United States District Court, D. Connecticut
MEMORANDUM AND ORDER
MICHAEL P. SHEA, U.S.D.J.
United States of America (“the Government”),
filed this suit to reduce to judgment a civil penalty the
Internal Revenue Service assessed against Paul G. Garrity,
Sr. under 31 U.S.C. § 5321(a)(5). After a six-day
trial, a jury found that Mr. Garrity had willfully failed to
file a Report of Foreign Bank and Financial Accounts
(commonly known as an FBAR) in 2005, in violation of 31
U.S.C. § 5314. (ECF No. 179.) The jury also found that
the Government had established the assessed civil penalty
($936, 691.00) was equal to 50% of the balance in Mr.
Garrity's account in the year he failed to file the FBAR.
(Id.) Before trial, the parties stipulated that, if
judgment entered in favor of the Government, the Defendants
would have an opportunity to file “a motion for
remittitur or similar post-verdict motion.” (ECF No.
154 at 2.) Accordingly, the Court entered judgment without
specifying the penalty amount. The Government filed a motion
to amend the judgment to include a civil penalty of $936,
691.00 plus interest and a late payment penalty. (ECF No.
191.) The Defendants filed a motion to alter or reduce
judgment. (ECF No. 190.) They assert that the maximum civil
penalty for failure to file an FBAR is $100, 000.00.
Alternatively, they argue that the civil penalty must be
reduced to “an amount that is proportional to the harm
caused by the failure to file the FBAR, as required under the
[Excessive Fines Clause of the] Eighth Amendment . . .
.” (ECF No. 190-1 at 13.)
reasons set forth below, the Government's motion to alter
judgment is GRANTED. The Defendants' motion to alter or
reduce judgment is DENIED. The judgment will be amended to
reflect a civil penalty of $936, 691.00 plus statutory
interest and a late payment penalty.
The Maximum Civil Penalty for Willful FBAR
statute, the maximum civil penalty for willfully failing to
file an FBAR is the greater of $100, 000 or 50 percent of the
balance of the account in the year for which the report was
due. 31 U.S.C. § 5321(a)(5)(c). At trial, the Government
proved that Mr. Garrity willfully failed to file an FBAR for
2005, and that 50 percent of the account balance in that year
was equal to $936, 691. Accordingly, the Government seeks to
impose the full penalty available under the statute plus late
fees and interest. The Defendants argue that, although the
statute allows for penalties up to 50 percent of an
account's balance even if that amount exceeds $100, 000,
the Secretary of the Treasury capped his discretion to impose
civil penalties at $100, 000 by regulation. See 31 C.F.R.
§ 1010.820(g). I agree with the Government and hold that
Congress effectively abrogated the regulation capping FBAR
penalties at $100, 000 when it increased the maximum penalty
by statute in 2004.
Statutory and Regulatory History of the Willful FBAR
passed the Bank Secrecy Act (“BSA”) in 1970. Pub.
L. No. 91-508, 84 Stat. 1114. The purpose of the BSA was
“to require the maintenance of records and the making
of certain reports or records where such reports or records
have a high degree of usefulness in criminal, tax, or
regulatory investigations or proceedings.” Id.
§ 202. The BSA delegated authority to the Secretary of
the Treasury to establish record keeping and reporting
requirements consistent with that purpose. Id.
§ 204; Id. at § 241 (codified as amended
at 31 U.S.C. § 5314) (“The Secretary of the
Treasury . . . shall by regulation require any resident or
citizen of the United States . . . who engages in any
transaction or maintains any relationship . . . with a
foreign financial agency to maintain records or to file
reports, or both, setting forth such of the following
information, in such form and in such detail, as the
Secretary may require . . . .”). The Secretary
promulgated final regulations implementing the BSA on July 1,
1972. 37 Fed. Reg. 6912, 6915. One provision required any
person with “a financial interest in, or other
authority over, a bank, securities or other financial account
in a foreign country” to file a “special tax
form” providing information about the account. 37 Fed.
Reg. 6912, 6913. The form is commonly known as the Foreign
Bank Account Report or “FBAR.”
1986, Congress amended the BSA, granting the Secretary
authority to assess civil monetary penalties “on any
person who willfully violates any provision of section 5314,
” the code section directing the Secretary to require
individuals to file an FBAR. Money Laundering Control Act of
1986, Pub. L. No. 99-570, Subtitle H, 100 Stat. 3207 (October
27, 1986) (codified as amended at 31 U.S.C. § 5321(a)).
The amended statute limited civil penalties to “the
greater of (I) an amount (not to exceed $100, 000) equal to
the balance in the account at the time of the violation; or
(II) $25, 000.” Id. § 1357 (codified as
amended at 31 U.S.C. § 5321(a)(5)). Six months later,
the Secretary promulgated a final rule restating the penalty
section of the statute nearly verbatim. See Amendments to
Implementing Regulations Under the Bank Secrecy Act, 52 Fed.
