The IRS continues to zealously pursue the collection of foreign assets and accounts, so taxpayers need to understand how the Report of Foreign Bank and Financial Accounts (FBAR) and FBAR penalties work. The enforcement of the FBAR is derived from the Bank Secrecy Act, which was passed by Congress in 1970 to combat money laundering and tax evasion. This is important because it means the Internal Revenue Service cannot use the traditional tax collection measures contained in the Internet Revenue Code to collect the penalty. Instead, they must refer the matter first to the Bureau of Fiscal Services, the primary accounting division of the US government, and then to the Department of Justice, which will sue to collect the money (a judgment in their favor makes the government a “super creditor” with broad power to recover the debt). There is a six-year statute of limitations governing these violations, which will begin to run regardless of whether a report was filed (i.e., 6 years from the due date of the FBAR to assess penalties).
FBAR penalties are proposed and determined by the examining Revenue Agent (the IRS), and the penalty assessment can be contested in IRS Appeals. If appeals are unsuccessful, the US Tax Court does not have jurisdiction to hear FBAR cases. The only option to judicially contest the fines is through the federal courts -- this is done in either the US Court of Federal Claims or Federal District Court. The US Government has two years from the date penalties were assessed, or the person was convicted of an FBAR penalty, to sue for collection of the debt. If a judgment is not obtained, the Government has an unlimited statute of limitations for offsetting payments (i.e., the IRS can keep your social security payments and any future tax refunds until the full payment of the liability).
The penalty structure is determined by the type of violation. Statutory penalties for FBAR violations are $10,000 per account per year for non-willful violations or the greater of 50% of the highest annual account value, or $100,000, per account per year for willful violations. Persons who have acted badly or willfully--as described in previous blogs--can utilize the Offshore Voluntary Disclosure Program, which offers an offshore penalty of 27.5% in lieu of other possible penalties. Streamlined filing compliance procedures can be used by people living outside the US who were unaware of their US tax obligations, who face no penalties, or for people living in the US who acted non-willfully, who are liable for a penalty of 5% in lieu of other applicable penalties.
There is something of a slight legal gray area regarding the nature of civil fines related to these matters. In 1998, in US v. Bajakajin, the Supreme Court held that the forfeiture of $350,000 as a penalty for attempting to leave the US with $350,000 in currency--without reporting any of it, as is required for all movements of international currency in excess of $10,000--violated the Eighth Amendment’s prohibition on the imposition of “excessive fines.” However, in the 2015 case US v. Moore, a district court in Washington held that a $40,000 penalty in an FBAR case did not constitute an “excessive fine” under the Eighth Amendment (the taxpayer had been assessed four years of maximum nonwillful penalties). Although US v. Moore has not reached the Supreme Court and perhaps never will, it appears that the current penalty structure for FBAR violations will withstand Eighth Amendment scrutiny--although defendants will surely make this argument among others when contesting their penalties in court.
For a free phone consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.