$100,000 Limit on Civil FBAR Penalties: The Colliot Case, Part I

When people learn that their FBAR penalties have been set at 50% of their account balance for each year that they have been noncompliant, they get understandably upset. At a certain point, those penalties become absurd, particularly when little or no U.S. taxes were due on the foreign account in the first place.

The recent United States v. Colliot case, which involves a taxpayer who willfully failed to disclose his foreign assets, offers some encouragement for those fighting excessive FBAR penalties.

U.S. vs. Colliot

From 2007-2010, Mr. Dominique Colliot willfully failed to file his required FBARs. This fact was never in dispute. Colliot’s objection was to the extraordinary FBAR penalties assessed for his transgression; he was penalized to the tune of $548,773 for four separate FBAR violations in 2007 and $196,082 for another four FBAR violations in 2008. Smaller amounts were assessed for 2009 and 2010.

The IRS claimed that it was authorized to assess these amounts under 31 U.S. Code § 5321(a)(5) and its corresponding federal regulation, 31 CFR 1010.820(g)(2). (A regulation is created by a government agency and provides details of how a law will operate, following a public notice and comment-making period.) Mr. Colliot moved for summary judgment, arguing that despite the fact that the statute allows a higher penalty assessment, the maximum penalty set forth under the very same regulation that the IRS cited is $100,000. The court agreed.

A (very) brief history of the civil FBAR penalty

Internal Revenue Code Section 5321 originally limited the maximum civil FBAR penalty to the greater of $25,000 or the balance of the unreported account, up to $100,000. Its corresponding regulation, 31 C.F.R. § 103.57 (later renumbered as Reg. §1010.820) was properly enacted and reiterated the $100,000 FBAR penalty cap.

Congress amended the statute in 2004, increasing the penalty under IRC Section 5321(a)(5)(C) to the greater of $100,000 or 50% of the account balance. However, the corresponding regulation was not revised to reflect the increased limit. Regulation 31 C.F.R. § 103.57 was changed in other ways over the years; for example, it was renumbered as Reg. §1010.820 and was amended to account for inflation – however the penalty itself was not changed in the regulation and remained capped at $100,000.

In Colliot, the IRS argued that regulations are subordinate to statutes, a position that the court did not accept. The court agreed with Colliot that by failing to repeal or revise Reg. §1010.820, that regulation remained in force and its $100,000 penalty cap was left in place.

In Part II, we will discuss the impact of the Colliot case on willful FBAR penalty cases.

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