Certain individuals and entities are required to file a FinCEN Form 114, Report of Foreign Bank Account Report (commonly called an “FBAR”), if they have a financial interest or signature authority in a foreign bank account. The FBAR form is filed electronically on the FinCEN website and must be filed each year. If a person or entity does not file the FBAR form, the IRS can impose civil penalties that equal or exceed 50% of the balance in the foreign account for each year. The United States also can bring criminal charges against a person who does not file the FBAR form.
The amount of a civil (that is, noncriminal) FBAR penalty depends on whether the person’s failure to file the FBAR form was “willful.” See 31 U.S.C. § 5321(a)(5). The term “willful” is not defined by statute. Instead, it is based on the facts and circumstances.
If a person’s failure to file the FBAR form was “willful,” there are two new cases that challenge the maximum FBAR penalty the government can assess. In two U.S. district court cases (Colliot and Wadhan), the court determined that the maximum FBAR penalty is capped at $100,000, even though the amounts the IRS assessed were much higher. See United States v. Colliot, case no. 1:16-cv-01281-SS (W.D. Texas May 16, 2018), available here; United States v. Wadhan, case no. 1:17-cv-01287-MSK (D. Colo. July 18, 2018), available here. On the other hand, in Norman, the Court of Federal Claims concluded the opposite: the FBAR penalty is not limited to $100,000. See Norman v. United States, case no. 15-872T (Fed. Cl. July 31, 2018), available here. In Colliot and Wadhan, the Department of Justice filed a complaint to reduce the FBAR penalty to a federal judgment. In contrast, the individual in Norman filed a complaint in the Court of Federal Claims claiming a refund of an FBAR penalty that she had already paid.
The conflicting court rulings stem from Congress amending the statute related to the FBAR penalty, and the Department of the Treasury failing to amend the related regulation. Before 2004, 31 U.S.C. § 5321(a)(5) stated that (1) Congress authorizes the Secretary of the Treasury to impose an FBAR penalty; and (2) this penalty is limited to the greater of $25,000 or 100% of the balance in the foreign account (not to exceed $100,000). The pre-2004 version of § 5321 is available here. Thus, before 2004, the FBAR penalty could not exceed $100,000.
While this version of the statute was in effect, the Department of the Treasury issued a regulation at 31 C.F.R. § 103.57, which was later renumbered as 31 C.F.R. § 1010.820. Specifically, § 1010.820(g)(2) provides for a 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.” This language mirrors the pre-2004 version of § 5321.
In 2004, Congress amended the statute to provide that the maximum willful FBAR penalty is the greater of (1) $100,000, or (2) 50% of the balance in the foreign bank account. See 31 U.S.C. § 5321(a)(5)(C)(i). However, the Department of the Treasury did not amend the related regulation to match. Therefore, currently, there is a statute stating that the FBAR penalty can equal 50% of the account balance (which may be significantly higher than $100,000), and there is a regulation stating that the penalty cannot exceed $100,000 “per violation” (that is, per foreign account).
Here is an example using Persons A and B:
|Person A||Person B|
|Foreign Bank #1 Balance||$1,500,000||$500,000|
|Foreign Bank #2 Balance||$750,000|
|Foreign Bank #3 Balance||$250,000|
|Total Foreign Account Balances||$1,500,000||$1,500,000|
|Maximum FBAR Penalty Under 31 U.S.C. § 5321||$750,000||$750,000|
|Maximum FBAR Penalty Under 31 C.F.R. § 1010.820||$100,000||$300,000|
At first, the statute and regulation might seem at odds with each other. However, as the district courts noted in both Colliot and Wadhan, the statute and regulation both set the maximum amount for an FBAR penalty. The regulation simply sets a lower maximum amount. Thus, the regulation layers on top of the statute and provides that the maximum amount is not 50% of the account balance–instead it is $100,000. Besides these three cases, no other courts have ruled specifically on the issue of whether the maximum FBAR penalty is limited to $100,000. Some taxpayers owe multi-million dollar FBAR penalties. If the $100,000 limitation applies, then these FBAR penalties could be reduced by millions of dollars.
Did the IRS determine that you owe more than $100,000 in FBAR penalties? If so, you should contact our office to discuss your options to fight for the correct amount of an FBAR penalty (if any), including the option of FBAR litigation. Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC represent clients in FBAR litigation, as well as sensitive domestic and international tax examinations, employment tax cases, and difficult tax collection matters. David J. Warner is a former IRS Attorney who, while at the IRS, handled all large FBAR penalty determinations. David currently represents clients in FBAR litigation in U.S. district court. Please contact David at (310) 550-6200 to schedule a consultation.