The FBAR refers to annual Foreign Bank and Financial Account Reporting (FinCEN Form 114). When the FBAR Form is not filed timely, the Internal Revenue Service may issue fines and penalties in accordance with Money and Finance Code Title 31 (FBAR is not actually. a “Tax” Form) Since the Internal Revenue Service has been on a rampage lately when it comes to foreign accounts compliance, it is no wonder that FBAR Litigation is on the rise. When it comes to filing an IRS lawsuit involving FBAR Penalties, the rules are different than regular tax litigation. The FBAR (FinCEN Form 114) is not a tax issue. Rather, the FBAR is a reporting issue. Unlike most civil tax matters that are enforced via title 26 of the tax code, FBARs are covered under Title 31 AML (Anti-Money Laundering Statute). Therefore, if the IRS seeks to enforce FBAR penalties, they do not take you to tax court.
Let’s review how FBAR Litigation works.
FBAR Litigation of Foreign Account Penalties
FBAR Litigation is complex. When the IRS wants to file a lawsuit for FBAR, it is in Federal Court, wherein the U.S government seek to reduce the FBAR Penalty to judgment.
FBAR Penalty Cases are on the rise, here are a few examples:
A few key facts about FBAR enforcement:
FBAR statute of limitations is 6-years.
FBAR assessment is 2-years.
You cannot sue the IRS in Tax Court for FBAR
Taxpayers can pay the penalty, and then sue for refund; or
Let the IRS sue the taxpayer, and counter-claim
As the IRS issues increasingly high penalties against individuals (Usually penalties which far outweigh any “Crime,”) the number of people trying to fight these FBAR penalties in court will continue to rise. There are various methods for fighting the FBAR penalties, once they have been “affirmed” by the IRS, and all administrative tactics have been exhausted. We will summarize the different options below:
Tax Court & FBAR Litigation
Technically, Tax Court is not the proper forum for FBAR Penalties, since it is supposed to be limited to the Federal Court or the Court of Claims…but many times even FBAR matters seem to have a way of appearing in Tax Court.
For most individuals, Tax Court would be the preferred forum to put on their gloves and go toe-to-toe with the IRS to try and fight FBAR Penalties (once all administrative remedies have been considered and/or exhausted), if it is an option. This is especially true when the FBAR overlaps other International Informational Return Penalties – and a finding of having acted with reasonable cause as to other informational returns may positively impact any enforcement of FBAR penalties.
There are some benefits to Tax Court:
No Pre-Payment of Penalties
First, a person does not need to pay the penalty before fighting the penalty. In other words, if the IRS agent says you owe $1 million in penalties, you get the chance to fight the penalties before having to fork over one penny. With that said, interest continues to accrue so some people may consider depositing some money to offset the interest.
Tax Court Judges Know Their Craft
The judges are very knowledgeable, and this is a pro or con – depending on how you look at it. The reality is, if you have a good legal tax position, then a judge is not going to necessarily disagree with you and side with the IRS just because it is “Tax Court.”
In other words, you should not be concerned about bias. These judges do nothing but tax; therefore, there’s a good chance that if you have a strong argument in your favor, the judge may be able to see in your favor.
Another benefit of the Tax Court is that there are certain rules and procedures in place to resolve the matter before it reaches the trial stage. Sometimes, while one attorney or agent may have disregarded your position, a more senior Attorney or different Agent (if a small court case) may be more apt to agree with you. And, depending on whether you want to fight the entire penalty or consider negotiating, you may be in a better position than you were dealing with the agent during the audit examination (or prior CAP/CDP hearings)
There are also some negatives to Tax Court.
There is no jury, and no “common folk” to understand your plight, and sympathize with you as a jury of your peers may. Moreover, if you happen to get on the bad side or the wrong side of the judge, there is only one person making the decision, not a group of people.
