Federal District Court Holds that FBAR Penalties in Excess of $100,000 is Unlawful

In United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), a case which was brought by the United States to obtain a judgment for FBAR penalties, the court granted Colliot's motion for summary judgment, holding that penalties in excess of $100,000 is unlawful.  

To understand the reason behind the holding, we need to examine the legislative history of the FBAR penalties and the laws that were enacted by Congress. We need to examine the code, which is the text of the law, and the regulations, which is the interpretation of the law.

Congress enacted 31 U.S.C. Section 5321 (a)(5), which stated that civil penalties of the greater of $25,000 or $100,000 could be imposed for the failure to file foreign bank account reports. 

In 2004, Congress amended section 5321 to increase the penalties that could be assessed for the failure to report foreign bank accounts. The section essentially states that the penalties assessed could be the greater of $100,000 or 50% of the account balance at the time of the violation. 

However, despite the fact that code was amended, the regulations were not amended. The old regulation was 31 C.F.R. Section 103.57, which is now Section 1010.820.

​Colliot essentially argued that although the law has been updated, the regulations were not repealed due to the fact that they were based upon the old rule and motioned for a summary judgment. The court agreed and held that because the regulations were not updated, the old rule was not repealed and thus penalties in excess of $100,000 were unlawful. The court also noted that it would not be difficult to update the regulations to reflect the changes in the amount of penalties that could be assessed under the new rule. 

This is a pretty significant holding and it will be useful for taxpayers who may be under audit and subjected to significant FBAR penalties under the new rule as amended in 2004. However, since this was decided in the 5th Circuit, the ruling will be persuasive authority for those who are not in the 5th Circuit.