This Is Post 2 in a series of posts describing the statutory and regulatory history of Mr. FBAR.
These posts are organized on the page “The Little Red FBAR Book“.*
Introduction – Distinguishing The Non-Willful Civil FBAR Penalty From Criminal Penalties
There have always been criminal penalties for FBAR violations. Civil penalties for FBAR WILLFUL violations were introduced as USC 31 5321(a)(5) in 1986. In 2004 USC 31 5321(a)(5) was amended to create a civil non-willful penalty. The current options for FBAR violations are:
– Criminal 31 USC 5322
– Civil willful 31 USC 5321(a)(5)
– Civil non-willful 31USC 5321(a)(5)
Each of these comes with its own permissible penalty range.
The purpose of this post is to explore ONLY the civil FBAR penalty regime in USC 31 5321(a)(5).
The text of the 53231(a)(5) …
(5)Foreign financial agency transaction violation.—
(A) Penalty authorized.—
The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.
(B) Amount of penalty.—
Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.
(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I)such violation was due to reasonable cause, and
(II)the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i)the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(II)50 percent of the amount determined under subparagraph (D), and
(ii)subparagraph (B)(ii) shall not apply.
(D) Amount.—The amount determined under this subparagraph is—
(i)in the case of a violation involving a transaction, the amount of the transaction, or
(ii)in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.
Analyzing the statute: What has to be proved, by whom and according to what standard?
It is generally agreed that in the context of the civil (as opposed to criminal) that the standard of proof is the civil standard of “preponderance of the evidence” and NOT the criminal standard described in Cheeks of “beyond a reasonable doubt”.
When considering the operation of 5321(a)(5) penalties (and assuming a person “who violates, or causes any violation of, any provision of section 5314” ), the order of analysis in the civil FBAR penalty context should ask the following questions:
1. Was the failure to file or report willful or non-willful? If willful reasonable cause is not a defence and massive penalties “may” be imposed. (Willfulness is a question of fact and the government bears the burden of proof on a preponderance of the evidence standard.)
(To be clear, if there is a finding of willfulness then a penalty of the greater of $100,000 or 50% of the account balance at the time of the violation “may” be imposed.)
2. If the failure to report was non-willful (maximum penalty of $10,000) can the account holder defeat the imposition of a penalty by proving on a preponderance of the evidence (note the account holder bears the burden of proof):
(A) Reasonable cause for the failure to file; and
(B) that the account was properly reported.
3. If the failure was non-willful but the penalty cannot be defeated through reasonable cause:
(A) how much should the penalty be (up to $10,000 adjusted for inflation); and
(B) can that penalty be imposed on each account or is the penalty restricted to a single FBAR penalty based on a failure to file a single form?
Note that the answer to the “non-willful” vs. “willful” question has a huge bearing on the amount of the penalty that “may” be imposed. The fate of the account holder may be effectively determined at this initial stage of the inquiry. I will explore this more in a subsequent post which discusses Ms. Toth’s meeting with Mr. FBAR.
Note also that these three questions require the analysis of a deceptively large number of legal and factual issues.
What is the FBAR law and where is it actually found?
The Law Of FBAR In Its Most Simple “Form” (pun intended)- A Three Headed Monster
The law of FBAR is composed of three components which are found in three distinct places:
1. The Federal Statue found in Title 31 USC – Sections 5314 and 5321
2. The Treasury Regulation mandated under 31 5314 which directs the Treasury Secretary to create the FBAR rules https://www.law.cornell.edu/cfr/text/31/1010.350
3. The FBAR form itself.
In summary the federal statute (USC 31 5314) directs Treasury to create the reporting rules in the form of a regulation. The Treasury regulation creates the rules (incorporating the instructions on the form). When there is a violation of the rules prescribed in the Treasury Regulation, the civil penalties are determined according to the statute (USC 31 5321). Criminal penalties may also be imposed under USC 31 5322. In other words, the law of FBAR is an unholy alliance of a statute, a regulation and the form where the actual reporting takes place. (This post will focus only on the USC 31 5321 civil FBAR penalty.)
John Richardson – Follow me on Twitter @Expatriationlaw