Penalty Limited to Maximum Amount Stated in Regulation Not Updated for Later Increase in Maximum Penalty

A U.S. District Court in the case of United States v. Colliot, Case No. 1:16-cv-01281, Western District of Texas, found that Treasury failure to update a regulation served the limit the amount of penalty the IRS could assess against an individual who willfully failed to report accounts on FBAR reports.

The case involves the penalty provisions found at 31 USC 5321(a)(5) for those who fail to report offshore accounts on annual FBAR reports.  That provision provides:

(5) Foreign financial agency transaction violation.—

(A)Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—

(i) In general.—

Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C)Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

(I) $100,000, or

(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

(D)Amount.—The amount determined under this subparagraph is—

(i) in the case of a violation involving a transaction, the amount of the transaction, or

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

That text was last modified by Congress in 2004.  Prior to the 2004 changes, the law provided the penalty would be capped at the greater of:

  • The amount (not to exceed $100,000) in the account at the time of the violation or
  • $25,000

In 1987 Treasury promulgated regulations that provided for above limits on penalties.  Treasury had not modified the regulations following the 2004 law changes, so 31 CFR §103.57 still provides for those penalty caps despite the Congressional action to raise the caps in 2004.

In this case, the following undisputed facts were before the Court:

In December 2016, the Internal Revenue Service (IRS) initiated this lawsuit to reduce to judgment outstanding civil penalties assessed against Colliot. Compl. [#1] at 1. The penalties were assessed for Colliot's repeated and willful failures to timely file Form TD F 90-22.1, entitled "Report of Foreign Bank and Financial Accounts" and commonly referred to as an "FBAR," from 2007 to 2010. Mot. Summ. J. [#52]. For 2007, the IRS assessed penalties of $548,773 for four separate FBAR violations. Resp. Mot. Summ. J. [#57] at 15. For 2008, the IRS assessed penalties of $196,082 for another four FBAR violations. Id. at 16. The IRS also assessed smaller penalties in 2009 and 2010. Id. at 17. In forms provided to Colliot in connection with the assessment of these penalties, the IRS stated the penalties were authorized under 31 U.S.C. § 5321(a)(5) and 31 C.F.R. § 1010.820(g)(2). Mot. Summ. J. [#52-12] Ex. L at 2.

Mr. Colliot argues that the IRS miscalculated the penalties in this case, with the limits found in the old 31 CFR §103.57 (now renumbered 31 CFR §1010.820) still being applicable to his situation since the Treasury has not, in the nearly 14 years since Congress changed the law, gone back and revised the underlying regulation to reflect the higher limits.

The IRS disputes that view, holding that Congress’s action in 2004 served to obsolete the regulations issued under the prior version of the law.

The Court did not agree, holding:

Unfortunately for the IRS, there is little reason to believe § 5321(a)(5)(C) implicitly superseded or invalidated § 1010.820. Section 5321(a)(5) sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor.2 31 U.S.C. § 5321(a)(5). 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). Id. And § 1010.820 — a regulation validly issued by the Treasury via notice-and-comment rulemaking — purports to cabin that discretion by capping penalties at $100,000.3 31 C.F.R. § 1010.820. Thus, considered in conjunction with § 5321, § 1010.820 is consistent with § 5321's delegation of discretion to determine the amount of penalties to be assessed. See US. Pipe & Foundry Co. v. Webb, 595 F.2d 264, 272 (5th Cir. 1979) ("Regulations are presumed valid unless they are shown to be unreasonable or contrary to the provisions of the enabling statute."). Since § 1010.820 can be applied consistent with § 5321(a)(5), the Court concludes § 5321(a)(5) does not implicitly invalidate or supersede § 1010.820.

The court found that, because of this, the $100,000 cap found in the old regulation must still be applied until the regulation is repealed via notice-and-comment rulemaking.  That is, the old regulation is not inherently inconsistent with the underlying law, even if it now may not reflect Treasury’s thinking on the matter.