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

In Part I, we discussed a very significant case involving a taxpayer who willfully failed to file FBARs for a number of years. Mr. Dominique Colliot objected to the extraordinary penalties assessed against him, arguing that 31 CFR 1010.820(g)(2) , the federal regulation used by the IRS to justify its assessment, had a $100,000 cap, despite the fact that the statute on which it was based, 31 U.S. Code § 5321(a)(5) , permits an assessment of $100,000 or up to 50% of an account balance.

FBAR Penalty Timeline

The court discussed the history of the FBAR penalty at length:

  • 2000 – Secretary of the Treasury is empowered to impose civil penalty for willful violation of 31 U.S. Code § 5314 . 31 U.S. Code § 5321(a)(5) and its corresponding regulation, Reg. § 103.57, set the FBAR penalty at the greater of $25,000 or the balance of the unreported account, up to $100,000.
  • 2002 – FinCEN is authorized by the Treasury Department to assess the IRC Section 5321(a)(5) FBAR penalty. IRS confirms that existing regulations remain in effect until superseded or revised.
  • 2003 – FinCEN re-delegates its authority to assess penalties under section 5321(a)(5) and Regulation § 103.57 to the IRS.
  • 2004 – Congress amends section 5321(a)(5), increasing the penalty to the greater of $100,000 or 50% of the account balance. The IRS does not revise corresponding regulation § 103.57.
  • 2010 – Regulation § 103.57 is renumbered to Reg. §1010.820. The language capping the penalty at $100,000 is not revised.
  • 2016 Regulation §1010.820 is amended to account for inflation. The language capping the penalty at $100,000 is not revised.

Accordingly, the court granted Colliot’s motion for summary judgement, finding that the IRS “acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot.”

Impact of Colliot holding

If the Colliot court’s ruling is affirmed on appeal, this case will have a dramatic effect on FBAR cases:

  • Until the regulations are amended, taxpayers may use the Colliot holding to their advantage in their negotiations with the IRS.
  • Willful FBAR noncompliance would carry a maximum penalty of $100,000 – a strong consideration for taxpayers considering enrollment in the Offshore Voluntary Disclosure Program (OVDP). Note that the threat of criminal sanctions may still make the OVDP a better option.
  • Taxpayers who have already paid FBAR penalties exceeding $100,000 per account may attempt to sue for a refund of excess amounts.

Note that the IRS recently announced that the OVDP will be closing on September 28, 2018, so there is limited time to take advantage of the program if it is still the best option for you.

FBAR attorneys

Taxpayers who have been willfully noncompliant with their foreign account reporting now have an additional factor to take into consideration when weighing their options. The tax team at Moskowitz, LLP has had tremendous success in minimizing FBAR penalties both within and outside the OVDP, and can zealously defend you with an IRS settlement or in court. Contact our San Francisco office today for a consultation.

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