In addition, if the judge disagrees with you, they typically will stand their ground and it will be very difficult to sway the judge it from the outset they believe that the penalties are justified.
District Court for FBAR Litigation Lawsuits
FBAR Litigation is handled in Federal Court — which operates differently than Tax Court. Oftentimes, a person does not choose Federal Court, but it is chosen for them. In other words, they miss the 90-day window to file with US Tax Court and have no alternative but to file in federal court.
The 90-day rule is exacting. In other words, if you miss the statute of limitations to file with Tax Court, then you have missed the opportunity for Tax Court.
The one biggest drawback about federal court is the fact that it is a claim for refund Stated another way, in order to sue the IRS in federal court you have to first pay the amount that is due and then sue for refund. This is very off-putting (understandably so) for many people, especially if they don’t have the money to sue the IRS or pay the penalty.
*BUT, a recent court case may negate the requirement of having to pre-pay FBAR penalties in order to pursue litigation under the Flora Rule.
In addition, it is very difficult to represent yourself in federal court. While it is never recommended that you represent yourself in Tax Court — it is more forgiving and oftentimes individuals will be unrepresented by themselves in Tax Court.
While the judges and opposing counsel may not want to deal with you, the procedures and policies in Tax Court for evidence and other related issues pale in comparison to the strictness of federal court. Moreover, the judges can be very tough – even on people representing themselves.
Now, a few positives:
A Jury of Your Peers
Since it’s a jury of your peers, it is nice to know that most peers would think you being penalized hundreds of thousands of dollars because you forgot to fill out an FBAR is absurd. Thus, there is a better chance that they may side with your position and disagree with the penalties issued.
IRS is not the “Preferred” Party
Second, even if the Jury has no idea what an FBAR is, you’ll be hard-pressed to find a cheerleading section for the IRS. Therefore, the mere fact that the IRS is coming after you for what seems like an unfair claim against you will benefit you. Also, the IRS Attorneys may not feel as comfortable or at home as they otherwise would in Tax Court.
Additional Claims Against the IRS
Finally, there may be additional causes of action you can file in federal court that you’d be limited to filing in Tax Court. That is not to say you will have any other basis to file any other claim or ancillary claim against the IRS, but who knows – maybe you will.
Court of Claims & FBAR Litigation
The Court of Claims is a federal court.
It is a court that is reserved for claims made against the government. Typically, the difference between whether you would want to go to Federal Court for the Court of Claims is a form of “forum shopping.” In other words, you have the right to choose either court. Therefore, it may benefit you to conduct a little research and get a feel for what the decisions have been at the District Court level versus the Court of Claims on various issues — as well as reviewing what the holdings are for various Court of Appeals depending on what circuit you are in.
Specifically asked the Court of Claims, as provided by their own website:
“Many cases before the court involve tax refund suits, an area in which the court exercises concurrent jurisdiction with the United States district courts. The cases generally involve complex factual and statutory construction issues in tax law.
Another aspect of the court’s jurisdiction involves government contracts. It was within the public contracts jurisdiction that the court was given new equitable authority in late 1996. In recent years, the court’s Fifth Amendment takings jurisdiction has included many cases raising environmental and natural resources issues. Another large category of cases involves civilian and military pay claims.
In addition, the court hears intellectual property, Indian tribe, and various statutory claims against the United States by individuals, domestic and foreign corporations, states and localities, Indian tribes and nations, and foreign nationals and governments.
While many cases pending before the court involve claims potentially worth millions or even billions of dollars, the court also efficiently handles numerous smaller claims. Its expertise, in recent years, has been seen as its ability to efficiently handle large, complex, and often technical litigation.”
Avoid FBAR Litigation & Penalties with IRS Offshore Disclosure
The best way to avoid, limit, or eliminate FBAR penalties is to be proactive. The U.S. Government has developed various IRS Offshore Voluntary Disclosure progams. These programs are designed to safely facilitate your compliance.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance with getting compliant.