Can the FBAR Regulatory Cap for Penalties be Exceeded?

Can the FBAR Regulatory Cap for Penalties be Exceeded?

Does FBAR Regulatory Cap Limit Penalties

Can the FBAR Regulatory Cap for Penalties be Exceeded: The short answer is, yes — several courts have held that the FBAR regulatory CAP for penalties can be exceeded. In a recent FBAR case in the U.S. Court of Appeals for the Second Circuit, the Court of Appeals affirmed the District Court’s ruling that willful FBAR Penalties are NOT limited to $100,000 per year. Appellant’s argument (which has been pursued by other Taxpayers across the nation as well) was that since the prior regulation limited the willful FBAR penalty to a maximum of $100,000 per year — that the $100,000 should remain as the penalty limitation for willfulness — since the Regulation was not updated to coincide with the revised statute. The Court disagreed with petitioner (as have other Courts in other jurisdictions on the same issues in other cases). Thus, the Court ruled that the U.S. Government is not limited to $100,000 per year when willful FBAR penalties are issued. Let’s look at why the Court ruled in favor of Appellee in US v. Kahn.

USA v Kahn & FBAR Regulatory Cap 

As provided in the Court Ruling:

      • The district court granted the government’s motion for summary judgment on the ground that, under 31 U.S.C. § 5321 as amended in 2004, the maximum penalty for Kahn’s failure to file an FBAR is 50 percent of the aggregate balance in the accounts at te9 time of that failure; the court rejected defendants’ contention that a 1987 Treasury Department regulation, 31 C.F.R. § 1010.820(g)(2), limits the government’s authority to impose penalties for willful FBAR violations to $100,000 per account. See United  States v. Kahn, 17-cv-7258, 2019 WL 8587295 (E.D.N.Y. Sept. 23, 2019).

      • On appeal, defendants pursue their contention that the regulation trumps the later-amended statute. We conclude that the district court correctly ruled that the penalty limitation provided in the 1987 regulation, which had tracked the penalty provision enacted in a prior version of the statute, was superseded by the 2004 statutory amendment increasing the penalty maximum.

What does this Mean?

It means that despite the fact that prior regulation limited willful FBAR penalties, the new revised statutes is not limited by the prior Regulation.

FBAR Statute was Revised but FBAR Regulatory Cap was Not Updated

As further provided in the Court Ruling:

      • In 1986, focusing on money-laundering-related violations of the BSA, Congress added a civil money penalty that could be levied against private individuals for their willful failures to file FBARs. The maximum penalty was set at “the greater of” $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(B)(ii)(I)-(II) (1988) (the “1986 Statute”).

      • In 1987, the Secretary promulgated the 1987 Regulation on which the Estate relies, currently located at 31 C.F.R. § 1010.820(g), which reflected the 1986 Statute’s maximum penalty provision “almost verbatim,” D.Ct. Op, 2019 WL 8587295, at *5. The 2004 Statute increased the civil penalty for willful behavior to its present level, making the maximum penalty for failure to file an FBAR the greater of $100,000 or 50 percent of the aggregate balance in the accounts at the time of the violation. See id. at *6; 31 U.S.C. § 5321(a)(5)(C)(i).

      • The district court noted that despite that 2004 statutory change, the Secretary did not amend the 1987 Regulation’s now-inconsistent FBAR penalty provision. The IRS, which enforced the penalty provision, took the position that revisions were not necessary as the statute was “self-executing.” Internal Revenue Manual,–FBAR Willfulness Penalty (July 1, 2008). The IRS thus began to impose penalties in excess of the regulatory cap, which it considered to be superseded. Seeid. And as of June 30, 2009, the FBAR penalty regulation, despite its apparent obsolescence, remained codified in the Code of Federal Regulations.

