Summer of Norman, Wadhan, Colliot: Defending Title 31 FBAR ... · IRM 4.26.1.1(3) (05 -23-2014) • The mission of the BSA Program is to safeguard the financial system from the abuses

Summer of Norman, Wadhan, Colliot: Defending Title 31 FBAR penalties: Pre and Post-

Assessment, IRS & DOJ Policies and Strategy

November 1, 2018

Caroline D. Ciraolo Kostelanetz & Fink, LLP

Washington, DC

Robert S. Horwitz Hochman Salkin Toscher & Perez PC

Beverly Hills, CA

Patrick W. Martin Procopio et al. LLP

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This presentation and the views expressed therein reflect the unofficial, individual views of the individual speakers.

Disclaimer

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Title 31 – Bank Secrecy Act

• Congressional intent behind the various anti-money laundering statutes, as stated in 31 USC 5311, is to “require certain reports or records where they have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.” IRM 4.26.1.1(3) (05-23-2014)

• The mission of the BSA Program is to safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity by providing the financial community top quality service to help them understand their obligations under the BSA and to ensure BSA compliance with integrity and fairness to all. IRM 4.26.1.1.1 (01-06-2016)

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Title 31 – Bank Secrecy Act • FBAR requirement and penalty originate in the BSA requiring “certain

reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” 31 USC § 5311; U.S. v. Chabot, 793 F.3d 338, 344 (3d Cir. 2015) (government agencies use information secured by the BSA “for tax collection, development of monetary policy, and conducting intelligence activities”)

• Among the issues Congress sought to address in the BSA were “[s]ecret foreign financial facilities” that offered the wealthy a “convenient avenue of tax evasion.” H.R. Rep. No. 91-975 at 13 (1970), reprinted in 1971-1 C.B. 559, 561

• In 2001, Congress required Treasury to study FBAR compliance. In response to Treasury’s findings that there may be hundreds of thousands of taxpayers still hiding assets offshore to avoid tax, Congress increased the willful FBAR penalties.

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Report of Foreign Bank & Financial Accounts

• 31 USC 5314(a) – Filing Requirement - 31 CFR 1010.350

• 31 USC 5321(a) – Penalties for violations (before Federal Civil Penalties Inflation Adjustment Act of 1990, 28 USC 2461, 31 CFR 1010.821)

• Negligence (only against financial institutions, nonfinancial trades or business) – penalty not to exceed $500 - 31 USC 5321(a)(6), 31 CFR 1010.820(h)

• Pattern of negligent activity – (only against businesses and penalty not to exceed $50,000 - 31 USC 5321(a)(6)(B)

• Nonwillful – penalty not to exceed $10,000 - 31 USC 5321(a)(5)(B)(i)

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• Negligence (only against financial institutions, nonfinancial trades or business) – penalty not to exceed $500 - 31 USC 5321(a)(6), 31 CFR 1010.820(h)

• Pattern of negligent activity – (only against businesses and penalty not to exceed $50,000 - 31 USC 5321(a)(6)(B)

• Reasonable cause is a defense if amount of transaction or balance in account was properly reported - 31 USC 5321(a)(5)(B))(ii)

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• Willful – penalty not to exceed greater of $100,000 or 50% of balance in account at the time of the violation - 31 USC 5321(a)(5)(C) and (D)

• Civil penalty can be imposed notwithstanding that a criminal penalty is imposed for the same violation – 31 USC 5321(d)

• 31 CFR 1010.820 addresses civil penalties for violations of the BSA reporting and recordkeeping requirements

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Who has an FBAR Reporting Obligation?

• United States Citizen (“USC”) and “Lawful Permanent Residents” (“LPRs”) residing outside the United States?

• Threshold analysis for all cases (with broad definitions in Title 31 Regulations) -

• Is there a “financial interest in” [including deemeed “financial interest in” or

• “signature authority over”

• any “financial account” in a foreign country . . .

• If the aggregate value of the accounts exceed US$10,000 at any time during the calendar year?

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Who has an FBAR Reporting Obligation? • Definition of “financial account” includes

• life insurance contracts with a cash surrender value [31 CFR1010.350(c)(3)(ii)

• policy holder of life insurance contract is responsible for reporting See FinCEN comments to 31 CFR 1010.350(c)(3).

• Annuity contracts [31 CFR1010.350(c)(3)(ii).]

• Is a foreign pension plan a “financial account”?

