Will an FBAR Lawsuit Stop IRS Interest Penalties?
Whenever the IRS issues an assessment, it starts a clock. Unless taxpayers work quickly to address the issue, they will begin to accrue penalties and interest on that assessment. But what happens if you take the IRS to court over improper FBAR penalties? Will an FBAR lawsuit stop IRS interest penalties?
Ruling Capping Penalties Didn’t End FBAR Lawsuit
Zvi Kaufman likely thought his battle with the IRS was over. A year ago, on January 11, 2021, the United States District Court for the District of Connecticut issued an opinion partially in his favor. The IRS had issued assessments against him on September 24, 2015, for failing to disclose his Israeli bank accounts. The IRS said he failed to file a report of his foreign bank accounts (FBAR) in 2008, 2009, and 2010. It assessed substantial penalties for what it labeled non-willful FBAR violations:
- $42,249 for 2008
- $42,287 for 2009
- $59,708 for 2010
However, those numbers were far above the $10,000 cap on non-willful FBAR penalties under the Bank Secrecy Act. When the government sued to collect those assessments, Kaufman’s tax attorney argued that they exceeded the statute.
The issue at that stage was something this blog has covered before: whether the IRS may assess non-willful penalties per year or per account not reported. The Connecticut court came down in favor of Mr. Kaufman. It limited the civil penalties for non-willful FBAR violations to $10,000 for each of the three years he failed to file the FBAR. That meant the total penalty the IRS could collect was reduced from more than $144,000 to $30,000.
Does an FBAR Lawsuit Stop IRS Interest Penalties?
Then the IRS sought a judgment for $41,137. The amount included $1,591 in pre-judgment interest and $9,547 in late-payment penalties. Kaufman objected again. He said the Court’s decision in the FBAR lawsuit should have stopped the IRS interest penalties. After all, the Court had said the maximum the IRS could collect was $30,000.
But that wasn’t exactly what the Court had ordered. The Court agreed with Kaufman that the civil penalties assessed under 31 U.S.C. § 5321(a)(5)(B)(i) of the Bank Secrecy Act were capped at $10,000. It did not limit all penalties the IRS could possibly apply. Pre-judgment interest and late-payment penalties were each based on separate sections of the Internal Revenue Code. The Court said:
It is a Kafkaesque proposition to suggest that the Court's determination that ‘the civil penalties for which Kaufman may be liable is capped at $30,000.00’ included the interest and penalties at issue here because the Court's holding was “without limitation as to the kind of civil penalties to which it referred.” (ECF No. 80 at 5.) The Court decided only the penalties available to the government under § 5321(a). The Government's entitlement to statutory interest or late payment penalties pursuant to §3717(a) and (e) was neither discussed nor determined. To suggest otherwise, as Kaufman does, is absurd.
The fact that the IRS assessed an incorrect amount did not stop it from applying interest and penalties on Kaufman’s non-payment. Those assessments were separate from the FBAR penalty itself.
When Do FBAR Interest and Penalties Start?
Kaufman argued that he could not have incurred interest and penalties because he did not receive a new notice with the new assessment amounts. However, the Court didn’t agree with that either. Interest under Section 3717(a) begins to accrue as soon as the notice of the amount due is mailed to the taxpayer. An FBAR penalty assesses “when a Penalty Assessment Certification (Form 13448) is signed by an authorized IRS employee” and the Bank Secrecy Act Examination office “sends the person assessed a Letter 3708 demanding payment.” Once the FBAR payment is 90 days late, penalties can begin 30 days after the Letter 3708 was mailed.
Mr. Kaufman was sent his letter on September 24, 2014. The fact that its assessment amount was incorrect did not change the date on which interest and penalties began to accrue. Instead, once the IRS corrected the assessment amount, it could calculate new penalties and interests based on the $30,000 cap on FBAR penalties due. Since the IRS did the math correctly, the Court entered the judgment for $41,137.
Filing an FBAR lawsuit won’t stop IRS interest and penalties unless the entire assessment is overturned. That is why it is important to consider every aspect of your case before filing. If you believe the amount of the assessment is incorrect, be sure to factor in the additional interest and penalties you may end up paying on the amount you believe to be legally correct, as well as the merits of your case, before taking the matter to court and allowing the interest and penalties to add up as your case makes its way through court.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing FBAR penalties and considering filing a lawsuit to challenge the assessment, contact Joe Viola to schedule a free consultation.