United States v. Richard Collins

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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No. 21-1935

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UNITED STATES OF AMERICA

v.

RICHARD COLLINS,

Appellant

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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

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OPINION OF THE COURT

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)”).

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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

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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.

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