United States v. Richard Collins ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 21-1935
_____________
UNITED STATES OF AMERICA
v.
RICHARD COLLINS,
Appellant
_____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 2-18-cv-01069)
District Judge: Hon. Cathy Bissoon
____________________
______
Argued on April 27, 2022
Before: HARDIMAN, RENDELL, and FISHER, Circuit
Judges
(Filed: June 6, 2022)
Jed Silversmith [Argued]
P.O. Box 2762
Philadelphia, PA 19118
Counsel for Appellant
David A. Hubbert
Julie C. Avetta [Argued]
Arthur T. Catterall
United States Department of Justice
Tax Division
Room 4333
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, DC 20044
Cyndi K. Chung
Office of United States Attorney
700 Grant Street
Suite 4000
Pittsburgh, PA 15219
Counsel for Appellee
________________
OPINION OF THE COURT
________________
HARDIMAN, Circuit Judge.
Richard Collins appeals the District Court’s order
imposing civil penalties for his failure to report ownership of
multiple foreign bank accounts. Because the Court did not err
2
when it held that Collins’s failure to report these accounts was
a willful violation of the Bank Secrecy Act, we will affirm.
I
Enacted in 1970, the Bank Secrecy Act requires United
States citizens to report interests in foreign accounts with a
value exceeding $10,000. 31 U.S.C. § 5314; 31 C.F.R.
§§ 1010.306(c), 1010.350(a); see Pub. L. No. 91-508, 84 Stat.
1114 (1970). Citizens must disclose these accounts through a
Form TD–F 90–22.1, Report of Foreign Bank and Financial
Accounts (FBAR). An FBAR is not a tax form and need not be
filed with a tax return. See 31 C.F.R. §§ 1010.306(c),
1010.350(a). Yet the Internal Revenue Service has the
authority to enforce reporting requirements, investigate
violations, and assess and collect penalties. Id. § 1010.810(g).
Congress also has authorized the Secretary of the Treasury to
impose “a civil money penalty on any person” who fails to
report a foreign account. 31 U.S.C. § 5321(a)(5)(A).
There is no dispute in this case that Richard Collins
failed to report his foreign accounts. Collins is a dual citizen of
the United States and Canada who, since the 1960s, has worked
as a professor in the United States, France, and Canada. He
opened bank accounts in all three countries to deposit his
earnings. Collins also opened a Swiss bank account in the
1970s, though he never lived in Switzerland. Since Collins
moved to the United States in 1994, he has maintained his
foreign accounts and continued to receive small pension
contributions into his French and Canadian accounts, which he
3
would periodically sweep into his Swiss account. By late 2007,
the balance of his Swiss account exceeded $800,000.
Collins did not report any of his foreign bank accounts
until he voluntarily amended his tax returns in 2010. At that
time, the IRS accepted Collins into its Offshore Voluntary
Disclosure Program, and his accountant prepared amended
returns for 2002 to 2009, which yielded modest refunds
stemming from large capital losses in 2002. Upon filing the
amended returns, Collins withdrew from the Voluntary
Disclosure Program, prompting an audit that uncovered an
unforeseen issue. Because Collins invested in foreign mutual
funds, his Swiss holdings were subject to an additional tax on
passive foreign investment companies, 26 U.S.C. § 1291 et
seq., which he failed to compute in his amended returns. The
IRS audit determined that Collins owed an additional $71,324
for 2005, 2006, and 2007, plus penalties. Collins made
payment towards these overdue taxes and associated penalties.
Still worse for Collins, in June 2015 the IRS determined
that since he withdrew from the Overseas Voluntary
Disclosure Program, Collins was liable for civil penalties under
31 U.S.C. § 5321(a)(5) for his “willful failure” to report
foreign accounts. App. 417. The maximum FBAR penalty for
the willful failure to report a foreign bank account is the
greater of $100,000 or 50 percent of the account balance at the
time of the violation. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii).
Fortunately for Collins, the statute grants the agency some
discretion, see id. § 5321(a)(2)—and specifies a cap for the
FBAR penalty, see id. § 5321(a)(5)(C)(i). The IRS found
Collins eligible for mitigation and assessed a civil penalty
4
totaling $308,064 for 2007 and 2008. After Collins failed to
pay, the Government sued to recover the penalty.
The District Court conducted a one-day bench trial and
affirmed the agency’s penalty calculation. See United States v.
Collins, 2021 WL 456962, at *4, *11 (W.D. Pa. Feb. 8, 2021).
