Certain individuals and entities are required to file a FinCEN Form 114, Report of Foreign Bank Account Report (commonly called an “FBAR”), if they have a financial interest or signature authority in a foreign bank account. The FBAR form is filed electronically on the FinCEN website. If a person or entity does not file the FBAR form, the IRS can impose civil penalties that equal or exceed 50% of the balance in the foreign accounts for each year. The United States also can bring criminal charges against a person who does not file the FBAR form.
If a person does not pay the FBAR penalty, the United States usually will file a complaint in U.S. district court to reduce the FBAR penalty to a federal judgment. The United States must take this step within two years of when the IRS assessed the FBAR penalty. 31 U.S.C. § 5321(b)(2). If a person believes that they do not owe the FBAR penalty (or owe a lesser amount), they can challenge the penalty as part of this district court case. One reason to challenge the FBAR penalty is if the IRS determined that a person owes more than $100,000 in penalties.
Another option to dispute the FBAR penalty is through “refund litigation.” In this process, if the United States claims that a person owes an FBAR penalty, the person first pays to the United States a nominal amount (any amount under $10,000) to partially pay the FBAR penalty. The person then files a complaint in the Court of Federal Claims under the Tucker Act, 28 U.S.C. § 1491, or a complaint in the U.S. district court under the Little Tucker Act, 28 U.S.C. § 1346(a)(2). In this complaint, the person asks the court to determine that (1) the person does not owe any FBAR penalties (or owes a lesser amount), and (2) the court should order the United States to refund the nominal amount paid.
However, this procedure may be in question after a recent opinion from the Third Circuit Court of Appeals in the case of Bedrosian v. United States. The opinion is available here. In this case, the Third Circuit said that the district court did not have the power to hear the case (that is, jurisdiction) under the Little Tucker Act in 28 U.S.C. § 1346(a)(2). Instead, the district court had jurisdiction under § 1346(a)(1) because the FBAR penalty is collected “under the internal-revenue laws.” While in the same statute, this change from (a)(2) to (a)(1) has several important consequences:
- A person cannot pay a nominal amount (for example, $1,000) and file a complaint seeking a refund. Instead, the person must pay the FBAR penalty in full (which could be over $1,000,000) before they file a complaint in district court. See Flora v. United States, 362 U.S. 145 (1960).
- A person may have an additional step to challenge an FBAR penalty. In addition to paying the FBAR penalty in full, the person may have to file a claim for refund with the IRS before filing a complaint in the U.S. district court. See 26 U.S.C. § 7422(a). In one case, the person filed an IRS Form 843 to claim a refund of the nominal FBAR penalty amount that they paid. See Memorandum Opinion, Kimble v. United States, no. 17-421 (Fed. Cl. Dec 27, 2018), available here.
- The IRS may be able to use its collection tools (including notices of federal tax liens and levies) to collect the FBAR penalty.
Concerned about your foreign bank accounts and FBAR penalties? David J. Warner is a former IRS Attorney who, for 9 years at the IRS, handled all large FBAR penalty determinations in Southern California. David now represents clients in FBAR litigation, as well as sensitive domestic and international tax examinations, tax litigation, employment tax cases, and difficult tax collection matters. Please contact David at (310) 550-6200 to schedule a consultation.