FBAR Penalties: Another Court Rules FBAR Penalties May Exceed Regulatory Limit | Free human rights
The reporting of foreign bank and financial accounts (i.e., “FBAR”) was for many years confined to the lonely backwaters of Title 31 of the United States Code – the bank secrecy law with an intriguing name. . For years, compliance levels have been abysmal. But the sanctions were generally not applied. To put it in perspective, over the course of more than a decade you could probably have counted the number of penalties imposed on non-compliant account holders on the one hand – maybe, maybe, just maybe, two hands – at least according to contemporary Treasury Department reports to Congress.
But my how times have changed. FBAR penalties are most certainly applied these days. Some might argue that they are enforced with a vengeance – a revenge that is disconnected from the purpose behind the FBAR filing requirement. Truly, the penalties associated with failing to file an FBAR are among the most punitive civil penalties on the books.
The recent Second Circuit decision in United States v. Kahn serves as a reminder of the draconian penalty structure of the FBAR. In this decision, the Second Circuit joined with the courts of the Fourth, Eleventh and Federal Circuit in refusing to cap FBAR penalties in accordance with Treasury regulations (from 1987). These regulations were on the federal books before a major legislative change in 2004. This 2004 change increased the statutory “Ceiling” of FBAR penalties to an amount equal to the greater of$ 100,000 or 50% of the cumulative value of the accounts at the time of the willful failure to file an FBAR. But the “old” Treasury regulations – which, by the way, have never been amended – are still in effect and claim to provide a “cap” on voluntary FBAR penalties equal to $ 100,000.
The case therefore raises an interesting question: whether a bylaw that imposes a penalty that is less than the maximum amount provided by law (the law that the regulation implements) prohibits an administrative body (here, the IRS) from imposing a penalty greater than the limit of the regulation? This is the agency’s duly promulgated regulation after all. And they only had about 17 years to update it if they wanted to. Maybe the expectations should be properly calibrated….
A little background
The will was not in dispute in this case. Mr. Khan willfully failed a Foreign Bank and Financial Accounts (“FBAR”) report for his two foreign bank accounts for 2009. The IRS imposed a penalty equal to $ 4,264,728, plus statutory additions and interest, for this failure.
The case squarely involved the discrepancy between the law and the regulations. On the one hand, Mr. Khan’s estate argued that a 1987 Treasury Department regulation, 31 CFR § 1010.820 (g) (2), limits the government’s power to impose penalties for willful violations. from FBAR to $ 100,000 per account. This is, after all, exactly what the regulations say. The government argued, however, that the regulation was effectively replaced by a 2004 statutory amendment: under 31 USC § 5321 as amended in 2004, the maximum penalty for a willful failure to file an FBAR is 50 percent of the overall balance in the accounts at the time of this failure.
The result ? The Second Circuit rejected the inheritance argument, holding that the limitation of penalties provided for in the 1987 regulation, which followed the provision on penalties adopted in an earlier version of the law, was effectively replaced by the statutory amendment. of 2004, thus increasing the maximum penalty.
The relevant facts were not in dispute. Indeed, the parties have stipulated the following basic facts:
- Harold Kahn… willfully failed to file Form TD F 90-22.1, Report on Foreign Bank and Financial Accounts (“FBAR”) for the Year 2008, as required by 31 USC § 5314 and the regulations.
- The 2008 FBAR filing deadline was June 30, 2009.
- The 2008 FBAR should have declared two bank accounts held by Mr. Kahn at Credit Suisse, Switzerland.
- Each account had more than $ 100,000 and the total value of the two Credit Suisse accounts was $ 8,529,456 as of June 30, 2009.
- The Internal Revenue Service imposed a deliberate penalty for failure to file the 2008 FBAR in the amount of $ 4,264,728, which represents 50% of the total account balance as of June 30, 2009, in accordance with 31 USC § 5321 ( at 5) .
