Fighting FBAR Penalties – Challenging an FBAR Penalty | Battle in Court
Fighting FBAR Penalties: When it comes to the IRS and FBAR Penalties, it can get very confusing. FBAR is an acronym for “Foreign Bank Account Reporting.” Technically, it is the Foreign Bank and Financial Account Form. FBAR is not originally an IRS Form.
Fighting FBAR Penalties
Rather, it is a FinCEN form (Financial Crimes Enforcement Network). Specifically, it is called FinCEN Form 114. Even though the form was developed by FinCEN, the IRS enforced the penalties.
Challenging an FBAR Penalty
Challenging an FBAR Penalty is more difficult than it needs to be.
Because it is falls under Title 31, instead of Title 26, and it is technically a “reporting” penalty and not a “tax” penalty — it can get complicated, and generally includes District Court or the Court of Federal Claims.
How is an FBAR Penalty Issued?
When it comes to FBAR penalties, there are two main aspects to it:
Assessment of the Penalty – The time the Secretary of Treasury has to actually assesses you have penalty for not properly filing the Form.
Civil Action: The time the Secretary has to commence the civil action against you, which is essentially filing the court case to enforce penalties that have been assessed, but not paid.
(1) Assessments.— The Secretary of the Treasury may assess a civil penalty under subsection (a) at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed.
(2) Civil actions.—The Secretary may commence a civil action to recover a civil penalty assessed under subsection (a) at any time before the end of the 2-year period beginning on the later of—
– the date the penalty was assessed; or
– the date any judgment becomes final in any criminal action under section 5322 in connection with the same transaction with respect to which the penalty is assessed.
Fighting FBAR Penalties
When it comes to FBAR Penalties, the choices to dispute the penalties are different than with other IRS Penalties.
U.S. Tax Court
Technically, Tax Court is not the proper forum for FBAR Penalties, since it is supposed to be limited to 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 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 the 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.
Federal court is a bit different. 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 you 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.
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 often times 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
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 to 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 Penalties – IRS Offshore Disclosure
The best way to avoid, limit, or eliminate FBAR penalties is to be proactive. The U.S. Government has programs in place called IRS Offshore Voluntary Disclosure. These programs are designed to safely facilitate your compliance.
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