Another taxpayer had a bad experience with his failure to properly report all of his foreign accounts on his annual FBAR filing in the case of United States v. Collins.[1] The Court found no issue with the IRS’s assessment of penalties on the willful failure to file reports on these accounts for 2007 and 2008, despite the taxpayer’s attempt to argue that he had acted reasonably in failing to report these accounts and the amounts of the penalty were excessive.

Penalties the IRS Sought to Impose

The IRS was proposing civil penalties of $154,032 for 2007 and the same amount for 2008 for willful failure to report these accounts on the FBAR filings for the years in question. The IRS did not impose the maximum penalties (50% of the highest balance for each year) nor even an amount as high as their internal mitigation document suggested Mr. Collins would qualify for. As the opinion notes:

20. Under this internal mitigation guidance, the IRS would have assessed civil FBAR penalties against Mr. Collins of: (a) $382,666 for his willful failure to report his foreign accounts on an FBAR for 2007; and (b) $233,462 for his willful failure to report his foreign accounts on an FBAR for 2008. (Pl.'s Ex. P42; Trial Tr. at 49:15–50:12.)

21. Notwithstanding the foregoing, the IRS further reduced the mitigated penalties after considering the facts and circumstances of Mr. Collins's case. (Pl.'s Ex. P58 at 9.)

22. The IRS ultimately proposed willful FBAR penalty assessments for 2007 and 2008 that were each half of the average of the penalties calculated under the mitigation guidelines. (Pl. Ex. P42; Trial Tr. at 49:15–50:17.)[2]

Mr. Collin’s Actions

One fact involving the FBAR penalties is that they often dwarf the amount of income tax the individual would have paid if the income had been properly reported on those accounts. In this case that was true even after the IRS imposed a penalty far below the statutory maximum. But the opinion notes that this is not relevant in the case of the FBAR penalty:

38. As a mixed-matter of fact and law, Mr. Collins’s circumstances bring to mind the adage, “the coverup often is worse than the crime.”

39. Understandably, Mr. Collins and his counsel very much wish for the Court to compare his putative tax-liability, had he properly reported his foreign accounts, against his penalty-liability under Section 5321(a)(5).

40. Such an approach appears intuitive, and the question is one likely-begged by any factfinder under the circumstances.

41. Nevertheless, the evidence reveals on the part of Mr. Collins a decades-long course of conduct, omission and scienter. That is the more salient inquiry, and Plaintiff has proven that the penalties-imposed are consistent with the law.[3]

The Court noted the following facts about Mr. Collins:

1. Defendant Richard Collins (“Mr. Collins”) is a sophisticated taxpayer, with a sophisticated understanding of finance, financial obligations and financial consequences that are well beyond that of an average person. (Trial Tr. at 220:15–19.)

2. Mr. Collins knew that, when he approved his tax submissions in 2007 and 2008, he held financial accounts in foreign countries. (Trial Tr. at 220:21–23.)

a. Mr. Collins identified an interest in keeping his foreign accounts secret in the United States and consciously avoided disclosing his accounts. (Trial Tr. at 221:1–4.)

b. Mr. Collins’s course of conduct reflects an actual intent to deceive the IRS and others about the existence of his foreign accounts, including his effort to avoid receiving mail from UBS in the United States, as well as his express desire to “discreetly” transfer funds from Switzerland to the United States in connection with a mortgage transaction. (Trial Tr. at 221:5–19; id. at 129:13–133:19; Pl.’s Exs. P25–P28.)

c. Mr. Collins has sought to excuse his conduct based on a multitude of objectively unreasonable beliefs, including those that:

i. By filing an IRS Form W-9 with UBS, he satisfied his reporting obligations for all of his foreign accounts (including those for which he did not file a W-9) (Pl.’s Ex. P63);

ii. The U.S. Embassy in Paris advised Mr. Collins, in the 1970s, that he did not have any obligations to the IRS (Pl.’s Ex. P56);

iii. As long as his foreign banks withheld taxes, Mr. Collins was not obligated to disclose his accounts to the IRS (though Mr. Collins did not ensure that UBS actually withheld funds) (Pl.’s Ex. P58 at *14; Doc. 42 at 7);

iv. Disclosing his accounts to his U.S. accountant, Dale Cowher, would increase the costs required for Mr. Cowher to perform any necessary paperwork (Pl.’s Ex. P35, Pl.’s Ex. P58 at *14); and

v. Swiss bank secrecy laws precluded Mr. Collins from disclosing his foreign accounts to his U.S. accountants (Pl.’s Ex. P54).[4]

