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Financial Services Law Insights and Observations

2nd Circuit: Willful FBAR violations capped at 50 percent of aggregate balance

Courts FBAR Of Interest to Non-US Persons Appellate Second Circuit Department of Treasury

Courts

On July 13, the U.S. Court of Appeals for the Second Circuit held 2-1 that, under 31 U.S.C. § 5321 as amended, the maximum penalty for failing to file a Foreign Bank and Financial Accounts Report (FBAR) is 50 percent of the aggregate balance in the accounts at the time of the failure. According to the opinion, after a now deceased individual willfully failed to file an FBAR in 2008 for two foreign bank accounts, the IRS assessed a “willful penalty” that amounted to 50 percent of the aggregate account balances (approximately $4.2 million). The individual passed away without paying the penalty, and the U.S. government filed a lawsuit against his estate’s co-executors (defendants). A 1987 regulation limited the penalties for willful violations to $100,000 per account, but a 2004 amendment to the statute increased the maximum penalty for willful violations, to the greater of $100,000 or 50 percent of the aggregate account balance at the time of the violation. The defendants argued that the 1987 $100,000 penalty cap should apply, but the district court granted summary judgment for the government, though it noted that, despite the 2004 amendment, Treasury did not amend the 1987 regulation’s “now-inconsistent FBAR penalty provision,” which remains codified in the Code of Federal Regulations.

On appeal, the majority agreed with the district court, holding that the 2004 statute amended the penalty provisions: “Given that, [] Congress in 2004 raised the maximum penalty for such violations after being informed by the Secretary [of the Treasury] that perhaps as many as 800,000 persons required to file FBARs were noncompliant, a regulation purporting to nullify the statutory increase plainly does not ‘carry out’ Congress’s goal of encouraging compliance with the FBAR requirement.” The 2nd Circuit also rejected the defendants’ argument that the rule of lenity requires that any ambiguity be resolved in their favor, pointing out that “[t]here is no ambiguity or uncertainty as to what Congress intended in the 2004 Statute when it” increased the penalties. The dissenting judge stated that the majority’s decision “departs from basic administrative law and unjustifiably accommodates ‘the Treasury’s relaxed approach to amending its regulations.’”

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