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Court Says Sen. Rand Paul, Plaintiffs Can't Challenge FATCA / FBAR

Rand Paul

Senator Rand Paul and several individual plaintiffs asked an Ohio federal court to strike down the Foreign Account Tax Compliance Act (FATCA), the Bank Secrecy Act's Financial Bank Account Reporting (FBAR) requirement, and certain intergovernmental agreements (IGAs). But the Ohio District Court and Sixth Circuit Court both struck down the case, saying they didn't have the right to sue because none of them had suffered any direct harm.

Photo credit: Gage Skidmore — some rights reserved under Creative Commons Public License

The Parties

Senator Rand Paul brought together six U.S. taxpayers and former taxpayers to sue the Treasury Department, IRS, and the Financial Crimes Enforcement Network in Crawford v Treasury, No. 16-3539. The individual plaintiffs were American citizens and former citizens who objected to the FATCA and FBAR regulations because:

  • They didn't want their private financial information given to the U.S. government
  • They claimed the FATCA caused them to lose business as a financial broker and a lawyer.
  • They claimed that the FATCA disclosures of their joint accounts created marital discord.
  • One plaintiff said he was unable to transfer his daughter's college-savings account into her name because she would have to file FBAR disclosures as a minor.

Sen. Paul and the plaintiffs said that the FATCA, FBAR, and IGAs, treated American taxpayers living outside the U.S. differently than those living domestically. They claimed this was an unconstitutional violation of the 14th Amendment's Equal Protection Clause. Senator Paul also claimed that he had suffered a personal injury because the IGAs denied him the ability to regulate taxpayer penalties by voting on legislation.

The Foreign Accounting Tax Compliance Act (FATCA)

The Foreign Accounting Tax Compliance Act (FATCA) gives the IRS the authority to investigate and penalize tax evasion. It requires U.S. taxpayers with more than a certain threshold of assets overseas to disclose those assets on their tax returns. Since 2012, the Secretary of Treasury has been requiring disclosures from the following threshold amounts:

 

Year End Asset Value     

Anytime Maximum Asset Value

U.S. Resident    
Unmarried or filing separately      $50,000 $75,000
Married filing jointly $100,000 $150,000
Living Outside the U.S.    
Unmarried or filing separately    $200,000 $300,000
Married filing jointly $400,000 $600,000


The FATCA also gives the IRS authority to demand information from foreign financial institutions and impose a 30% pass-through penalty tax if they don't comply.

As a result, many foreign financial institutions have begun restricting or refusing services to U.S. citizens, rather than complying with the FATCA disclosures. Rand Paul and the plaintiffs said that this caused them harm personally and professionally. They alleged that they were denied mortgages and lost business as a result of their U.S. citizenship.

The 6th Circuit Court said none of the plaintiffs had standing to raise the claim. Only one of the plaintiffs had alleged ever exceeding the reporting thresholds. Nor did they manage to establish any harm caused by the government. The intervening actions of the foreign financial institutions to go above and beyond the law and eliminate U.S. account holders was a voluntary action that could not be legally tied to the FATCA.

As for the pass-through penalties paid by the foreign financial institutions, the Court said that the banks themselves, and not the plaintiffs, would be the ones with standing to challenge those taxes.

The Bank Secrecy Act and Financial Back Account Reports (FBARs)

The Bank Secrecy Act requires U.S. taxpayers with more than $10,000 in financial accounts overseas to file a Financial Bank Account Report (FBAR) with the Department of Treasury's Financial Crimes Enforcement Network (FinCEN 114). It applies to anyone with a financial interest in the accounts, including spouses who own joint accounts and grantors of foreign trust accounts. U.S. taxpayers who willfully fail to file this report can be charged up to half the value of the asset or $100,000, whichever is greater. Non-willful violations can result in a $10,000 penalty per violation.

While most plaintiffs did allege meeting the FBAR reporting threshold, the Court said they hadn't claimed any actual harm. The parties chose to separate the joint assets of spouses or not transfer assets to a minor child to avoid disclosing financial information. The Court said these choices were voluntary and did not legally relate back to the law.

It was not enough for the plaintiffs to say they were in violation of the law. To have standing to challenge the constitutionality of either the FATCA or FBAR penalties, the Court said that they would also need to establish either (1) that they had paid a penalty or (2) that an IRS investigation and prosecution was imminent.

The Senate and the Intergovernmental Agreements (IGAs)

In executing the FATCA and obtaining information from foreign financial institutions, the Department of Treasury entered into several intergovernmental agreements (IGAs) with foreign governments. In most cases, these agreements provided that the government itself would collect and forward the requested information to the IRS, rather than the banks doing so directly. In Israel's case, it also required certain local laws to be changed to allow the transfer.

These agreements were signed in 2014. However, delays in U.S. legislation meant that some IGAs could not be enforced until 2016. The IRS announced that it would not enforce the FATCA in any country with an IGA in place, even if it was not yet in force.

Senator Rand Paul alleged these IGAs violated his constitutional right as a senator to set the laws of the country. A similar lawsuit has succeeded in the past, where internal procedure nullified the vote of Michigan congressmen and women. However, in that case the legislator-plaintiffs were able to show that if their votes had counted the legislation would have been defeated. As a lone senator, Paul was unable to meet that threshold. He therefore did not have standing to challenge the Department of Treasury's contracts with the foreign entities.

The 6th Circuit Comments on FBAR / FATCA Penalties

The 6th Circuit Court of Appeals dismissed Sen. Paul's case challenging the FBAR and FATCA processes and penalties, but not without comment on the laws themselves. It concluded its opinion by calling the FATCA a "far-reaching" obligation that "undoubtedly exact[s] monetary and other costs of compliance." It called the IGAs an "unprecedented scheme" and FBAR willfulness penalties "admittedly steep." All this suggests that while Senator Rand Paul and his plaintiffs may not have had standing, another challenge to these reporting requirements could change the way the IRS does its job.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FATCA or FBAR requirements or penalties, contact Joe Viola to schedule a consultation.

Categories: FATCA, FBAR

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