FBAR rules and the evolution of the FBAR declaration requirement
In 1970, Congress enacted the Bank Secrecy Act (“BSA”). The reason given: to fight money laundering and other financial crimes in the United States. Pub. L. n ° 91-508, 9202, 84 Stat. 1114 (1970). One of the main objectives of the BSA was to deter the use of foreign financial accounts to avoid tax obligations. See Id.
The BSA required individuals to disclose their relationships with foreign financial institutions. Identifier. § 241 (codified as amended at 31 USC § 5314). Congress gave the Secretary of the Treasury (“the Secretary”) the authority to prescribe the FBAR form and authorized the secretary to promulgate the regulations necessary to implement and enforce this reporting requirement. See Id. § 242.
In 1972, the Secretary promulgated regulations implementing the FBAR requirement. 37 Fed. Reg. 6912 (codified as amended at 31 CFR Ch. X) (April 5, 1972). These required everyone with an interest in a bank account in a foreign country to report the relationship on their federal income tax return for each year in which the relationship exists. Identifier. to 6913 (codified as amended at 31 CFR 5 1010.350). The form prescribed by the secretary is now known as the FBAR, and failure to file it may result in financial penalties.
As money laundering became a growing problem, Congress passed the Money Laundering Control Act 1986 (“MLCA”). Pub. L. n ° 99-570, subtitle. H, 100 stats. 3207 (October 27, 1986). Through the MLCA, Congress increased the civil and criminal penalties associated with money laundering and related BSA violations. Specifically for our purposes, Congress added a new civil financial penalty – a penalty for willful failure to file an FBAR.
The maximum penalty was set at “the greater of” $ 25,000 or “an amount (not exceeding $ 100,000) equal to the account balance at the time of the violation”. 31 USC § 5321 (a) (5) (B) (ii) (I) – (II) (1988) (the “1986 Statute”). In 1987, the Secretary promulgated the 1987 Regulations. These Regulations are currently found at 31 CFR § 1010.820 (g), (which I have affectionately referred to as the “isolated ponds of Title 31” above). This rule reproduced almost verbatim the wording of the new civil penalties provision in 31 USC § 5321 (a) (5).
The revised FBAR sanctions regulations read as follows:
((g)) For any intentional breach committed after October 27, 1986, any requirement to [§ 1010.350, § 1010.360 or § 1010.420], the Secretary can impose on any person, a civil sanction:
((2)) In case of violation of [§ 1010.350 or § 1010.4201 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.
Id. at 11446 (codified as amended at 31 C.F.R. § 1010.820(g)).
Following the terrorist attacks of 9/11, Congress began to debate legislative changes of its own. Both chambers of Congress contemplated amendments to the FBAR penalty statute. Notably, though, while one chamber of Congress proposed substantially raising the penalty ceiling, the other proposed retaining the original caps. Congress ultimately elected to increase the penalties and, in 2004, amended the FBAR penalty statute to increase the prior-law penalty for willful behavior.
As a result, the 2004 Statute increased the civil penalty for willful behavior to its present level, making the maximum penalty for failure to file an FBAR the greater of $100,000 or 50 percent of the aggregate balance in the accounts at the time of the violation. 31 U.S.C. § 5321(a)(5)(C)(i).
The regulations, however, were not updated or amended to reflect the statutory changes. They continued to require that each person holding a foreign bank account file an FBAR for each year in which he or she holds such an account. 31 C.F.R. § 103.24 (2009) (codified as amended at 31 C.F.R. § 1010.250). And a failure to do so, under those regulations, could result in “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.”
That is where the legislative evolution stood at the relevant point in time for Kahn.
So back to the issue. The government, in Kahn, maintained that the 2004 Statute, 31 U.S.C. § 5321(a)(5)(C)—providing that the maximum assessable penalty was the greater of $100,000 or 50 percent of the aggregate account balance at the time of the violation—should be applied. That amount was $4,264,728. The Estate, on the other hand, contended that the penalty was necessarily limited to $100,000 per account (for a total of $200,000) under 31 C.F.R. § 1010.820(g)(2)—the 1987 Regulation.