The Court found a “decades‐long course of conduct, omission
and scienter” by Collins in failing to disclose his foreign
accounts, id. at *4, before also finding that the IRS’s penalty
determination was neither arbitrary and capricious nor an
abuse of discretion. Id. at *5–7. The Court imposed the same
FBAR penalty as the IRS, id. at *11, and under the Federal
Claims Collection Act (the Collection Act), 31 U.S.C. § 3717,
awarded 1% per annum interest and a 6% per annum penalty
for failure to pay pre- and post-judgment. As of the date of the
judgment, the interest and penalties totaled $98,200.
Collins filed this timely appeal.
II
The District Court had jurisdiction under 28 U.S.C.
§§ 1331, 1345, and 1355 because this matter arises under a
federal statute and the United States is the plaintiff seeking to
recover civil penalties. We have jurisdiction under 28 U.S.C.
§ 1291 to review the District Court’s final order imposing
Collins’s FBAR penalty.
III
Collins claims the District Court erred when it found
that he willfully failed to report his foreign bank accounts in
2007 and 2008 and that the IRS’s penalty calculation was an
abuse of discretion. Collins also argues the District Court erred
5
by limiting his discovery regarding the IRS’s penalty
computation and by imposing interest and penalties pursuant
to 31 U.S.C. § 3717. We consider each argument in turn.
A
Collins first challenges the District Court’s finding that
his failure to report the foreign accounts was willful. That
finding was significant because the Bank Secrecy Act caps the
penalty at $10,000 if the violation is not willful, 31 U.S.C.
§ 5321(a)(5)(B)(i). We review the District Court’s finding of a
willful FBAR violation for clear error. Bedrosian v. United
States, 912 F.3d 144, 152 (3d Cir. 2018). We also apply the
usual civil standard of willfulness, which encompasses
recklessness, to FBAR penalties. Id. at 152. Recklessness is
“conduct that violates ‘an objective standard: action entailing
an unjustifiably high risk of harm that is either known or so
obvious that it should be known.’” Id. at 153 (quoting Safeco
Ins. Co. of Am. v. Burr, 551 U.S. 47, 58 (2007)). 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.” Id. (quoting United States v. Carrigan, 31 F.3d 130,
134 (3d Cir. 1994)).
Collins argues that the voluntary correction of his tax
returns and application for amnesty prior to any investigation
evidences a simple, honest mistake rather than willfulness. He
faults the District Court for not considering that neither he, his
accountant, nor his lawyer believed he owed any tax prior to
the audit. He also points to his prompt payment towards the
passive foreign investment company tax as evidence of good
faith compliance inconsistent with willfulness. Finally, Collins
6
contends he could not have been expected to know about the
FBAR requirement since his experienced accountant was
unaware of the reporting requirement and believed it to be new.
(In fact, the requirement has been in place since the 1970s.)
The District Court concluded that Collins’s failure to
disclose his foreign accounts was willful—not just reckless,
but with “an actual intent to deceive.” Collins, 2021 WL
456962, at *1. A “sophisticated taxpayer,” Collins was aware
of his foreign accounts when he approved his tax filings and
intentionally managed the accounts to avoid disclosure. Id. For
example, Collins purposefully avoided receiving mail from his
Swiss bank in the United States and, at one point, expressed a
desire to “discreetly” transfer funds to the United States for a
mortgage transaction. Id.Collins offered various explanations over the years to
justify his conduct, but the District Court found them
unpersuasive. In 2010, Collins claimed he believed filing an
IRS Form W-9 with his Swiss bank satisfied all reporting
requirements—including those banks for which he did not file
a Form W-9. In 2013, he justified his failure to report by citing
his reliance on advice in the 1970s from an official at the U.S.