IRS’s Decision on the Amount of the Penalty Was Not an Abuse of Discretion

The Court reviewed the IRS’s actions with regard to Mr. Collins, applying a review solely looking to see if the IRS abused its discretion in deciding on the penalty to apply. The Court notes that the mitigation standards, while not binding on the IRS, were helpful in a showing that the IRS had acted reasonably:

61. Although IRS internal guidelines do not bind the agency, see Norman v. United States 942 F.3d 1111, 1115 (Fed. Cir. 2019), the IRS’s adherence in this case to these guidelines indicates that its penalty calculations were proper. See Estate of Duncan v. Comm’r of Internal Revenue, 890 F.3d 192, 200 (5th Cir. 2018) (“courts can draw on IRM guidelines as factors to assess the propriety of IRS actions”); cf. Moore v. United States, 2015 WL 1510007 at *8 n.5.

62. These nonbinding “mitigation” guidelines assist examiners in determining whether to reduce an FBAR penalty below the statutory maximum. (Pl.’s Exs. 42, 58 at 27.) See generally I.R.M. 4.26.16.4.6.1, 2008 WL 5900937 (July 1, 2008); I.R.M. 4.26.16.4.6.3, 2008 WL 5900939 (July 1, 2008). First, examiners consider whether the taxpayer’s case satisfies four conditions: (a) the taxpayer has no history of FBAR penalty assessments or criminal tax or Bank Secrecy Act convictions; (b) the funds in the accounts were not from an illegal source or used to fund a criminal purpose; (c) the taxpayer cooperated during the examination; and (d) the IRS did not assess a civil fraud penalty against the taxpayer with respect to the income attributable to a foreign account. Id. If these conditions are met, examiners may mitigate the penalty below the statutory maximum by different amounts depending on the balances in each account. Id.[5]

The opinion notes that the IRS had documented how it had applied these guidelines in this case:

63. As explained in the FBAR lead sheets and penalty calculation chart, the IRS exercised its discretion in a reasoned manner when it determined that Mr. Collins was eligible for mitigation under its guidelines, calculated mitigated penalties based on those guidelines and further reduced the mitigated penalties after considering the facts and circumstances of his case. (Pl.’s Exs. P42, P58.)

64. Mr. Collins’s delinquent 2007 FBAR reported five foreign accounts with an aggregate maximum balance of $885,913, and his 2008 FBAR reported six foreign accounts with an aggregate maximum balance of $906,004. (Pl.’s Exs. P14 & P15.)

65. The IRS assessed willful FBAR penalties of $154,032 for 2007 and $154,032 for 2008.[6]

The Court notes that these amounts were far below the statutory maximum penalty:

66. The $154,032 penalty for each year is well below the statutory maximum (the greater of $100,000 or 50% of the account balance for each unreported account).3 See 31 U.S.C. § 5321(a)(5).

67. Nothing (other than the statutory maximum) precluded the IRS from assessing far higher penalties than it ultimately did. Williams, 2014 WL 3746497 at *2 (affirming IRS’s assessment of maximum civil FBAR penalties because, although “the IRS may impose a lower penalty where the violating taxpayer meets certain criteria, such departures are within the discretion of the agency”) (internal citation omitted).[7]

Another Court Rejects the Position That Penalties are Capped at $100,000

Although we had noted back in 2018 that two courts had found that the true maximum FBAR willful failure penalty remained at $100,000,[8] this Court, like many others since those 2018 rulings, found that there was no such cap:

71. In 2004, Congress increased the maximum civil penalty for willful FBAR violations (for each account) from $100,000 to the greater of $100,000 or 50 percent of the account balance. See United States v. Cohen, No. CV 17-1652-MWF (JCX), 2019 WL 4605709, *3 (C.D. Cal. Aug. 6, 2019). The Secretary did not amend a 1987 regulation, which had capped the penalty at $100,000, to reflect this increased statutory maximum.

72. Although two earlier courts have found otherwise, as the last nine courts (including the Federal Circuit) to have considered the issue have found, “[s]tatutes trump regulations.” See Cohen, 2019 WL 4605709 at *4 (collecting cases); Norman v. United States, 942 F.3d 1111, 1118 (Fed. Cir. 2019); United States v. Rum, 2019 WL 3943250 at *6–7, report and recommendation adopted, 2019 WL 5188325 at *2.