The regulation states that the Secretary ”may assess … a civil penalty” on any person who willfully violates the FBAR requirement, 31 C.F.R. § 1010.820(g) (emphasis added). The estate maintained that this provision is not inconsistent with the 2004 statutory language. The court, however, noted that while the regulation states that the Secretary may impose such a penalty only up to a maximum of $25,000, the statute provides that the maximum “’shall be increased to the greater of (I) $100,000, or (II) 50 percent’” of the unreported aggregate balance. The court reasoned that the use of the mandatory “shall be” phrase “shows that Congress did not intend to delegate the determination of the maximum penalty to the Secretary.” The court stated that:
[t]The Secretary may, on a case-by-case basis, impose penalties lower than the legal maximum. But he cannot effectively repeal the law and the maximum penalty specifically set by Congress by enacting (or failing to repeal) a regulation providing for a different penalty cap.
Identifier. (emphasis added).
Based on the District Court’s analysis, the Second Circuit concluded that the 1987 regulation and the 2004 law are not “harmonious”, citing several authorities in support of its position. Norman v. United States, 942 F.3d 1111, 1117-18 [124 AFTR 2d 2019-6595] (Cir. Fed. 2019) (“Norman“); United States v. Horowitz, 978 F.3d 80, 90-91 [126 AFTR 2d 2020-6551] (4th Cir. 2020) (” Horowitz “); United States v. Rum, 995 F.3d 882, 892 [127 AFTR 2d 2021-1761] (11th Cir. 2021) (“Rum“). Thus, the second circuit found that:
“When Congress enacted the 2004 law stating that the maximum penalty” must be increased ” identifier. , registered in the statutes of 2004. As the Court of Appeal of the federal circuit in Norman declared by rejecting an attempt to enforce the limitation of penalties in the 1987 regulation instead of the maximum provided for in the 2004 law ”,
[i]It is well established that laws adopted or subsequently amended supersede earlier conflicting regulations.…. A regulation which contravenes a law is invalid…. A regulation cannot go beyond a clearly stated legal requirement…. It is well established that when a regulation conflicts with a law subsequently enacted, the law controls and overrides that regulation.…. Ms. Norman’s position to the contrary would inappropriately prevent any newly created or amended laws from coming into force until any inconsistent regulations are amended or repealed.
Norman, 942 F.3d to 1118 (inner quotes omitted (emphasis added)); to see, for example, Rum, 995 F.3d to 892 (“The plain text of § 5321 (a) (5) (C) makes it clear that an intentional penalty may exceed $ 100,000 because it states that the maximum penalty” will be … the most high of (I) $ 100,000, or (II) 50 percent of “… the account balance. The regulations were enacted in 1987 and reflected the language of the law at this moment but has never been updated. ‘[T]The wording of the law is hardly compatible with the intention of Congress to allow the secretary to impose a lower maximum sentence by regulation; on the contrary, Congress itself has set a specific maximum penalty for a willful violation. “(Quoting Horowitz, 978 F.3d at 91 (emphasis added)); Horowitz, 978 F.3d to 91 (“[T]The 1987 regulations on which the Horowitz are based were repealed by the 2004 Congress amendment to the statute and are therefore no longer valid. “).
Where do we go from here?
The Second Circuit ruling follows the pattern of federal court decisions dealing with this particular issue. But do I think this is correct? No. In my opinion, several courts that have addressed this issue (and, frankly, a number of other FBAR issues) have invited and contributed to an echo chamber, repeatedly repeating superficial erroneous reasoning that – if we are brutally honest, of course results oriented. But the courts, in my humble opinion, should be more concerned with being right than with consistency. If the courts stop forcing the IRS to follow its words (the words of its regulations), then what value and role do regulations serve? And what must an average citizen think of the meaning, validity or necessity of conforming to these words? After all, the Treasury has turned 17 and is planning to change the regulations.
For other relevant FBAR articles, see this information: