Self-study Article: Litigating the Fbar Penalty in District Court and the Court of Federal Claims

• Publication year: 2014
• Author: By Robert Horwitz

Self-Study Article: Litigating the FBAR Penalty in District Court and the Court of Federal Claims

By Robert Horwitz¹

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As a result of a campaign by the Internal Revenue Service ("IRS") against taxpayers who hide assets overseas and fail to report income from offshore accounts, the long-dormant Report of Foreign Bank and Financial Accounts ("FBAR") penalty has become a potent weapon in the IRS's arsenal. IRS agents examining taxpayers who made quiet disclosures or failed to report income from offshore accounts have been told to be "aggressive,"² leading to the assertion of one or more 50% willfulness penalties under 31 USC §5321(a)(5)(C).³

The only reported decisions in which the courts reached the merits of an FBAR penalty assessment have been ones brought in district courts by the Government to reduce a penalty assessment to judgment.⁴ The Tax Court has held it has no jurisdiction over the FBAR penalty.⁵ A bankruptcy court held that an FBAR penalty could not be discharged in bankruptcy.⁶ Several articles have been written about the litigation of the FBAR penalty, focusing on the published decisions.⁷ This could lead one to conclude that a person against whom an FBAR penalty has been assessed cannot file a lawsuit to seek a judicial determination of his or her liability for the penalty. In the author's view, such a belief is wrong. Under both the Tucker Act and the Little Tucker Act, the Court of Federal Claims and federal district courts, respectively, have jurisdiction over a cause of action for illegal exaction brought by a person who has paid only a portion of an FBAR penalty assessment.

I. BACKGROUND OF THE FBAR CIVIL PENALTY

On October 26, 1970, Congress passed the Bank Secrecy Act as Pub. L. 91-508. One little-noticed provision required the filing of reports and the maintenance of records. As codified in 31 USC §5314(a), it states:

(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.

This provision is the statutory authority for the requirement that U.S. persons with foreign accounts totaling over $10,000 annually file Form TD 90-22.1, the FBAR.⁸

Originally, there were no civil penalties that could be imposed for failure to comply with section 5314(a) and the regulations promulgated under that section. This was rectified in 1986, when Congress added subsection (a)(5) to 31 USC §5321.⁹ As originally enacted, section 5321(a)(5) authorized the imposition of a penalty for a willful violation of section 5314. The maximum penalty for failing to file a report was the greater of the balance in the account at the time of the violation (not to exceed $100,000) or $25,000.

In 1992, the Department of Treasury issued Treasury Directive 15-41, which delegated to the IRS the authority to investigate (but not enforce) potential violations of section 5314(a). The Financial Crimes Enforcement Network or FinCEN's enforcement of civil penalties under the directive was lackadaisical. In its 2002 Report to Congress under section 361(b) of the USA Patriot Act, the Treasury Department reported that between 1993 and 2002, the IRS had referred only twelve cases to FinCEN to determine whether to impose a civil penalty under section 5321(a) (5). Only two penalties were imposed. In four of the cases, FinCEN issued warning letters. It took no action in the remaining six cases.¹⁰

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In an effort to increase FBAR compliance, in April of 2003, the IRS and FinCEN entered into a memorandum agreement under which FinCEN delegated the authority to enforce the FBAR penalty to the IRS.¹¹ The following year, as part of the American Jobs Creation Act of 2004, Congress amended the penalty provisions of 31 USC §5321(a)(5).¹² The amendment provided a penalty for a nonwillful violation of section 5314 of up to $10,000, unless the violation was due to reasonable cause and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported."¹³ In the case of a "willful" violation, the maximum penalty that can be imposed is the greater of $100,000 or 50% of the balance in the account at the time of the violation for "a failure to report the existence of an account or any identifying information required to be provided with respect to an account." There is no reasonable cause exception for a willful violation.¹⁴

Following on the heels of the conviction of Igor Olenicoff for filing a false return,¹⁵ the UBS deferred prosecution agreement¹⁶ and the IRS's serial offshore voluntary disclosure initiatives, there has been an increased emphasis on imposing both criminal and civil sanctions against persons who hide assets in offshore financial accounts. As explained below, a person against whom an FBAR penalty has been assessed can file a complaint in either district court or the Court of Federal Claims to challenge her liability.

II. THE TUCKER ACT AND THE LITTLE TUCKER ACT

There are two prerequisites for a person to maintain an action against the United States. First, the court must have subject matter jurisdiction. Second, there must be a waiver of sovereign immunity. The Tucker Act¹⁷ and the Little Tucker Act¹⁸ give the Court of Federal Claims and the United States district courts, respectively, jurisdiction to hear cases for money damages against the Government. The Tucker Act vests the Court of Federal Claims with jurisdiction over:

... any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.¹⁹

The Little Tucker Act vests the United States district courts with jurisdiction over:

any other civil action or claim against the United States, not exceeding $10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort...²⁰

The Tucker Act and the Little Tucker Act not only vest the courts with jurisdiction, they are also waivers of sovereign immunity over claims for money damages against the United States, where the claimant can "demonstrate that the source of substantive law he relies upon 'can fairly be interpreted as mandating compensation by the Federal Government for the damage sustained.'"²¹ Thus, the question is whether the statutes or regulations upon which the claim is founded "create the substantive rights to monetary damages" against the United States.²²

The history of the Tucker Act and the Little Tucker Act was outlined by the Supreme Court recently in United States v. Bormes, 133 U.S. 12 (2012):

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Sovereign immunity shields the United States from suit absent a consent to be sued that is "unequivocally expressed." United States v. Nordic Village, Inc., 503 U.S. 30, 33-34 (1992) (quoting Irwin v. Department of Veterans Affairs, 498 U.S. 89, 95 (1990); some internal quotation marks omitted). The Little Tucker Act is one statute that unequivocally provides the Federal Government's consent to suit for certain money-damages claims. United States v. Mitchell, 463 U.S. 206, 216 (1983) (Mitchell II). Subject to exceptions not relevant here, the Little Tucker Act provides that "district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims," of a "civil action or claim against the United States, not exceeding $10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort." 28 U.S.C. §1346(a)(2). The Little Tucker Act and its companion statute, the Tucker

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