Tuesday, June 7, 2022

Third Circuit Sustains FBAR Willful Penalty (6/7/22)

In Collins v. United States, ___ F.4th ___, 2022 U.S. App. LEXIS 15467 (3rd Cir. 6/6/22), CA3 here and GS here, the Court affirmed the district court’s holding that Collins was liable for the willful FBAR penalty.  See United States v. Collins, 2021 U.S. Dist. LEXIS 23260, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), GS here.

The steps in the Court of Appeals reasoning were:

1. Collins had unreported foreign accounts.

2. Collins joined OVDP, apparently in 2010.  After filing his “amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002,” Collins opted out of OVDP, presumably hoping to pay less on opt-out.  The IRS audited and found that the amended returns failed to report PFIC income, which generated additional tax of “$71,324 for 2005, 2006, and 2007, plus penalties.”  Further, by opting out, Collins subjected himself to potential willful FBAR penalties rather than the mitigated miscellaneous penalty in OVDP.  The IRS proceeded to asset the FBAR penalty, although the IRS mitigated the penalty substantially under the IRM mitigation rules and agent discretion.

3. The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”

4. On the willful determination, The Court of Appeals articulated and applied the “civil standard of willfulness, which encompasses recklessness * * * * The dispositive question here is whether “Collins knew or (1) clearly ought to have known that (2) there was a grave risk that he was not complying with the reporting requirement, and if (3) he was in a position to find out for certain very easily.”  (Cleaned up.)

5. The Court of Appeals handily affirmed the district court’s holding that “Collins’s failure to disclose his foreign accounts was willful—not just reckless, but with ‘an actual intent to deceive.’”

6. The  Court of Appeals next rejected Collins argument that the FBAR penalty as assessed was arbitrary and capricious.  (Slip Op. 9-11).  It is not clear to me whether the Court engaged or Collins even argued the basis that other courts have found the FBAR penalty calculation arbitrary and capricious, although the substantial mitigation applied may have masked that issue.

7. The Court of Appeals finally rejected Collins’ attempt to avoid the 1% interest and the 6% penalty provided by the Collection Act at 31 USC § 3717, here.  Slip Op. 13-16. Collins’ argument, as best I understand it, was that the FBAR was a tax penalty that should be subject to the tax regime for interest rather than the Collection Act.  I am not sure how that would have saved him any interest, but I have not tried to connect all the dots on that.  I guess what Collins was trying to avoid was the 6% failure to pay penalty in 3717(d) which could not apply if the Collection Act did not apply.  The argument that the FBAR penalty is a tax penalty is erroneous, but based on some loose language in Bedrosian in a jurisdictional context that: “Our take is the FBAR statute is part of the IRS’s machinery for the collection of federal taxes; thus it is an act ‘providing for internal revenue.’”  The Court in Collins said: "even if the FBAR provision is a revenue statute for jurisdictional purposes, the FBAR penalty is not a tax within the statutory context of failure-to-pay penalties of the Collection Act."

JAT Comments:

All of this is pretty standard fare.  I comment here only on the Collection Act.  I don’t recall that I have focused on the Collection Act before.  It is an interesting read.  I just make the following comments as to the statute's key features (without having done any further research).

  • The Collection Act interest rate is “the average investment rate for the Treasury tax and loan accounts for the 12-month period ending on September 30 of each year, rounded to the nearest whole percentage point. § 3717(a)(1).  
  • Interest accrues from the date the notice of liability is first mailed to the debtor.  § 3717(b)(2).  
  • The interest rate is the rate in effect when the debt first accrues and remains fixed at that rate for the duration of the indebtedness.”  § 3717(c)(2).  
  • No interest is due if the debt is paid within 30 days.  § 3717(d).  
  • A late payment penalty of up to 6% may be charged.  § 3717(e).  
  • In lieu of Collection Act penalties and interest, the agency may increase the administrative claim by the cost of living adjustment in lieu of charging interest and penalties under this section.  § 3717(i). 

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