Embassy in Paris. He next justified his non-disclosure in 2014
by explaining that his Swiss bank advised that withholding at
the source absolved him of any further tax obligations. Finally,
in 2015 Collins excused his failure to report by suggesting that
Swiss law had prohibited him from even acknowledging the
existence of his private bank accounts. The District Court
found these justifications “objectively unreasonable.” Collins
2021 WL 456962, at *1.
Our review of the record leads us to conclude that the
District Court committed no error, much less clear error, when
7
it found that Collins’s failure to disclose his foreign accounts
was willful. Schedule B of IRS Form 1040 contains a check-
the-box question (line 7a) that places a taxpayer on notice of
this obligation. IRS, OMB No. 1545-0074, Schedule B (Form
1040) (2007). Schedule B directs taxpayers to check “Yes” if
they had authority over, or an interest in, a foreign account. Id.(“At any time during 2007, did you have an interest in or a
signature or other authority over a financial account in a
foreign country, such as a bank account, securities account, or
other financial account? See page B-2 for exceptions and filing
requirements for [FBAR]”). Collins repeatedly checked “No”
and filed no FBAR until 2010. He filed returns indicating he
had no foreign financial accounts while managing investments
worth hundreds of thousands of dollars in his French,
Canadian, and Swiss accounts (even after engaging an
accountant in 2005). So we agree with the District Court that
Collins did not plausibly claim he should not have known
about the FBAR filing requirement. See Kimble v. United
States, 991 F.3d 1238, 1242–43 (Fed. Cir. 2021), cert. denied,
142 S. Ct. 98 (2021) (holding that a taxpayer has inquiry notice
of the FBAR reporting requirement even if failing to read line
7a of Schedule B).
Collins claims the District Court gave insufficient
weight to his voluntary filing of amended returns, prompt
payment of overdue taxes, and subjective belief that he did not
owe tax. But disagreement with the District Court’s weighing
of evidence does not establish clear error. And it is wrong to
suggest that “a voluntary correction . . . should be legally
sufficient to negate willfulness as a matter of law.” Collins Br.
38; United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996)
(“[E]ventual cooperation with the government does not negate
willfulness.”). The penalties imposed under the Bank Secrecy
8
Act stem from Collins’s failure to disclose foreign assets, not
his failure to pay overdue tax. A subjective belief he owed no
tax is, at best, tangential to the core inquiry of a § 5314
violation—whether a taxpayer “clearly ought to have known”
of his obligation to report his interest in foreign financial
accounts. Bedrosian, 912 F.3d at 153. Put simply, Collins
should have known of that obligation.
Collins had undisclosed foreign accounts, constructive
knowledge of the requirement to disclose his accounts, and
falsely represented that he had no such accounts. Therefore, the
District Court did not clearly err when it held that Collins
willfully violated the reporting requirement of § 5314.
B
Collins next challenges the IRS’s imposition of a
$308,064 penalty under the Bank Secrecy Act. We review de
novo the affirmance of the IRS’s penalty calculation. See, e.g.,
Pennsylvania, Dep’t of Pub. Welfare v. U.S. Dep’t of Health &
Hum. Servs., 647 F.3d 506, 511 (3d Cir. 2011). So we apply
the same standard of review as the District Court to the
underlying agency decision. Id.Courts will set aside the IRS’s determination of a
penalty only if it was arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law. See, e.g.,
Kimble, 991 F.3d at 1242. Under this standard, we will uphold
an agency determination where there is a “rational connection
between the facts found and the choice made.” Frisby v. U.S.
Dep’t of Hous. and Urb. Dev., 755 F.2d 1052, 1055 (3d Cir.
1985) (quoting Burlington Truck Lines v. United States, 371
U.S. 156, 168 (1962)). Moreover, because the IRS “is charged
with choosing the means by which to enforce and achieve the
9
goals” of the Bank Secrecy Act, “heightened deference is due
to the agency’s penalty assessment.” See Sultan Chemists, Inc.
v. U.S. EPA, 281 F.3d 73, 83 (3d Cir. 2002). The court “must
ensure that, in reaching its decision, the agency examined the
relevant data and articulated a satisfactory explanation for its
action, including a rational connection between the facts found
and the choice made.” Prometheus Radio Project v. FCC, 373
F.3d 372, 389–90 (3d Cir. 2004) (internal quotation marks
omitted). Only rarely are IRS proceedings considered “so
insufficient as to mandate de novo review.” Rum v. United
States, 995 F.3d 882, 893 (11th Cir. 2021), cert. denied, 142 S.
Ct. 591 (2021).
Prior to trial, the District Court said it would review the
validity of the IRS’s penalty calculation de novo. The District
Court observed that some courts have reviewed FBAR penalty
assessments under an abuse of discretion standard borrowed
from § 706 of the Administrative Procedure Act, but opined
that the application of this standard is “limited in the FBAR
context because Congress did not enumerate factors for the
Secretary to consider in calculating the FBAR penalty.”
Collins, 2021 WL 456962 at *5. In its decision, however, the
District Court modified its approach somewhat, upholding the
IRS’s $308,064 FBAR penalty under both de novo, id. at *4,
and abuse of discretion standards, id. at *6–7. Collins labels
the Court’s abuse of discretion analysis an “impermissible
change,” but does not explain why it was improper or how it
worked to his detriment. Collins Br. 52.
