In an unusual turn of events, the IRS argued that its own regulation was outdated and therefore invalid when urging a Texas district court to impose stricter FBAR penalties. The court refused to do so, limiting the penalties at issue to the $100,000 cap in the regulation.
Under Title 31, an individual can be severely penalized for failing to file a foreign bank and financial account report, commonly known as an FBAR, disclosing foreign financial accounts. Since 2009, the IRS has been cracking down on these failures and collecting heavy penalties in the process.
In 2004 Congress amended 31 U.S.C. § 5321, to raise the maximum penalty for failure to file an FBAR to the greater of $100,000 or 50% of the account balance at the time of the violation. Prior to this amendment, the regulations issued under this statute provided that the penalty could not exceed $100,000, consistent with the earlier version of the statute. Despite the change in the penalty cap by Congress, the IRS did not update its regulations.
Earlier this year, in Colliot v. United States, the IRS brought suit for judgment to collect unpaid FBAR penalties levied against a defendant with significant undisclosed Swiss bank accounts. In doing so, the IRS followed this revised statute (and not the regulation), seeking penalties in excess of the $100,000 cap in the regulation.
The defense sought to have the penalties reduced and filed a motion arguing that the IRS's penalty assessments violated the governing regulations. The IRS, on the other hand, argued that its own regulation was no longer valid because Congress's amendment to the statute increased the penalty limits. The Texas court ruled in favor of the taxpayer, determining that the regulation had not been repealed and therefore remained law when the FBAR penalties in question were assessed against the defendant. This is a big win for taxpayers with foreign accounts who may be subject to FBAR penalties.