statute under which they are promulgated.” Because the relevant U.S. Code requires the maximum penalty to be set to the greater of $100,000, or 50% of the balance of the account, the reg is no longer consistent with the amended statute.
The court also said that, 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 American Jobs Creation Act of 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,” according to Senate Report No. 108-192.
Taxpayer’s failure was willful
After considering the documents and hearing the taxpayer’s testimony, the court found that she’d willfully failed to file an FBAR for 2007.
In ruling against her, the court noted the following points:
- Her memory of nearly every fact at issue was both uncertain and inconsistent with the evidence. (For example, she didn’t remember whether she’d opened the account herself or whether it was an inheritance, whether she’d traveled to Zurich to open the account and when she’d opened the account).
- Her many admitted “inaccuracies” and “misstatements” — all of which would have skewed the facts in her favor if true — further impeached her credibility. (For example, she provided false and inconsistent statements about her knowledge and control of the foreign account on her 2007 income tax return.)
- The taxpayer signed documents to open a numbered bank account — which, by definition, concealed her income and financial information — with Union Bank of Switzerland (UBS) in 1999.
- The taxpayer closed her account with UBS when it announced its new business model of working with the United States to identify the names of U.S. clients who may have engaged in tax fraud, and would “no longer provide offshore banking.”
The woman transferred the funds to now-defunct Swiss bank Wegelin & Co. In 2013, Wegelin pled guilty to tax law violations for unlawfully helping U.S. taxpayers who had fled from UBS and other banks to hide their income and assets from the IRS.
If you have control or signature authority over a foreign bank account, consult with your B&V tax advisors, at 713-667-9147 or email@example.com, about your responsibilities and don’t fail to file your annual FBAR.