Few penalties have the bite of the FBAR penalty. As the IRS obtained more information and more sophistication in locating foreign bank accounts, it offered taxpayers who had used such accounts the opportunity to limit their civil and criminal exposure through a series of Offshore Voluntary Disclosure Initiatives (OVDI and its cousin OVDP). We have discussed OVDI and OVDP in previous posts here and here. Les wrote about a non-wilful FBAR case here.
The Court of Federal Claims recently rendered an opinion in Norman v. United States, No. 1:15-cv-00872 (July 31, 2018) finding the taxpayer liable for the 50% penalty imposed by 31 U.S.C. 5314. The 50% penalty means that Ms. Norman owes the IRS half of the money in her foreign bank account which makes the FBAR penalty one with an enormous bite. Jack Townsend’s blog covers FBAR issues extensively and is a much better source than PT on this issue. As usual, he wrote about this case the day after it came out and his post can be found here. The Norman case has importance not only because the court finds her conduct willful but also because the court addresses the application of the regulations. For that reason, it deserves mention in PT where we spend relatively little time writing about foreign bank accounts.
In October, 2013, the IRS assessed an FBAR penalty against Ms. Norman in the amount of $803,530 for willfully failing to report her foreign bank account. After unsuccessfully contesting the penalty administratively, she paid it and brought a suit for refund. The IRS tried to win the case on summary judgment but the court found that the issue of willfulness required the gathering of facts in a manner not possible through summary judgment. So, a three hour trial took place in Brooklyn on May 10, 2018.
A couple of things about the trial deserve note. First, the location of the trial shows that the Court of Federal Claims regularly travels around the country for its trials to a site near the taxpayer. This is not news for those familiar with the Court of Federal Claims but for those not familiar with this court it may come as a surprise. Second, the timing of the decision in this case vis a vis the trial stands in stark contrast to the normal time for a decision from the Tax Court. Unless decided by a bench opinion, I would not expect a Tax Court decision following a trial of this type for about a year instead of less than three months; however, it did take almost three years after the filing of the complaint in the Court of Federal Claims before the case came to trial.
In short, the court did not believe the testimony of Ms. Norman. It found her memory quite selective. It went through the elements necessary to prove a willful failure to report a foreign bank account, then through the facts she did and did not prove in order to reach the conclusion without much difficulty that Ms. Norman knew about the account and knew she should have reported it. It’s not worth going through all of the factual findings here but for those representing individuals with foreign accounts the details might matter. As Les mentioned in his post, the number of opinions coming out on this issue is relatively low. The IRS settlement initiative doubtless has resolved the vast majority of cases without litigation.
Having found a willful violation, the court then had to deal with the amount of the penalty. The taxpayer argued that the court should cap her penalty based on regulation 31 C.F.R. 1010.820 which was written under the previous version of the Bank Secrecy Act and which capped the penalty at $100,000 which would be quite a reduction from the assessment here. Taxpayer requested that the court adopt the reasoning set forth in Colliot v. United States, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018), and in Wadhan v. United States, 122 AFTR2d 2018-5208 (D. Colo. 2018). In 2004 Congress amended the law to increase the penalty. Colliot and Wadhan held that the new law did not supersede the regulation promulgated under the prior statute. The Colliot district court reasoned that:
[The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by 5321(a)(5)(C).
The Court of Federal Claims found that the statement in Colliot “mischaracterizes the language of 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.” The revised statute provided that the maximum penalty “shall be increased” to the greater of $100,000 or 50% of the account. Because Congress used the imperative, the amendment did not merely permit a higher ceiling on penalties based on the decision of the Secretary it “removed the Treasury Secretary’s discretion to regulate any other maximum.” It found Congress superseded the regulations.
In invalidating the regulations the Court of Federal Claims refused to follow precedent that could have damaged the IRS not just in FBAR cases but in other similar situations in which a revised statute did not immediately trigger a withdrawal or revision of a regulation by the IRS. Of course, the Colliot decision turned on an interpretation of the intent of Treasury in leaving the regulations on the books but it had potentially far reaching consequences for the IRS. The Norman decision does not mean the IRS has won this issue but it does mean that a court of nationwide jurisdiction has not signed on to the interpretation of one district court. While I agree with the decision in Norman, the IRS could do itself a favor by addressing the regulation. It seems that it has the power to avoid having to litigate this issue repeatedly.