Reg. 11436, 11446 (Apr. 8, 1987) (stating that the Secretary
may impose a civil penalty for willfully failing to file an
FBAR up to “the greater of the amount (not to exceed
$100, 00) equal to the balance in the account at the time of
the violation, or $25, 000.”). The penalty portion of the
new regulation did not go through notice and comment
procedures, appearing for the first time in the final rule on
April 8, 1987. Indeed, the notice of proposed rulemaking had
been published in the Federal Register in August of 1986-two
months before Congress enacted the BSA amendments authorizing
the Secretary to impose civil penalties on account holders.
See Notice of Proposed Rulemaking, 51 Fed. Reg. 30233 (Aug.
25, 1986); Money Laundering Control Act of 1986, Pub. L. No.
99-570 (October 27, 1986).
2004, Congress amended the civil penalties for failing to
file an FBAR. See American Jobs Creation Act of 2004, Pub L.
No. 108-357, § 821, 118 Stat. 1418, 1586 (2004)
(codified at 31 U.S.C. § 5321(a)(5)). The amendment
increased the penalty for willful FBAR violations to the
greater of $100, 000 or 50 percent of the balance of the
account at the time of the violation. See 31 U.S.C. §
5321(a)(5)(C). It also added a penalty for non-willful
violations limited to $10, 000. Id. §
5321(a)(5)(B). The Secretary did not promulgate updated
regulations to reflect the new non-willful penalty or the
increased willful penalty.
The 2004 Statute Abrogated the Civil Penalty Limit in the
Defendants argue that, notwithstanding the statutorily
increased penalties, the IRS remains bound by the Treasury
regulation promulgated in 1987 under the pre-2004 version of
the statute. According to this argument, the maximum penalty
for willful FBAR violations is therefore $100, 000. See 31
C.F.R. § 1010.820(g)(2). The Defendants assert that the
amended statute establishes a ceiling on civil penalties but
not a floor, and that the Secretary of the Treasury has, by
retaining the old regulation, categorically established a
lower ceiling for such penalties, limiting his own authority
to the level set by Congress before the amendment. I
disagree. The plain language of the 2004 amendment
demonstrates Congress's intent to authorize the Secretary
to impose higher penalties for willful FBAR violations
without the need for additional Treasury regulations, and, as
shown below, the old regulation will not bear the freight the
Defendants attempt to foist upon it.
2004 legislation, Congress specified that the higher
penalties for willful FBAR violations would take effect
immediately once the amendments were enacted. See Pub. L. No.
108-357, § 821(b) (“The amendment made by this
section shall apply to violations occurring after the date of
the enactment of this Act.”) (emphasis added). In
contrast, where Congress intended in the BSA to rely on the
Secretary first to flesh out the statutory scheme by
regulation, it made that intention clear. E.g., 31 U.S.C.
§ 5314 (directing the Secretary to require citizens to
either “keep records, file reports, or keep records and
file reports” containing certain information “in
the way and to the extent the Secretary prescribes . . .
.”). The Secretary could not override Congress's
clear directive to raise the maximum willful FBAR penalty by
declining to act and relying on a regulation parroting an
obsolete version of the statute.
Defendants contend that the BSA is not self-executing and the
Secretary therefore lacks authority to impose FBAR penalties
greater than $100, 000 without first promulgating a
regulation raising the limit. (See ECF No. 190-1 at 6.) The
Defendants rely on dicta in California Bankers Ass'n
v. Shultz, 416 U.S. 21, 26 (“[W]e think it
important to note that the [Bank Secrecy] Act's civil and
criminal penalties attach only upon violation of regulations
promulgated by the Secretary; if the Secretary were to do
nothing, the Act itself would impose no penalties on
anyone.”). In that case, the Supreme Court held that
the domestic reporting requirements for financial
institutions under the BSA did not violate the Fourth
Amendment. 416 U.S. at 66. The petitioner banks had argued
that the BSA authorized the Secretary of the Treasury to
impose reporting requirements that would amount to
unreasonable searches. Id. at 64. The Court rejected
their claims, holding that the banks did not have “an
unqualified right to conduct their affairs in secret”
and that the reporting requirements were not unreasonable.
Id. at 67.
in California Bankers suggests that the Secretary must take
some formal regulatory action before the penalty provisions
of the BSA acquire the force of law. The above-quoted
language simply notes that the statute itself does not
establish specific reporting requirements but affords the
Secretary discretion to define those requirements for holders
of foreign accounts. See California Bankers Ass'n, 416
U.S. at 26; 31 U.S.C. § 5314. Once the Secretary
establishes reporting requirements under Section 5314,
though, the civil penalties in Section 5321(a)(5) attach
whenever the Secretary chooses to impose them for a reporting
violation, as he has in this case. 31 U.S.C. §
5321(a)(5)(A) (“The Secretary of the Treasury may
impose a civil monetary penalty on any person who violates .
. . any provision of section 5314.”); Id.
