How to Challenge a Penalty for Willful FBAR Violations
If you have been assessed a civil penalty for willful FBAR violations, you may be wondering whether the IRS has the final say. Find out how to challenge a penalty for willful FBAR violations, and how the courts will decide whether or not you have to pay.
The United States Third Circuit Court of Appeals recently decided Bedrosian vs. United States of America, in which a U.S. taxpayer challenged a penalty for willful FBAR violations using the U.S. federal district courts. The opinion raised the question of whether the district court had the authority to hear the case at all. That, in turn, raises the issue of how to challenge a penalty for willful FBAR violations.
What is the Penalty for Willful FBAR Violations?
The Bank Secrecy Act of 1970 and the Secretary of the Treasury require U.S. taxpayers to report foreign financial accounts with a balance over $10,000. These FBAR reports must be filed every year, and must disclose each account held by the taxpayer. If a U.S. taxpayer fails to file FBAR reports, the IRS may impose a civil penalty of up to $10,000 for non-willful violations or up to $100,000 or 50% of the balance of the unreported accounts for willful violations.
These civil penalties for willful FBAR violations can be devastating to the taxpayer. By challenging the penalty, taxpayers can sometimes ask the courts to determine their violation was non-willful, or even that the penalty was improperly assessed in the first place. However, the way to challenge a penalty for willful FBAR violations can be confusing. It is best to consult with a tax attorney familiar with foreign financial disclosures early -- even before the penalty for willful FBAR violations is assessed.
Do You Have to Pay the Penalty for Willful FBAR Violations Before You Challenge Them?
There is a general rule in federal tax penalty cases, which are generally outside the jurisdiction of the taxpayer-friendly U.S. Tax Court: “pay first and litigate later.” For taxpayers facing a penalty for willful FBAR violations, that means they will generally have to put forward the entire FBAR penalty first. Then, after filing an administrative claim for a refund with the IRS, they can file a complaint in the U.S. District Court or the U.S. Court of Federal Claims, asking the court to decide if the penalty is valid. If the taxpayer wins in court, the IRS must pay him or her back for the improper assessment.
But Arthur Bedrosian didn’t do that. Bedrosian was a successful pharmaceutical business owner who opened a savings account in Switzerland in 1973. Over the years, he used that account first to make purchases overseas, then as a savings account, and eventually as an investment account. When he hired a new accountant in 2007, that accountant told him about the potential of penalties for willful FBAR violations. While Bedrosian, his accountant, and his tax attorney worked to file the missing reports, the IRS levied a penalty for willful FBAR violations in the amount of $975,789 -- 50% of the balance of the undisclosed account. Rather than paying first and litigating later, Bedrosian paid 1% of the penalty ($9,757.89) and then filed a complaint in the Federal District Court to get it back. The U.S. government filed a counter-complaint asking for the court to make Bedrosian pay the remaining 99% of the penalty.
Court Considers Whether Taxpayers Must Pay First
The Third Circuit Court of Appeals noted that in “most cases involving the IRS’s assessment of a civil FBAR penalty  the IRS files suit to recover the penalty”. That makes the taxpayer the defendant and gives the Federal Court of Claims the power to enforce or set aside the assessment. However, in this case Bedrosian filed his complaint under the “Little Tucker Act” which gives courts power to decide certain claims up to $10,000 based on “an Act of Congress”.
The court said the Little Tucker Act wouldn’t apply in this case, because another statute -- the tax refund statute -- controls challenges to a penalty for willful FBAR violations. That statute would have required Bedrosian to pay the entire penalty before heading to court. However, in this case, the IRS fixed any problem with how the case was filed when it filed its counter-complaint. That meant even if the District Court wouldn’t have had jurisdiction over Bedrosian’s partial payment, it did have the ability to rule on the enforcement of an IRS assessment of FBAR penalties.
Circuit Court Says Reckless Violations Count in Civil FBAR Cases
The Third Circuit also considered whether Bedrosian willfully violated the FBAR reporting requirements. In a first-of-its-kind decision, the Circuit Court said that in reviewing IRS willful FBAR determinations, a federal district court must apply the civil willfulness standard. This includes “both knowing and reckless conduct”. In other words, it wasn’t enough for the court to find Bedrosian’s actions were “intentional, knowing, or voluntary, as distinguished from accidental”. The court also needed to determine whether, as a U.S. taxpayer, Bedrosian recklessly created “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” For taxpayers with FBAR filing requirements that means that
- The taxpayer clearly ought to have known he or she was required to file
- There was a grave risk that the filing requirement would not be met
- The taxpayer could have very easily found out about the filing requirement
Sometimes figuring out how to challenge a penalty for FBAR violations can be just as confusing as the challenge itself. By getting the advice of a skilled tax attorney early in the process, you can be sure your case will not be dismissed because you filed it the wrong way.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding how to challenge a penalty for willful FBAR violations, contact Joe Viola to schedule a free consultation.