• Regulations do not explicitly provide they are –

• However, by implication, . . . (?) as participants and beneficiaries in retirement plans under IRC 401(a), 403(a) or 403(b) that have a foreign financial account are NOT required to file an FBAR [31 CFR1010.350(g)(4)]

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Who has an FBAR Reporting Obligation? • “financial interest in” includes “deemed” ownership -

» Owner of record or holder of legal title [31 CFR1010.350(c)(1)]

» Person acting as agent, nominee on behalf of the USP [31 CFR1010.350(c)(2)(i)]

» A corporation, partnership, or any other entity in which a USP owns directly or indirectly more than 50% of the shares/capital/profits interests or assets (voting/value) [31 CFR1010.350(c)(2)(ii)]

» A trust if the USP is the trust grantor and has an ownership interest under the “grantor trust” rules of IRC 671-679 [31 CFR1010.350(c)(2)(iii)]

• To determine if an individual has signature authority over an account is to determine whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of the assets in the account. [FinCEN comments Section II.B]

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• FBAR 2011 Regulations defines a person subject to FBAR reporting generally to be a “United States Person” (“USP”) as similarly defined with Title 26

• [31 CFR1010.350(b)] • United States Citizen (“USC”) is always a USP under 26 USC

7701(a)(30)(A) and expressly defined in • 31 CFR1010.350(b)(1)

• “Lawful Permanent Residents” (“LPRs”) residing outside the

United States may be a USP – but not always

• YES – if 26 USC 7701(b)(1)(A)(i) is applicable

• NO– if 26 USC 7701(b)(6) flush language – “timing issues galore”

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Who has an FBAR Reporting Obligation? • United States Citizen (“USC”) not always easy to know -

• USCs (including dual citizens) residing outside of the U.S. must file FBARs for their bank and financial accounts outside the U.S. [31 CFR 1010.350(b)(1) and U.S. Cons. Amend. XIV]

• Under the 14th Amendment of the U.S. Constitution, “all persons born or naturalized in the United States … are citizens of the United States.”

• Persons born outside of United States where one or more parents are USCs may be a USC at birth depending on number of factors. INA 301; 8 USC 1401.

• Example: Dual national Mexican and USC residing in Mexico with bank accounts in Zürich, Mexico City and Toronto is subject to reporting requirements re: her Swiss, Canadian and Mexican accounts.

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• “Lawful Permanent Residents” (“LPRs”) residing outside the United States may be a USP –

• NO– if 26 USC 7701(b)(6) flush language is applicable–

• “An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.

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• “Lawful Permanent Residents” (“LPRs”) residing outside the United States may be a USP –

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• “Lawful Permanent Residents” (“LPRs”) residing outside the United States may be a USP – • Carla, a Mexican citizen holds a green card and has never filed I-

407, Record of Abandonment of Lawful Permanent Resident Status and resides 310 days each year in Mexico.

• Carla has bank accounts in Mexico and Canada. Under the U.S. - Mexico Article 4 of the income tax treaty Carla is deemed to be a non‐resident for U.S. income tax purposes. She filed IRS Form 1040NR along with the Treaty position IRS Form 8833 notifying the Treasury and did not waive the benefits of the treaty (and files as a Mexican income tax resident)

• She is no longer a “lawful permanent resident” as defined in Title 26 and hence not a USP and therefore not subject to FBAR filings

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Who has an FBAR Reporting Obligation? • “Lawful Permanent Residents” (“LPRs”) residing outside the United States

may be a USP –

• YES –if 26 USC 7701(b)(6) flush language is NOT applicable–

• Why? If a non-USC with LPR (that has not been formally abandoned with I-407) permanently leaves U.S. and takes up permanent residency in a country different from U.S., they will no longer have lawful privilege of returning and residing permanently in the U.S. per Title 8; but they will retain their “USP” status for purposes of Title 31 Regulations

• Are Regulations valid if the LPR has no right to live or return to the U.S. – but still an FBAR filing requirement?

• Example: LPR residing in Brazil (no income tax treaty with Brazil), with accounts in Brazil, Mexico and Panama are subject to FBAR reporting requirements of her Brazilian, Mexican and Panamanian accounts.