      • Concluding that the regulation is inconsistent with the plain language of the amended statute, the court granted summary judgment in favor of the government on the ground that the 1987 Regulation is no longer valid, and that the assessment against the Estate of $4,264,728, i.e., 50 percent of the aggregate balance in Kahn’s two foreign accounts at the time of his willful violation–the statutory  maximum–was therefore permissible.

Court Denied Appellant’s Motion Despite the FBAR Regulatory Cap

Here is the Court’s ruling as to why they disagreed with Appellant’s motion to limit the application of the statute regarding the FBAR Regulatory Cap:

Inconsistent Regulation

      • Of course, the 1987 Regulation–when it was adopted–was not inconsistent with the maximum penalty that Congress had then set; the 1987 Regulation tracked the precise levels set out in the 1986 Statute. But the 1986 Statute’s — penalty provisions were plainly amended by the 2004 Statute, and a regulation that “contravenes the plain language of the statute” is invalid, Lawrence + Memorial Hospital v. Burwell, 812 F.3d 257, 259 (2d Cir. 2016).

      • Even a regulation that is not “technically inconsistent with the statutory language” is invalid “when that regulation is fundamentally at odds with the manifest congressional design.” United States v. Vogel Fertilizer Co., 455 U.S. 16, 26 (1982) (internal quotation marks omitted).

      • Thus, when Congress enacted the 2004 Statute stating that the maximum penalty “shall be increased,” any continued adherence to the 1987 Regulation contravened both the plain language of the statute and the “manifest congressional design,” id., embodied 10 in the 2004 Statute.

      • As the Court of Appeals for the Federal Circuit in Norman stated in rejecting an attempt to have the 1987 Regulation’s penalty limitation applied  instead of the maximum provided by the 2004 Statute.

Regulation Not an Independent Force of Law of the BSA

      • Second, even assuming arguendo that the Secretary had been given authority to set a maximum penalty lower than the level specified in the statute, there is no basis for inferring that the 1987 Regulation was the product of either a desire to promulgate a regulation that would have the force of law independently of the BSA or a desire to reduce the Secretary’s own discretion.

      • Although Treasury engaged in proposed rulemaking in August 1986, that notice-and-comment process involved a rule designed to “correct[] a technical error in the [1985] regulations that implemented [an] increase in [the] civil penalty amount made by” an amendment to the statute in 15 1984. Amendments to Implementing Regulations; the Bank Secrecy Act, 51 Fed. Reg. 16 30233, 30236 (Aug. 25, 1986).

      • The provision that became the 1987 Regulation–which parrots the 1986 Statute–was not part of the proposed rulemaking, because the 1986 18 Statute had not yet been enacted. Thereafter, the 1987 Regulation simply included the – penalty maximum provision enacted by the 1986 Statute, “to keep the regulations as current as possible.” Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11440 (April 8, 1987). And in stating a maximum penalty that parroted the 1986 Statute, the 1987 Regulation did not reduce the discretion accorded to the Secretary.

Rule of Lenity

      • Finally, we note the Estate’s argument that the penalty for Kahn’s willful 16 failure to file an FBAR should be limited to a total of $200,000 under “‘the rule of 17 lenity,'” which “‘applies if, after considering text, structure, history, and purpose, there remains a grievous ambiguity or uncertainty in the statute, such that the Court must simply guess as to what Congress intended.'” (Estate brief on appeal at 42 (quoting 2 Barber v. Thomas, 560 U.S. 474, 488 (2010) (emphasis ours).)

      • Assuming that the rule of lenity is applicable to a civil rather than a criminal statute, we see no basis for its invocation here. There is no ambiguity or uncertainty as to what Congress intended in the 2004 Statute when it provided that the penalty for a willful failure to file an FBAR would be “the greater of” $100,000, or 50 percent of the aggregate balance of the accounts.

What does this Mean?

It means that despite any argument from Appellant, the Court stood firm on the fact that an older regulation would not trump the newer FBAR statute and updated penalty structure. The FBAR Regulatory Cap did not limit FBAR statutory penalties.

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