§ 5321(a)(5)(C) (“In the case of any person
willfully violating . . . any provision of section 5314- (i)
the maximum penalty . . . shall be increased to the greater
of (I) $100, 000, or (II) 50 percent of [the balance in the
account at the time of the violation] . . . .”). The
language of the statute does not suggest that additional
regulations are necessary before the civil penalties can take
effect. The American Jobs Creation Act made no substantive
changes to the FBAR filing requirement and thus did not
create any additional gaps for the Secretary to fill through
regulation. See American Jobs Creation Act, Pub. L. No.
108-357, §§ 801-822 (2004) (modifying the BSA and
raising civil penalties without altering the substantive FBAR
requirement). As a result, the higher penalties the Act
established took effect immediately in accordance with its
The Secretary Did Not Reaffirm the Lower FBAR Penalties After
Congress Raised Them by Statute
is also no reason to conclude that the Secretary intended
categorically to limit his own discretion to impose the
higher penalties that Congress authorized. The pre-amble to
the 1987 regulation parroting the unamended statute stated
that Treasury intended to enforce the BSA “to the
fullest extent possible.” 52 Fed. Reg. 11436, 11440
(Apr. 8, 1987). Further, that regulation, now codified at 31
C.F.R. § 1010.820(g), was not promulgated after notice
and comment, which means it was, at most, an interpretive
rule; it “d[id] not have the force and effect of law,
” Perez v. Mortgage Bankers Ass'n, 135
S.Ct. 1199, 1204 (2015), and it vested no rights in account
holders. This suggests that the reference to a
civil FBAR penalty in the 1987 regulation was intended only
to express the Secretary's intent to enforce the BSA with
the full authority conferred on him by Congress. It is
untenable to argue that the same regulation now significantly
constrains the Secretary's ability to enforce the amended
Defendants assert that Treasury regulations promulgated after
Congress raised the maximum penalties suggest that the
Secretary tacitly reaffirmed the limits in the 1987
regulation. For example, Treasury re-arranged the chapter of
the Code of Federal Regulations including the defunct FBAR
penalty in 2010. See 75 Fed. Reg. 65806 (Oct. 26, 2010).
Similarly, in 2016, Treasury amended a nearby code section to
note that penalties with definite dollar amounts- which, by
definition, would not include the 50 percent referenced in
the 2004 amendment-would be adjusted for inflation. See 81
Fed. Reg. 42503 (Jun. 30, 2016). At best, these actions imply
that the Secretary knew the obsolete regulation remained on
the books. Other regulations in the same section are also
clearly obsolete. For example, 31 C.F.R. § 1010.820(a)
establishes penalties for willful reporting violations by
financial institutions before 1984. The statute of
limitations on such penalties-six years-expired in 1990. See
31 U.S.C. § 5321(b). Thus, the first subparagraph in
Section 1010.820 has been defunct for nearly two decades. And
in 2008 the IRS explicitly acknowledged that the earlier
civil penalty regulation had not been formally repealed; the
agency warned that the statute overrode the regulation and
the higher statutory penalties applied. Internal Revenue
Serv., Internal Revenue Manual § 188.8.131.52.5.1 (Jul. 1,
2008) (“At the time of this writing, the regulations at
31 C.F.R. § 103.57 [now re-codified at § 1010.820]
have not been revised to reflect the change in the
willfulness penalty ceiling. However, the statute is
self-executing and the new penalty ceilings apply.”);
see also Id. § 184.108.40.206 (“31 U.S.C.
§ 5321(a)(5) establishes civil penalties for violations
of the FBAR reporting and recordkeeping
requirements.”); Id. § 220.127.116.11.5
(“There are two different statutory ceilings for
willful penalty violations of the FBAR requirements,
depending on whether or not the violation occurred before
October 23, 2004.”) I cannot conclude that the Secretary
categorically limited his own discretion to enforce fully the
FBAR requirement by implication or inaction, particularly
given the IRS's clear statements to the contrary.
Defendants next contend that Treasury Order 180-01,
originally promulgated in October 2002, reaffirmed all FBAR
regulations “that were in effect or in use on the date
of enactment of the USA Patriot Act of 2001 . . . .” 67
Fed. Reg. 64697-01. Treasury re-issued Order 180-01 in July
2014. See Treasury Order 180-01: Financial Crimes Enforcement
Network (Jul 1., 2014),
The Defendants fail to acknowledge, however, that the order
also indicates that pre-2001 regulations would remain in
effect only “until superseded or revised.”
Id. As explained above, the lower FBAR penalty in 31
C.F.R. § 1010.820(g) was superseded by statute in 2004.
As a result, the general reference to reaffirming earlier
regulations in Treasury Order 180-01 does not support an
inference that the Secretary intended to reaffirm the lower
penalties in the specific regulation at issue here.
Defendants also argue that the FBAR form itself demonstrates
the Secretary's intent to impose a tighter limit on his
own authority to levy civil penalties than the one Congress
selected. The Privacy Act Notification on the ...