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How to File?

https://bsaefiling.fincen.treas.gov/NoRegFilePDFIndividualFBAR.html

https://bsaefiling.fincen.treas.gov/NoReg

FBARFiler.html

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https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

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Authority to Assess FBAR Penalties • IRS is authorized to assess FBAR penalties, Delegation Order

25-13, 31 CFR 1010.810(g), but not to collect. IRM 5.21.6.4(2) (11-27-2013)

• Upon assessment, IRS makes notice and demand for payment by sending Letter 3708 via certified mail to taxpayer and POA. IRM 4.26.17.4.4(4)(05-05-2008)

• Interest does not accrue until assessment and due only if not paid within 30 days. IRM 8.11.6.1(12) (02-02-2015); 31 CFR 5.5(a), (b)

• 6% delinquency penalty on amount unpaid 90 days after assessment. 31 USC 3717; IRM 4.26.17.4.3(6) (05-05-2008)

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Authority to Assess FBAR Penalties

• At least 60 days before referring an assessed FBAR penalty to Bureau of Fiscal Services for collection, IRS sends notice to the debtor with: (i) the nature, amount and facts giving rise to the debt; (ii) how and when interest, penalties and costs are added; (iii) opportunity to discuss alternative payment arrangements; (iv) deadline to avoid enforcement (offset, private collection agency, credit bureau, admin. wage garnishment, litigation, referral to BFS); (v) right to inspect and copy records; (vi) right to/process for review/hearing and stay admin wage garnishment; and (vii) other rights and consequences of nonpayment. 31 CFR 5.9(b)

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Pursuit of Foreign Accounts and Assets 2003 – 2008 Offshore Compliance Programs – Mitigation Provisions

March – Oct 2009 Offshore Voluntary Disclosure Program – FAQ 9, 10

February – Sept 2011 Offshore Voluntary Disclosure Initiative – FAQ 17, 18

January 2012 – June 2014 OVDP

June 2012 Non-resident filing procedures (IR 2012-65)

August 2013 Swiss Bank Program (App. period 08.01.2008 – 12.31.2014)

June 2014 OVDP, Streamlined, Delinquent International Returns

May 2015 IRS Interim Guidance: Agents using “best judgment” (50% willful, $10,000 non-willful/open year)

March 2018 IRS announces end of OVDP

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VOLUNTARY DISCLOSURES

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Results of OVDP/OVDI

Date Disclosures Tax, “Penalties”

Jan 2012 33,000 $4.4 billion

June 2012 34,000 $5 billion

June 2014 45,000 $6.5 billion

Oct 2016 55,800 $9.9 billion

Mar 2018 56,000+ $11.1 billion

Date Disclosures Tax, Penalties Oct 2016 48,000 streamlined ($450 million)

Early 2018 65,000+ streamlined ---

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• Delinquent International Information Return Filing Procedures - File delinquent returns with Reasonable Cause statement and certification that entities were not engaged in tax evasion

• Delinquent FBAR Submission Procedures - delinquent FBARs, statement explaining noncompliance, no penalty if all income reported and tax paid

Remaining Offshore Initiatives

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• Streamlined Domestic Offshore Filing Procedures - 3 years of amended tax returns; 6 years of FBARs; 5% miscellaneous “high balance” penalty; certification

• Streamlined Foreign Offshore Filing Procedures - 3 years of tax returns; 6 years of FBARs; certification; pay full tax and interest due; no penalty

Remaining Offshore Initiatives

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AUDITS AND ADMINISTRATIVE APPEALS

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After the IRS proposes an FBAR penalty, the person can appeal to IRS Office of Appeals

In a pre-assessment appeal, the Office of Appeals can compromise a penalty without DOJ approval. IRM 8.20.7.32.3 (10-03-14)

In a post-assessment appeal, the Office of Appeals cannot compromise a penalty of more than $100,000 (excluding interest) without DOJ approval because an assessed FBAR penalty is a claim of the U.S. Government. 31 USC 3711(a)(2); 31 CFR 902.1

Pre-Litigation Compromise

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FBAR LITIGATION

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U.S. Tax Court does not have jurisdiction over an FBAR penalty since it is not assessed under Title 26 and is not subject to deficiency procedures. Williams v. Commissioner, 131 T.C. 54 (2008)

Since the FBAR penalty is not assessed under Title 26, CDP procedures do not apply.

Suits regarding FBAR Penalties

USTC Jurisdiction?

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• To collect an FBAR penalty, the United States must file a complaint in a U.S. district court. 28 USC 1345

• Venue for recovery of a pecuniary penalty is in district where the penalty “accrues” or where the defendant is found. 28 USC 1395

• Suit to collect must be brought within 2 years of the later of assessment or date of final criminal judgment involving penalty. 31 USC 5321(b)(2).

• 2-year period for government to counterclaim to collect FBAR penalty may be tolled if suit to recover payment is filed before 2-year period expires. Burlington Industries Inc. v Milliken & Co., 690 F.2d 380, 389 (4th Cir. 1982) (filing suit tolls limitations for compulsory counterclaim)

• 31 USC 5321 does not require a written waiver of limitations before expiration of limitations period; in non-tax context, limitations is an affirmative defense that can be waived if not asserted in the pleadings.

