FBAR Penalties – Government Pushes Civil “$10K a Pop – Penalties”: U.S. citizens residing outside the U.S. are subject to the same penalty structure as U.S. citizens residing in the U.S.
Case law is starting to develop, slowly but surely, on various legal issues raised under Title 31, as to reporting foreign bank accounts.
The electronic filing deadline for foreign bank account reports (“FBARs”) is June 
30th. This filing deadline (under Title 31) cannot be extended unlike filing of federal income tax returns (under Title 26).
U.S. citizens residing overseas and most lawful permanent residents who live substantial time (if not all of their time) outside the U.S. are generally subject to these FBAR reporting requirements as the government has made no exceptions in the regulations for such overseas residents.
See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
Earlier in April, the U.S. District Court in Moore v. United States, 2015 U.S. Dist. LEXIS 43979 (W.D. WA 2015) published an opinion where the IRS had assessed multiple year US$10,000 penalties. See Jack Townsend’s thoughtful comments and reference to the arguments presented by both the U.S. citizen and the government here.
There are many key questions that remain undecided by the Courts, which continue to generally be asserted by the government:
- The US$10,000 penalty should be assessed at the maximum level (versus a lesser amount);
- The US$10,000 penalty should and can be assessed multiple times for each year reporting is required, when there are multiple accounts (e.g., 8 accounts means the government will try to assess 8 violations and hence a US$80,000 penalty);
- U.S. citizens residing outside the U.S. are subject to the same penalty structure as U.S. citizens residing in the U.S.; and
- Lawful permanent residents residing outside the U.S. are subject to the same penalty structure as U.S. citizens and LPRs residing in the U.S.
To date, there is no binding case law on any of these issues.
The IRS internal revenue manual (4.26.16.4.1) summarizes how and why the IRS has authority to assess penalties for FBAR Title 31 violations as set forth below:
- As of April 8th 2003, IRS was delegated the authority to assess and collect FBAR civil penalties. 31 C.F.R. § 103.56(g). The delegation includes the authority to investigate possible FBAR civil violations, provided in Treasury Directive No. 15-41 (Dec. 1, 1992), and the authority to assess and collect the penalties for violations of the reporting and recordkeeping requirements.
- When performing these functions, the IRS is not acting under Title 26 but, instead, is acting under the authority of Title 31. Provisions of the Internal Revenue Code generally do not apply to FBARs.
- Criminal Investigation has been delegated the authority to investigate possible criminal violations of the Bank Secrecy Act. 31 C.F.R. §103.56(c)(2)
May 3, 2015 at 3:12 pm
It is wrong to threaten, harass and punish the American diaspora simply because they bank locally.
May 3, 2015 at 6:18 pm
The court presumes that the agency acted correctly, and is not permitted to substitute its judgment for the agency’s. Id. at 415, 417. The court must nonetheless be certain that the agency acted within the scope of its authority, and its must determine whether the “decision was based on a consideration of relevant factors and whether there has been a clear error of judgment.
The court’s conclusion that Mr. Moore lacked reasonable cause is sufficient to answer any question about the IRS’s authority to impose penalties.
The record before the court contains no administrative explanation of the IRS’s decision to impose penalties. The IRS’s December 2012 “appeals” letter to Mr. Moore contains 3 sentences of “explanation” that do nothing to illuminate what the IRS considered or why it arrived at its decision. The letter at least mentions the “reasonable cause” standard; it says nothing at all about why it choose a $40,000 maximum penalty as opposed to a smaller amount. The court looks for a “rational connection between the facts found and the choice [the agency] made.”. What the court requires is evidence from which it could conclude that the IRS did not act arbitrarily, capriciously, or in abuse of its discretion when it imposed $40,000 in penalties on Mr. Moore. That evidence is absent.
“Even when an agency explains its decision with less than ideal clarity, a reviewing court will not upset the decision on that account if the agency’s path may reasonably be discerned.”).
For now, the court concludes only that unless the Government provides evidence articulating its reasons for assessing a maximum penalty against Mr. Moore, the court will have no recourse but to hold that it acted arbitrarily and capriciously. Nonetheless, the IRS assessed a penalty without providing Mr. Moore the “appeal” it promised. The Government can perhaps supplement the record to provide an explanation for its failure to honor its promise, or clear explanation that the failure was harmless. If it does not, the court will rule that assessing the 2005 penalty in January 2012 was arbitrary and capricious