No Collection Due Process Hearing for FBAR Violations

Unlike most types of international information reporting forms such as Form 3520, Form 8938, and Form 5471, the FBAR is not an IRS form. It is a FinCEN (Financial Crimes Enforcement Network) form that is covered under U.S.C. Title 31 (Money and Finance) instead of U.S.C. Title 26 (Internal Revenue Code). Depending on which different types of foreign accounts and assets a U.S. Taxpayer owns, he may have to file multiple forms including the FBAR in the same year to report his accounts and assets to the IRS. If the Taxpayer files late forms and is assessed international penalties, it can put the Taxpayer in a precarious position with the IRS when it comes to fighting the penalties. That is because while the IRS has been tasked with enforcement of FBAR penalties, a Taxpayer may not be able to challenge both FBAR and non-FBAR penalties together – even though the penalties all stem from the same common nucleus of fact — since the FBAR is not a tax form. While the IRS takes the position that Taxpayers do not have the right to go to U.S. Tax Court to challenge an FBAR, what about a Collection Due Process (CDP) Hearing?

Unfortunately, in the recent Tax Court case of Jenner, the U.S. Tax Court ruled that the IRS does not have an obligation to provide petitioners with a Collection Due Process hearing for FBAR penalties, and also that the Tax Court lacks jurisdiction because the FBAR penalty is not a tax under U.S.C. Title 26.

Let’s take a brief look at how and why the court ruled against Petitioners.

FBAR Penalty Challenges Can be Unecessarily Complicated

In general, when Taxpayers want to challenge an FBAR penalty, they have to go to Federal court such as U.S. District Court or the Court of Federal Claims and not U.S. Tax Court. While this would usually mean that under the Flora Rule, Taxpayers must pay the penalty first before challenging the penalty in Federal Court, in the 2021 ruling in the case of Mendu, the Court of Federal Claims rejected the government’s position and held that since Taxpayers do not have an opportunity to challenge FBAR penalties in Tax Court, it is not right to make them follow the Flora Rule to fight the penalty in federal court (so that Taxpayers do not have to pre-pay the penalty to challenge an FBAR penalty in Federal Court).

Is a Collection Due Process Hearing an Option for FBAR Violations?

With most types of international information reporting penalties, Taxpayers would prefer a Collection Due Process Hearing when available since the Taxpayer may have a chance to prove reasonable cause at the CDP hearings — and may also be able to pursue the matter in Tax Court if they do not get the outcome they want at the CDP Hearing In general, it has been IRS standard practice to deny taxpayers an opportunity for Collection Due Process when they are challenging FBAR penalties — because the FBAR is not an IRS tax form (again, even though the IRS is tasked with FBAR enforcement).

In the recent case of Jenner, Taxpayers petitioned the Tax Court to rule they were entitled to a Collection Due Process Hearing but were denied. Here are two key excerpts from the Tax Court Opinion:

- - “Because an FBAR penalty is not a tax, neither section 6321 nor section 6331 applies to petitioners, and therefore, no lien or levy to collect these penalties is authorized. Section 6320(a)(1) provides that “[t]he Secretary shall notify in writing the person described in section 6321.” The person described in section 6321 is any person “liable to pay any tax” who “neglects or refuses to pay the same after demand.” Section 6330(a)(1) provides that “[n]o levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing.” “The person described in section 6330(a)(1) is the same person described in section 6331(a) — i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer).” Treas. Reg. §301.6330-1(a)(3), Q&A-A1. “The collection mechanism authorized in the FBAR statute itself is not lien or levy but ‘a civil action to recover a civil penalty.’” Williams, 131 T.C. at 59 n.6 (quoting 31 U.S.C. §5321(b)(2)).
  - In short, Title 31 expressly provides the assessment and collection procedures for FBAR penalties, and there is no statutory, regulatory, or judicial authority providing that these penalties are subject to sections 6320 and 6330. “[T]he rights afforded by the CDP statutes apply only to those people subject to IRS actions to collect ‘tax.’” Ryckman v. Commissioner, No. 750-21L, 163 T.C., slip op. at 11 (Aug. 1, 2024). FBAR penalties are not taxes. Accordingly, the IRS was under no obligation to provide petitioners with a CDP hearing.”

Challenging an FBAR Penalty

One of the main benefits for taxpayers who seek a Collection Due Process Hearing is that they may have the opportunity to go to Tax Court after the hearing if they are not successful. With FBAR Penalties, the IRS — and now the Tax Court — takes the position that the Taxpayer does not have the opportunity to go through Collection Due Process to fight FBAR penalties. Thus, Taxpayers seeking to challenge an FBAR penalty will want to fight the penalty at the appeals phase to try to avoid going to Federal Court.

While some courts will take the position that the Taxpayer does not have to pay the penalty first, litigation can be very expensive and time-consuming and depending on the size of the penalty, may not be a feasible alternative.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

**Need Help Finding an Experienced Offshore Tax Attorney?**

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.