73. The Court rejects Mr. Collins’s claim that a regulation from 1987 overrides the statutory maximum amended by Congress in 2004. See Norman, 942 F.3d at 1118 (“the 2004 amendment . . . rendered void the 1987 regulation”).[9]

No Eighth Amendment Issues

The Court also rejected Mr. Collin’s argument that the FBAR penalties represented an excessive fine barred by the Eighth Amendment. First, the Court found that the FBAR penalty is a civil penalty that is at least partially remedial, to compensate the government for a loss, and not covered by the Eighth Amendment. The Court points out that Congress separately provided for criminal penalties for willfully failing to file these forms.[10]

As well, the Court ruled that even if the penalty was a fine covered by the Eighth Amendment, the amounts are not excessive. The opinion, citing the Supreme Court’s opinion in the 1998 Bajakajian case,[11] finds that the court needs to look at four factors to see if a fine is excessive:

The amount of the penalty authorized by Congress;
The class of persons for whom the statute at issue was principally designed;
The nature of the offense;
The harm caused by the defendant’s conduct; and
A comparison with the potential criminal penalties, including imprisonment.

The Court noted the amounts were well within the limits Congress had provided for such conduct, and that there is a strong presumption that Congress’s judgment in such cases is within Constitutional limits.

Mr. Collins was clearly the type of person at which this penalty was aimed in the view of the Court.

Looking at the third and fourth factors, the Court held:

92. The third and fourth factors, the nature of Mr. Collins’s actions and the harm he caused, additionally weigh against a finding of excessiveness. Mr. Collins acted willfully — which means that his actions fall into the more serious category of FBAR violations, for which Congress authorized a 50-percent penalty. 31 U.S.C. § 5321(a)(5)(C). In enacting the Bank Secrecy Act, Congress explained that “secret foreign bank accounts” have enabled the proliferation of crime, including tax evasion, securities violations and fraud. H.R. Rep. No. 91-975, at 12, reprinted in 1970 U.S.C.C.A.N. at 4397-98. When it increased the maximum willful FBAR penalty, Congress announced that improving compliance was “vitally important.” S. Rep. No. 108-192, at 108.

93. Secretive offshore activity — like that engaged in by Mr. Collins — has “vast” consequences and significantly harms the integrity of the tax system. H.R. Rep. No. 91-975, reprinted in 1970 U.S.C.C.A.N. at 4397. That Congress based the willful FBAR penalty on the account balance reflects a judgment that the harm to the tax system increases with that balance, irrespective of the size of any correlated tax loss. Chaplin’s, Inc., 646 F.3d at 852 (“Congress . . . can distill the monetary value society places on harmful conduct”); United States v. Mackby, 339 F.3d 1013, 1019 (9th Cir. 2003) (harm of false claims “extends beyond the money paid out of the treasury”).[12]

Finally, the Court notes that the penalty does not seem excessive when compared with a possible alternative Congress could have considered, such as imprisonment:

As for the last Bajakajian factor, the penalties at issue are not excessive when compared with the potential criminal sanctions for Mr. Collins’s actions. Those sanctions include imprisonment of up to five years in addition to a fine of up to $250,000 for an FBAR offense standing alone (and double that if there are other violations or a pattern of illegal activity). 31 U.S.C. § 5322(a)–(b). The criminal penalties include a substantial fine in addition to the prospect of a prison term — a consequence much more serious than even the maximum civil penalty permitted by § 5321(a)(5)(C). Cf. Mackby, 339 F.3d at 1018 (noting that “when courts have compared civil judgments with criminal penalties for the same conduct, they have considered the full criminal penalty”).[13]

[1] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/court-upholds-penalties-for-willful-failure-to-file-fbars/2r4sg (retrieved February 14, 2021)

[2] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[3] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[4] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[5] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[6] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[7] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[8] See Ed Zollars, “Another District Court Agrees Maximum FBAR Penalty Limited to $100,000,” Current Federal Tax Developments website, July 21, 2018, https://www.currentfederaltaxdevelopments.com/blog/2018/7/21/another-district-court-agrees-maximum-fbar-penalty-limited-to-100000 (retrieved February 14, 2021)

[9] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[10] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[11] United States v. Bajakajian, 524 U.S. 321

[12] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021

[13] United States v. Collins, USDC WD PA, Case No. 2:18-cv-01069, February 8, 2021