Where to File a FBAR Penalties Challenge
No one wants to pay penalties for failing to file reports on federal accounts. Even in spite of a tax attorney's best efforts, the IRS will sometimes issue FBAR penalties improperly. A recent federal District Court decision explains what U.S. taxpayers can do when that happens.
U.S. taxpayers with financial accounts oversees are required to report those assets and related income on their federal tax returns, and through Foreign Bank & Financial Account reports (FBAR) on form FinCEN Form 114. When they don't, the IRS is authorized to impose civil sanctions and even criminal penalties depending on whether the violation was willful or non-willful. However, penalties are not appropriate if a person can demonstrate he or she had reasonable cause for his or her failure to file FBARs.
Reasonable Cause Defense in Kentera v. United States
Milo and Lois Kentera were U.S. taxpayers. In 1984, Milo inherited a foreign bank account at Banque Cantonale de Geneve (BCGE). He added Lois's name to the account shortly thereafter. In 2007, Milo sold his parents' property in Montenegro and deposited the proceeds into the BCGE account.
The Kenteras had consistently disclosed the BCGE account on their federal income tax returns since 1984. But in 2006, 2007, 2008, and 2009, their accountant failed to file the necessary FBARs. In 2010, the Kenteras changed accountants and the new firm acknowledged the existence of the BCGE account, but again failed to file the FBAR. They argued that their failures to file FBARs were the fault of the accountants.
Voluntary Disclosure Can Still Result in FBAR Penalties
In September 2011, the Kenteras applied to the Offshore Voluntary Disclosure Initiative (OVDI). They amended their 2006-2010 tax returns and completed FBARs fro 2005-2010. After investigating the claim, in August 2013, the IRS disregarded their reasonable cause defense and indicated in a closing agreement that the taxpayers would be liable for over $90,000 in penalties. The Kenteras did not agree, and withdrew from the OVDI program. Then the IRS assessed non-willful FBAR penalties totaling $10,500 to Lois and $40,500 to Milo. These assessments were upheld in internal appeals determinations in April 2015.
Sovereign Immunity and FBAR Penalty Challenges
The Kenteras filed a lawsuit in the Federal District Court in the Eastern District of Wisconsin, challenging the FBAR penalties. The government asked for the case to be dismissed on the basis of sovereign immunity.
As a general rule, U.S. taxpayers may not sue the federal government unless some law explicitly waives sovereign immunity. The Administrative Procedures Act (APA) does just that, but only in certain cases. To use the APA, the case must:
- Seek some relief other than money damages based on a claim that an agency acted or failed to act in its official capacity or under apparent official capacity (called color of legal authority)
- Be based on a statute that authorizes review of an agency's action or where there is no other adequate remedy available in court.
The question for the court was whether the Kenteras' lawsuit met those two requirements. The judge said it did not.
The Court of Federal Claims and the Tucker Act
The court said that the Kenteras could not file their complaint under the APA's waiver of sovereign immunity because they had another way to bring their case in the Court of Federal Claims. The Kenteras' lawsuit was connected to the Bank Secrecy Act (BSA), which creates the FBAR requirements. While the BSA did not explicitly grant plaintiffs the right to sue, the court found that improper decisions under the statute resulted in "illegal exaction".
An illegal exaction happens when money is "improperly paid, exacted, or taken from the claimant" contrary to the Constitution or federal law, such as when taxes are improperly collected by the government. The Court of Federal Claims has jurisdiction over these illegal exaction claims if the tax or penalty is based on particular statutory power. That makes the BSA a "money-mandating" statute, where the necessary relief when the government violates the law is the return of unlawfully taken money.
The District Court and the Little Tucker Act
If the Kenteras did not want to use the Court of Federal Claims, the judge held that they could also bring their claim in District Court under the Little Tucker Act. This statute allows the District Court to rule on Tucker Act claims against the United States for $10,000 or less. That limit applies per claim, not per case. Because non-willful FBAR penalties are capped at $10,000, the Little Tucker Act would have allowed the District Court to rule on the Kenteras' claims under the BSA.
Plaintiffs suing under the Little Tucker Act can receive money damages, but not injunctive or declarative relief. In other words, the court can fix what was done wrong, but not tell the government to do it differently in the future. The Kenteras said this would cause them to have to pay penalties even if they won their case, but the court disagreed. It said that, under a legal theory called res judicata, if the plaintiffs were able to get even a partial refund of their FBAR penalties, the government could not continue to impose inappropriate penalties.
A Dismissal That Isn't a Total Loss
The bottom line of this admittedly technical analysis of the statutes involved is that the Kenteras could have filed their claim with the Court of Federal Claims under the Tucker Act or in the District Court under the Little Tucker Act. Because they had these options, they did not need to resort to the APA. That means that the government was immune to the lawsuit in the form it was filed.
However, this dismissal was not a total loss for the Kenteras or other U.S. taxpayers in their position. Instead, the opinion told the plaintiffs that they did have a forum to have their claim heard, they had simply filed it the wrong way. This is why it is so important to hire an experienced tax attorney if you are facing FBAR penalties. By selecting a lawyer who regularly deals with cases involving foreign accounts, you can make sure your lawsuit is filed right the first time.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding appeals of FBAR penalties, contact Joe Viola to schedule a consultation.