Government Suits to Collect FBAR Penalties

Jurisdiction, Venue & Limitations

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Taxpayer can pay some of the FBAR penalty OR wait until government collects by administrative means (e.g., offsets) and then file a refund suit

The full payment rule of Flora v. U.S., 362 U.S. 145 (1958) does not apply because the FBAR penalty is not assessed or collected under the internal revenue laws. Greene v. U.S., 124 Fed. Cl. 636, 641 (2015) (illegal exaction claim does not require full payment)

Then, file a suit for money damages under: Tucker Act (28 USC 1491) in the U.S. Court of Federal Claims.

Norman v. U.S., 126 Fed. Cl. 277 (2017), or Little Tucker Act (28 USC 1346(a)(2)) (for claims not exceeding

$10,000) in U.S. District Court or U.S. Court of Federal Claims Claims over $10,000 in U.S. District Court? 18 USC 1355(a)

Taxpayer Suits to Challenge FBAR Penalties

Jurisdiction

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Tucker Act and Little Tucker Act waive sovereign immunity for claims for money damages against the U.S. for “illegal exaction,” defined as money improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.” Norman v. U.S., 429 F3d 1081, 1095 (Fed. Cir. 2005)

A cause of action in a Tucker Act suit accrues as soon as all events have occurred that are necessary to enable plaintiff to bring suit; in other words, “when all events have occurred to fix the government's alleged liability, entitling claimant to demand payment and sue for his money.” Martinez v. U.S., 333 F.3d 1295 (Fed. Cir. 2003)


Tucker & Little Tucker Act

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Taxpayer has 6 years after “claim first accrues”’ to file suit under the Tucker Act in the U.S. Court of Federal Claims. See 28 USC 2501.

Taxpayer has 6 years after “the right of action first accrues” to file suit under the Little Tucker Act in either U.S. Court of Federal Claims or U.S. District Court. See 28 USC 2401(a).

No right to jury trial in the U.S. Court of Federal Claims, and no right to jury trial for an action to recover money from the United States in the U.S. District Court, except in tax refund suits. 28 USC 2402.

Right to jury trial in an action brought by United States to impose a civil penalty. Tull v. U.S., 481 U.S. 412 (1987) (right to jury trial in suit by government to assess penalties under Clean Water Act)

If government sues or countersues to collect the FBAR penalty in the U.S. District Court, the taxpayer has the right to demand trial by jury.


Limitations & Jury Trial

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U.S. Department of Justice FBAR Litigation

2014 13 cases

2016 30 cases

2017 66 cases

FBAR Penalty Cases Filed by U.S. and Taxpayer

Through September 9, 2018 – 55 cases

2015 22 cases

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• A complaint or counterclaim must allege every element needed to establish that the party is entitled to the relief requested

• Where Government fails to plead facts sufficient to show willfulness, complaint can be dismissed (with leave to amend). U.S. v. Pomerantz, 2017 WL 2483213 (WD WA)

• Any affirmative defense must be raised in the answer or it is deemed waived

Challenges to Amount of Willful Penalty

Pleadings

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Reasonable cause exception does not apply to willful penalties. 31 USC 5321(a)(1)(C)(ii)

Not defined in the Bank Secrecy Act or its regulations.

IRS uses Treas. Reg. 1.6664-4 as guidance to determine whether reasonable cause exists. IRM 4.26.16.3.1

Jarnigin v. U.S., 134 Fed. Cl. 368 (2017) - Husband and wife challenged previously assessed and collected penalties, but failed to successfully assert a reasonable cause defense (applying reasonable cause standards of 26 USC 6651)


Reasonable Cause

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Treas. Reg. 301.6651-1(c)(1) • “If the taxpayer exercised ordinary business care and prudence

and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause.”

• “A failure to pay will be considered to be due to reasonable cause to the extent the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship... if he paid on the due date.”


