Can You Request a Collection Due Process Hearing on FBAR Collections?
The penalties imposed for failure to file a Foreign Bank Account Reporting form (FBAR) can be substantial. The IRS has many mechanisms to collect on those debts. If you have received a notice of collection efforts, can you request a collection due process hearing on FBAR collections? Or are there other methods you can use to contest the penalty?
What is a Collection Due Process Hearing?
The IRS has a lot of tools it can use to collect on unpaid tax debts. One method it can use is to impose a levy on funds the taxpayer is entitled to receive from the federal government, including Social Security benefits. However, it can’t just take your money unannounced.
Before the IRS can levy your assets or place a lien on your property, it must first issue a Notice of Intent to Levy which includes a notice of your right to a hearing. That hearing is called a “Collection Due Process (CDP) hearing.” You can request a Collection Due Process hearing by filing a request using Form 12153 with the IRS Independent Office of Appeals. At the CPD hearing, you will be given the opportunity to dispute the amount of taxes you owe and discuss alternatives to the collection methods the IRS has chosen. For example, you may be able to enter into an installment agreement, or an offer in compromise that will control when and how you can pay back what you owe.
Can You Request a Collection Due Process Hearing on FBAR Collections?
A recent opinion from the United States Tax Court, Jenner v IRS, examines the question of whether you can request a collection due process hearing on FBAR collections. The IRS had issued FBAR penalties against the petitioners in the case, Stephen and Judy Jenner for failing to file mandatory FBARs between 2005 and 2009. The Department of Treasury’s Bureau of Fiscal Service then sent notices to both Jenners saying it planned to withhold funds from their monthly Social Security benefits to pay the debts. The Jenners filed forms to request CDPs related to the debt, but the IRS said they could not request a collection due process hearing on FBAR collections. They sued the IRS arguing that the government had violated their right to due process.
The petitioners argued that there was no “rational distinction” between tax levies issued by the IRS and the collection of FBAR penalties by the same government agency. Since the IRS was attempting to impose a levy, they believed they were entitled to a collection due process hearing first.
But the Tax Court disagreed, calling the petitioners’ contentions “specious.” The statutes that grant taxpayers a right to a Collection Due Process hearing are sections 6320 and 6330. However, the Tax Court said that they only applied in cases “that [] relate to an unpaid tax.” It quoted an earlier decision, Williams v Commissioner, saying:
“The statutes creating the ‘collection due process’ procedures, and the statutes creating the lien and levy collection mechanisms reviewed by those procedures, all explicitly pertain to ‘tax’...”
FBAR penalties are not taxes, according to the Tax Court, because they are not imposed by the Internal Revenue Code under Title 26. Instead, they are a separate civil penalty under the Bank Secrecy Act. That law does not give taxpayers the right to request a Collection Due Process hearing on FBAR collections. Because of this, the Tax Court said the petitioners were not entitled to the hearing and dismissed the case.
Other Ways to Challenge Wrongfully Imposed FBAR Penalties
Even if you are not entitled to a Collection Due Process hearing, you can still contest a wrongfully imposed FBAR penalty. Unlike other tax issues, the FBAR statute does not authorize collections by a lien or levy. Instead, the IRS is supposed to file a civil suit against the taxpayer. The normal process requires the IRS to notify the taxpayer of an FBAR assessment. The taxpayer can then request an appeal with the IRS Independent Office of Appeals. This is similar, but not the same as a Collection Due Process hearing. If the IRS Office of Appeals agrees with the IRS that the FBAR penalty is appropriate, it will sustain the assessment.
Then, if you don’t pay the assessment on time, the IRS can file a lawsuit against you to collect the debt. In the resulting litigation, you can challenge the wrongfully imposed FBAR penalties, including any determination that your failure to file was willful or reckless, or that the amount was calculated incorrectly. If the IRS is taking too long to file suit, there are also several laws that allow taxpayers to sue the IRS directly for improper “fines, penalties, or forfeitures” including FBAR penalties. In either case, the decision about whether the FBAR penalty is correct will ultimately be made by a federal district court judge.
The Jenner case shows how important it is to work with a tax attorney familiar with FBAR procedures and proceedings if you receive a notice or assessment related to FBAR penalties. If you use the wrong procedure, such as requesting a collection due process hearing on FBAR penalties, it could cause you to lose your opportunity to dispute the debt.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about challenging FBAR penalties, contact Joe Viola to schedule a free consultation.