In this case, the IRS’s proceedings were not so
insufficient as to require de novo, rather than the usual abuse
of discretion, review. Contrary to Collins’s complaint of “scant
evidence” to support the determination of his penalty, Collins
Br. 42, the record demonstrates the facts on which the IRS
10
relied and the process by which the IRS computed, mitigated,
and assessed Collins’s penalty. The record shows the IRS’s
penalty calculation was not arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law. See 5
U.S.C. § 706(2)(A). The IRS revenue agent’s worksheet
demonstrates that she determined foreign balances from
Collins’s bank accounts and his belated FBAR disclosures. The
revenue agent also found that Collins qualified for mitigation
under the Internal Revenue Manual (the Manual). She then
calculated the mitigated penalty based on the 2007 and 2008
account balances and assigned half to each year. The revenue
agent then found this mitigated penalty “excessive” given
Collins’s facts and circumstance and further reduced the
proposed penalty for each year. The amounts ultimately
assessed against Collins, while substantial, represented an
additional 50% reduction of the mitigated penalty for which he
qualified—an overall reduction of 75% below the maximum
penalty. The evidence is far from “scant”—the record supports
the agency’s computation, mitigation, and further reduction of
the penalties assessed against Collins. The revenue agent
followed the Manual and the agency did not act arbitrarily.
Collins’s penalty is well below the amount permitted by law
and the administrative record supports a rational connection
between the agency’s findings and the penalty assessed. So the
District Court did not err when it held that the IRS did not
abuse its discretion.
IV
Collins also argues he should have been able to take
discovery regarding internal IRS discussions about the
computation of his FBAR penalty. “We review a district
court’s discovery orders for abuse of discretion, and will not
disturb an order absent a showing of actual and substantial
11
prejudice.” Anderson v. Wachovia Mortg. Corp., 621 F.3d 261,
281 (3d Cir. 2010). To demonstrate an abuse of discretion,
Collins “must show that the court’s decision was arbitrary,
fanciful or clearly unreasonable.” Democratic Nat’l Comm. v.
Republican Nat’l Comm., 673 F.3d 192, 201 (3d Cir. 2012)
(internal quotation omitted). He has not done so.
In a protective order, the magistrate judge held “that the
opinions, conclusions, and reasoning of IRS officials are
irrelevant to the ultimate issue in dispute, i.e., a determination
of whether the Defendant’s conduct was willful.” App. 2. The
order noted that the United States “agree[d] to produce a
witness regarding the 2007 and 2008 FBAR audit of the
Collins[es] which is at issue,” App. 2, and permitted Collins to
take discovery regarding the audit, but only “other than to seek
information about the opinions, conclusions, and reasoning of
government officials.” App. 5.
The District Court concluded it possessed the
“fundamental documents” that formed the basis of the IRS’s
penalty calculations. They included: Collins’s Offshore
Voluntary Disclosure Program submissions, FBAR filings,
correspondence with the IRS, foreign account statements, and
the IRS’s FBAR decision documents. Collins, 2021 WL
456962127 at *6. Moreover, the revenue agent responsible for
calculating Collins’s penalty testified at trial. Collins contends
that he is entitled to discovery from the revenue agent’s
supervisor, as well, who he alleges overruled the agent’s initial,
lower penalty calculation against the Manual’s guidance.
Collins mischaracterizes the exchange between the
revenue agent and her supervisor, as well as the relevant
Manual guidelines. The revenue agent’s activity record—a
journal of actions taken during the audit—shows that the
12
supervisor felt the agent’s penalty determination was “too low”
or expressed disagreement with its value, see, e.g., App. 632–
37 (entries for 2/17/15, 5/1/15, 5/7/15, and 6/25/15), but
Collins still received a penalty determination well below the
original mitigated value. Far from depriving the revenue agent
of her due discretion, as Collins alleges, the Manual’s
guidelines on FBAR penalty mitigation require an agent to
“make [the FBAR penalty] determination with the written
approval of that [agent’s] manager.” App. 629. The supervisor
was empowered to reject the revenue agent’s proposal as too
low before the agent selected an appropriate penalty. So the
record demonstrates the IRS adhered to its own guidelines, and
even Collins concedes the IRS does not act arbitrarily when it
follows the Manual. In sum, Collins cannot show any prejudice
regarding the scope of his discovery.
V
Finally, Collins challenges the District Court’s addition
of interest and a failure-to-pay penalty under the Federal
Claims Collection Act. Collins contends that, if his other
arguments are rejected, he should owe $308,064 plus 1%
interest accruing from March 15, 2021—the date the District
Court entered judgment—pursuant to 28 U.S.C. § 1961.