Reasonable Cause

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Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that he or she exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law. IRM 20.1.1.3.2.2(1)


Reasonable Cause – Ordinary Business Care

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The taxpayer’s explanation, compliance history, the length of time between the noncompliance and subsequent compliance, and any circumstances beyond the taxpayer’s control

IRM 20.1.1.3.2.2


Reasonable Cause – General Factors

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If the taxpayer was unable to obtain records necessary to comply with a tax obligation, taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if taxpayer exercised ordinary business care and prudence, but due to circumstances beyond taxpayer’s control, he or she was unable to comply. IRM 20.1.1.3.2.2.3

For failure to file foreign information returns, the IRS warns that not having access to records or information is not reasonable cause: “[i]t is not reasonable or prudent for taxpayers to have no knowledge of, or to solely rely on others for, international transactions.” IRM 20.1.9.1.1(4)


Reasonable Cause – Inability to Obtain Records

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Reasonable cause may be established if taxpayer shows ignorance of the law in conjunction with other facts and circumstances: • Taxpayer’s education. • If taxpayer has previously been subject to the tax. • If taxpayer has been penalized before. • If there were recent changes in the tax forms or law which a taxpayer

could not reasonably be expected to know. • The level of complexity of a tax or compliance issue. IRM 20.1.1.3.2.2.6 Reasonable cause due to ignorance of the law if: • A reasonable, good faith effort was made to comply with the law, or • The taxpayer was unaware of a requirement and could not reasonably

be expected to know of the requirement. IRM 20.1.1.3.2.2.6


Reasonable Cause – Ignorance of the Law

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U.S. v. Boyle, 469 U.S. 241 (1985) – Executor of estate hired a lawyer to handle the estate and file Form 706. Executor had no experience with estate tax. Executor called lawyer several times to determine if return was filed. Despite assuring the executor that it would be taken care of, the lawyer failed to file on time. Court states in dicta: “When an accountant or an attorney advises a taxpayer on a matter of law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” “ By contrast, one does not have to be a tax expert to know that returns have fixed filing deadlines and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common but that reliance cannot function as a substitute for compliance with an unambiguous statute…such reliance is not reasonable cause for a late filing penalty under 6651(a)(1).”


Reasonable Cause – Reliance

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Neonatology Associates, P.A. v. Commissioner, 229 F.3d 221 (3d Cir. 2002) – Advisor was a competent professional with sufficient expertise to justify reliance. Taxpayer provided necessary and accurate information and relied in good faith on advisor’s judgement. • Advice must take into account all relevant facts and circumstances,

including taxpayer’s sophistication. Treas. Reg. § 1.6664-4(c)(1)(i). • Advice must relate the law to facts and circumstances, taking into account,

among other things, taxpayer’s motives for entering the transaction. Treas. Reg. § 1.6664-4(c)(1)(ii).

• Advice must not be based on unreasonable factual or legal assumptions and must not unreasonably rely on taxpayer’s or any other person’s representations, statements, findings, or agreements. Treas. Reg. § 1.6664-4(c)(1)(iii).

• Advice must not rely upon invalidity of a regulation without disclosing such position. Treas. Reg. § 1.6664-4(c)(1)(iv)

Challenges to Amount of Willful Penalty Reasonable Cause – Reliance

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• Reliance on advice of tax professional a defense that may negate willfulness. Bedrosian v. U.S., 2017 WL 4946433 (ED PA)


Reasonable Cause – Reliance

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IRS can prove a failure to timely file a FBAR by a preponderance of the evidence rather than by clear and convincing evidence U.S. v. Garrity, 304 F.Supp.3d 267, 270-21 (D Conn. 2018); Bedrosian v. U.S., 2017 WL 4946433 (ED PA); U.S. v. Bohanec, 263 F.Supp.3d 881 (CD CA 2016); U.S. v. McBride, 908 F.Supp.2d 1186, 1201 (D Utah 2012); U.S. v. Williams, 2010 WL 3473311 (ED VA), rev'd on other grounds, U.S. v. Williams, 489 Fed.App’x 655 (4th Cir. 2012).


Willfulness

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• Willfulness for purposes of Bank Secrecy Act requires a “voluntary violation of a known legal duty.” Ratzlaf v U.S., 510 US 135, 142 (1994) (criminal prosecution for structuring)

• Willfulness can be inferred based on a person’s conduct, including conscious avoidance - U.S. v Sturman, 951 F.2d 1466 (6th Cir. 1991) (circumstantial evidence, including reading Schedule B to Form 1040 but not attempting to learn of FBAR reporting requirements, supported conviction for criminal FBAR violation).

• Willfulness can be established by willful blindness or reckless conduct - U.S. v. Garrity, supra; U.S. v. Williams, supra; U.S. v. Kelley-Hunter, 281 F.Supp.3d 121 (D DC 2017); U.S. v. Katwyk, 2017 WL 6021420 (CD CA); Bedrosian v. U.S., supra; U.S. v. Bohanec, supra; U.S. v. Bussell, 2015 WL 9957826 (CD CA 2015); U.S. v. McBride, supra.


