The U.S. District Court for the District of Connecticut has joined a growing debate among lower courts regarding the appropriate civil penalty applicable to willful FBAR violations through its ruling in United States v. Garrity. The FBAR statute, regulations, instructions, and related guidance require that taxpayers annually report to the Treasury Department any financial interest in or signature authority over accounts outside the United States when the aggregate balance of such accounts exceeds $10,000 during the calendar year. Failure to make FBAR filings may result in civil penalties, with the amount of such penalty varying based on whether the accountholder’s FBAR delinquency was willful or non-willful.
The Government brought the case against the fiduciaries of the Estate of Paul G. Garrity, Sr., who passed away in 2008. Following a six-day jury trial, the jury found that Garrity willfully failed to make the required FBAR filing in 2005. The court entered judgment for the United States, but did not specify a civil penalty amount in its judgment order. Under the penalty statute, 31 U.S.C. § 5321(a)(5)(C)(i), willful violations of the FBAR requirements can result in civil penalties equal to the greater of $100,000 or 50% of the account balance at the time of the violation that should have been reported. In post-judgment motions, the Government sought to impose a penalty of $936,691 − an amount that represents 50% of the bank account balance in the year the FBAR violation occurred. The defendant, pointing to 31 C.F.R. § 1010.820(g), argued that notwithstanding the fact that the FBAR statute authorizes penalties in excess of $100,000, the Secretary of the Treasury had by regulation capped the penalty amount to $100,000.
The court rejected the defendant’s argument and upheld the $936,691 civil penalty, reasoning that because the Treasury Regulations had been promulgated under an earlier version of the FBAR statute (which imposed lower penalties), Congress effectively abrogated the Treasury Regulations when it passed the current version of the statute in which Congress increased the penalties for FBAR violations. Furthermore, the Secretary of the Treasury did not reaffirm the penalty cap following the amendment of the statute. Separately, the court ruled against the defendant’s Eighth Amendment argument that the larger penalty constitutes an excessive fine.
In ruling for the Government on the penalty amount issue, the District of Connecticut followed the position taken in 2018 by the District of Maryland in United States v. Horowitz and the Court of Federal Claims in Norman v. United States and Kimble v. United States. However, other courts in 2018 reached the opposite conclusion regarding the proper amount of civil penalties in cases involving willful FBAR violations. The District of Colorado in United States v. Wahdan, and the Western District of Texas in United States v. Colliot issued decisions consistent with the defendant’s position. At the time of this post, the two Court of Federal Claims cases are currently on appeal before the Court of Appeals for the Federal Circuit.
UPDATE: On April 25, 2019, the defendants filed an appeal in the U.S. Court of Appeals for the Second Circuit. Click here to read our post about the brewing circuit split on civil penalties for willful FBAR violations.