Whether the provisions of the Collection Act at 31 U.S.C.
§ 3717 apply to the FBAR penalty is a question of law subject
to de novo review. Abraham v. St. Croix Renaissance Grp.,
L.L.L.P., 719 F.3d 270, 275 n.5 (3d Cir. 2013).
The Bank Secrecy Act offers no independent authority
for the Government to collect additional failure-to-pay
penalties on FBAR penalties through the Collection Act. See
31 U.S.C. § 5321(b). Accordingly, Collins contends the
Collection Act’s application is ambiguous, and the canon of
13
strict construction of revenue statutes dictates resolution of
ambiguity in the taxpayer’s favor. Collins also cites our
Bedrosian decision to argue that the FBAR penalty is a tax that
is statutorily untethered from the Collection Act. Bedrosian,
912 F.3d at 151 (“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.’”).
But 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. The Collection Act provides for interest and
late-payment penalties on “debt[s],” 31 U.S.C. § 3717(a), (e),
which are defined as “any amount of funds or property that has
been determined by an appropriate official of the Federal
Government to be owed to the United States.” Id. § 3701(b)(1).
This includes “any fines or penalties assessed by an agency.”
Id. § 3701(b)(1)(F). The interest and late-payment penalty
provisions of § 3717, however, do not apply to debts under “the
Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.).” 31
U.S.C. § 3701(d)(1).
Unfortunately for Collins, his FBAR penalty is not a
debt under the Internal Revenue Code; it arises under 31 U.S.C.
§ 5321(a)(5) for a violation of the Bank Secrecy Act. As a
nontax debt, the FBAR penalty falls within the auspices of the
Collection Act. See 31 U.S.C. § 3701(a)(8) (defining “nontax”
debts as any debts “other than [debts] . . . under the Internal
Revenue Code of 1986.”). Bedrosian should not be read to hold
otherwise. Cf. Bedrosian, 912 F.3d at 151 (concluding only
that the Bank Secrecy Act penalties “‘provid[e] for internal
revenue’ within the meaning of [the jurisdictional statute] 28
U.S.C. § 1295(a)(2)”).
14
Collins sees ambiguity where there is none. The
provisions of the Collection Act apply unless another statute
“explicitly fixes the interest or charges” on a particular type of
federal claim, in which case the more specific statute governs.
United States v. Hyundai Merch. Marine Co., Ltd., 172 F.3d
1187, 1192 (9th Cir. 1999) (emphasis omitted) (quoting 31
U.S.C. § 3717(g)(1)). Since the Bank Secrecy Act does not fix
interest or similar charges, or otherwise deprive § 3717 of its
effect, § 3717 controls—and requires—the imposition of pre-
judgment interest and penalties on the debt Collins owes to the
United States.
Collins further argues that imposing the 7% interest and
failure-to-pay penalty pre-judgment is unjust, as the rules
pertaining to taxpayer challenges to FBAR claims were
“Kafkaesque” before Bedrosian clarified jurisdictional
questions in 2018. Collins Br. 61. He points to pre-Bedrosian
uncertainty over whether his route to judicial challenge lies
through full or partial payment of his penalty, and whether he
should have filed in a federal district court or the Court of
Federal Claims. Collins’s uncertainty over the proper judicial
forum, however, does not create statutory ambiguity regarding
the Collection Act’s application. Nor is his decision not to pre-
pay his FBAR penalty reason to disregard the Collection Act.
The accumulation of pre-judgment interest is a risk inherent in
that litigation strategy. There is no basis now to excuse Collins
from the consequences of his own choice. Because the
Government timely filed suit to reduce the assessment to
judgment, interest and penalties under § 3717 are appropriate.
Collins’s argument that the Collection Act failure-to-
pay penalty applies only to claims or debts, but not judgments,
fares no better. There is no basis to conclude § 3717 ceases to
apply to a “debt” once that debt is reduced to judgment. Section
15
3717 requires interest and late-payment penalties “on an
outstanding debt on a United States claim.” 31 U.S.C.
§ 3717(a). A debt is no less a claim of the United States simply
because the Government has sued to collect and a court
confirms that it is owed. In such circumstances, interest and
penalties apply under § 3717—and are mandatory.
* * *
The disparity between Collins’s putative income tax-
liability and his FBAR penalty is undeniably stark. Yet it is
consistent with the Bank Secrecy Act, which forces Collins to
suffer the consequence of his willful failure to disclose foreign
accounts. We will therefore affirm the District Court’s order
assessing penalties and interest in full.
16