Willfulness

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• Use of a bank secrecy jurisdiction • Motivation to hide from spouse or partner • Failure to pay tax on the corpus or income • Numbered account or pseudonym • Use of entities or structures • Hold mail • Move the account • Use of cash or debit card • Use of other non-reportable assets • Failure to tell accountant or other advisor • Failure to check the box


Indicia of Willfulness

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Does a taxpayer’s signature on a return constitute prima facie evidence that he knew the Schedule B questions about foreign accounts and that put him on notice to inquire about FBAR filing requirements?

U.S. v. Williams, 489 Fed.App’x 655 (4th Cir. 2012) – YES

U.S. v. McBride, 908 F.Supp.2d 1186 (D Utah 2012) – YES

U.S. v. Flume, 2018 WL 4378161 (SD TX 2018) – NO Bedrosian v. U.S., 2017 WL 4946433 (E.D.PA) - Reliance on advice of tax professional a defense that may negate willfulness.


Willfulness

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• Since 31 USC 5321 and 5322 were enacted at same time, shouldn’t they be read in pari materia and the Ratzlaf definition of willful apply to civil FBAR penalties?

• Virtually identical definitions of “willful” applies to both civil and criminal trust fund cases. U.S. v. Easterday, 594 F.3d 1004 (9th Cir. 2009) (criminal trust fund prosecution defining willful as a voluntary, intentional violation of a known legal duty) and Phillips v U.S., 73 F.3d 939, 942 (9th Cir. 1996) (civil trust fund penalty case defining willful as “voluntary, conscious and intentional” preference of other creditors over government).


Willfulness

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• Are the courts in FBAR cases correctly applying the correct standard for “reckless” and “conscious disregard”? See Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007) (recklessness requires “an unjustifiably high risk of harm that is either known or so obvious that it should be known. … It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law.”); Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769-770 (2011) (“a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” Deliberate indifference is insufficient to establish that the person acted knowingly or willfully.)


Willfulness

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United States v. Colliot - Taxpayer successfully argued that FBAR penalties are capped by treasury regulations at $100,000. United States v. Colliot, 2018 WL 2271381 (W.D. TX) (NOTE: This approach could result in willful penalties greater than 50% for persons with multiple unreported smaller accounts)

United States v. Wadhan - The Court built upon the holding in Colliot to find that FBAR penalties are capped at $100,000. United States v. Wadhan, --- F.Supp.3d ---- 2018 WL 3454973 (D. Colo. 2018).

Norman v. United States - The Court rejected Colliot, holding that the 2004 amendments to the Bank Secrecy Act superseded the regulations, as Congress’s intent to increase FBAR penalties was clear. Norman v. United States, 138 Fed. Cl. 189 (July 31, 2018).


Cap on FBAR Penalty Amount

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• Under statute, assessments can be made for every year for which there is a violation

• IRS policy where penalties may be assessed for multiple years is generally not to assess willful penalties for more than 100 percent of the highest balance in the accounts. SBSE-04-0515-0025.

• Statute penalizes any violation of the FBAR requirements: If FBAR is filed and there are multiple accounts that are not

accurately reported how many penalties can be assessed? If FBAR is not filed, is there one violation or multiple

violations?


How Many Assessments Can Be Made?

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The statute has no reference to “per violation” – (A)Penalty authorized.—The Secretary of the Treasury

may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty - (i)In general.—Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000 [31 USC 5321(a)(5)(B)(i)]



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https://www.law.cornell.edu/definitions/uscode.php?width=840&height=800&iframe=true&def_id=31-USC-1264422296-746653741&term_occur=168&term_src=title:31:subtitle:IV:chapter:53:subchapter:II:section:5321

The statute has no reference to “per violation” – IRM, Penalty for Nonwillful FBAR Violations, creates the

term – “per violation” – and now practitioners regularly parrot this term referencing each account not reflected on an FBAR as a “violation”– . . . penalty, not to exceed $10,000 per violation, may be

imposed . . . IRM 4.26.16.6.4 Same IRM discusses “per violation” in FBAR Penalty

Mitigation Guidelines - Per Person Per Year



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Kentera v. U.S., 2017 WL 401228 (ED WI): Suit filed challenging FBAR penalty pre-payment. “APA provides a waiver of sovereign immunity when two prerequisites are met. First, the action in question must ‘see[k] relief other than money damages and stat[e] a claim that an agency or an officer or employee thereof acted or failed to act in an official capacity or under color of legal authority.’ See 5 USC 702. Second, the plaintiff must show that (1) review of the agency action in question is authorized by a substantive statute or (2) review is made of a ‘final agency action for which there is no other adequate remedy in a court.’ 5 USC 704”

Court found no waiver and no jurisdiction because Kenteras have adequate remedies - pay some of the penalties, file a refund suit, and raise reasonable cause defense, or assert reasonable cause defense in suit to collect

APA challenge to assessment as arbitrary and capricious can be raised in refund suit or suit to collect if IRS cannot produce contemporaneous evidence showing a rational basis for determination. Moore v U.S., 2015 WL 1510007 (WD WA)


Administrative Procedure Act

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• Bussell v. U.S., 2015 WL 9957826 (C.D. CA 2015) - Supreme Court declined to review Ninth Circuit decision affirming district court's grant of summary judgment to government and upheld $1.2M FBAR penalty

• Bussell argued that FBAR penalty violates the Eighth Amendment excessive fines clause and that government improperly used information obtained under Swiss-U.S. tax treaty


Eighth Amendment – Excessive Fines

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• FBAR penalty cannot be discharged in bankruptcy. 11 USC 523(a)(7) (non-tax fines, penalties and forfeitures are exempt from discharge); U.S. v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008)

• A debtor against whom an FBAR penalty has been assessed can litigate the merits of the Government’s claim through either an objection to claim or an adversary proceeding


Bankruptcy

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FBAR COLLECTIONS – ADMINISTRATIVE

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Transfer to Bureau of Fiscal Service • BFS was established in 2012 after consolidation of Financial

Management Service and Bureau of Public Debt. See Treasury Order 136-01 (Pub. Date: May 14, 2013)

• IRS sends information to BFS, responsible for collecting all non-tax debts including FBAR penalties. IRM 5.21.6.7 (02-18-2016); 31 USC 3711(g)(4) (IRS may refer nontax claim to debt collection center (BFS), private collection contractor, or DOJ)

• IRS will transfer eligible non-tax debt more than 120 days delinquent to BFS for debt collection services (known as “cross-servicing) and administrative offset. 31 USC 3711(g); 31 CFR 5.4(a)(7), 5.9, 5.10, 285.5(a), and 285.12(c); see also 31 USC 3716(c)(6)

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Transfer to Bureau of Fiscal Service • For accounting and reporting purposes, the debt remains on

the books and records of the agency that transferred the debt to BFS.

• BFS was established in 2012 after consolidation of Financial Management Service and Bureau of Public Debt. See Treasury Order 136-01 (Pub. Date: May 14, 2013)

• IRS sends information to BFS, responsible for collecting all non-tax debts including FBAR penalties. IRM 5.21.6.7 (02-18-2016); 31 USC 3711(g)(4) (IRS may refer nontax claim to debt collection center (BFS), private collection contractor, or DOJ)

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Transfer to Bureau of Fiscal Service • IRS sends information to BFS, responsible for collecting all

non-tax debts including FBAR penalties. IRM 5.21.6.7 (02-18-2016); 31 USC 3711(g)(4) (IRS may refer nontax claim to debt collection center (BFS), private collection contractor, or DOJ)

• IRS will transfer eligible non-tax debt more than 120 days delinquent to BFS for debt collection services (known as “cross-servicing) and administrative offset. 31 USC 3711(g); 31 CFR 5.4(a)(7), 5.9, 5.10, 285.5(a), and 285.12(c); see also 31 USC 3716(c)(6)

• For accounting and reporting purposes, the debt remains on the books and records of the agency that transferred the debt to BFS.

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Transfer to Bureau of Fiscal Service • Under 31 CFR 285.12(d), no mandatory transfer to BFS for cross-

servicing if the debt is:

• In litigation or foreclosure, or scheduled for sale • At a private collection contractor, or debt collection center • Collected by internal offset (full collection expected in 3 yrs) • Covered by an exemption

• Upon referral, BFS must take appropriate action to collect or compromise the debt (or suspend or terminate collection action) in accordance with any requirements and authorities applicable to the debt and collection action to be taken. 31 CFR 5.9 and 285.12(b); 31 USC 3711(g)(9) (government must take all appropriate steps to collect)

• “Appropriate action includes, but is not limited to, contact with the debtor, referral of the debt to the Treasury Offset Program, private collection agencies or the Department of Justice, reporting of the debt to credit bureaus, and administrative wage garnishment.” 31 CFR 5.9

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Statutes of Limitations on Federal Debt Collection

• There is no statute of limitations for collection using administrative offset or administrative collection tools. 31 USC 3716 (e)(1) (“Notwithstanding any other provision of law, regulation, or administrative limitation, no limitation on the period within which an offset may be initiated or taken pursuant to this section shall be effective.”); 31 CFR 285.5(d)(3)(v) (“Debts may be collected irrespective of the amount of time the debt has been outstanding.”); IRM 8.11.6.3.1.1 (11-13-2014).

• The government has two (2) years to file a civil action to recover an

FBAR penalty beginning on the later date penalty was assessed or date any judgment becomes final in a criminal action involving the same transaction that resulted in the penalty. IRM 5.21.6.6 (02-18-2016); IRM 8.11.6.3.1.1 (11-13-2014)

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Collection Alternatives & The Authority to Compromise

• Treasury entities may accept payment of debt in regular installments. 31 CFR 5.6; 31 CFR 901.8 (generally focused on full payment within 3 years)

• Treasury entities may compromise debt in accordance with 31 CFR 902. See Treasury Directive 34-02 (Credit Management and Debt Collection); 31 CFR 5.7

• Assessed FBAR penalties in excess of $100,000 cannot be compromised without DOJ approval. 31 USC 3711(a)(2), 31 CFR 902.1(a),(b); IRM 8.11.6.1(6) (02-02-2015)

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Collection Tools Intro to Administrative Offsets

• Although the IRS does not have the power to collect, the IRM directs taxpayers who have questions or need to pay an FBAR penalty to write to: IRS, Detroit Federal Building, POB 33115, Detroit, MI 48232. IRM 5.21.6.7 (02-18-2016)

• Administrative offset used only after an attempt to collect the amount owed from the debtor directly under 31 USC 3711(a) and debtor is given notice and opportunities under 31 USC 3716(a).

• At least 60 days before referring FBAR penalty to TOP, IRS sends notice debtor (31 CFR 5.10(a)(2)) (same notice required under 31 CFR 5.9(b) before sending to BFS)

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• If centralized administrative offset is not available or appropriate, the government may collect debts using non-centralized administrative offset. 31 CFR 5.10 (and non-centralized offset can occur in conjunction with administrative offset – for example, SSA offsets a social security payment to collect overpayment of social security)

• Federal payments eligible for offset include tax refunds, salary, travel advances, reimbursements, retirement and vendor payments, and Social Security and other benefit payments. 31 CFR 285.5(e)(1)

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• Federal agencies compare payment records with records of debts submitted to BFS for collection by administrative offset. A match occurs when TIN and name of payee are the same as TIN and name of debtor on debt record. 31 CFR 285.4(c)

• Debt collection procedures may be used separately or in conjunction with offset collection procedures. 31 CFR 285.2(b)(5)

• Disbursing official conducting offset will notify debtor of any offsets.

• The creditor agency must notify BFS immediately of any payments credited by the agency to the debtor’s account (other than those received by offset) after a debt is submitted to BFS. 31 CFR 285.7(d)(5)

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Collection Tools Exemptions from Administrative Offsets

• Federal benefit programs that statutorily proscribe levy of benefits are subject to administrative offset unless there is a statutory proscription against offset. 31 USC 3716(c)(3)(A)(i); 31 CFR 285.5(e)(2)(v). Only benefit explicitly exempt from offset is payable under Higher Education Act of 1965. 31 USC 3716(c)(1)(C)

• Treasury further exempts (1) Black Lung Benefits Act Part C or RRB tier 2 benefit payments, (2) payments under US tariff laws, (3) VA benefit payments to extent exempt from offset under 38 USC 5301, (4) payments under Title IV of the Higher Education Act of 1965, and (5) federal loan payments other than travel advances. 31 CFR 285.5(e)(2)

• First $9,000 debtor receives in 12-month period under Social Security Act, part B of Black Lung Benefits Act, or any law administered by the Railroad Retirement Board, is exempt. 31 USC 3716(c)(3)(A)(ii)

• Treasury may exempt payments under means-tested or other programs where justification is provided by the head of the respective agency. 31 USC 3716(c)(3)(B); 31 CFR 285.5 (e)(7)

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Collection Tools Administrative Offsets: Tax Refunds

• For tax refund offsets (as well as other types of debts), the creditor agency must certify that (31 USC 3720A(b); 31 CFR 285.2(d)):

• Debt is at least $25, past-due, and legally enforceable • Collections will be applied to debt • Reasonable efforts made to obtain payment (unique to tax refunds) • Debtor notified that debt is past due, and unless repaid within 60 days,

will be referred to BFS • Debtor given at least 60 days to prove all/part of debt is not past-

due/legally enforceable, evidence considered, agency disagreed • Debtor has 30 days from determination to request review by the

creditor agency unless debtor has been afforded that opportunity prior to referral to BFS

• With joint tax returns where only one spouse is liable, non-liable spouse may secure their share of a tax refund. 31 CFR 285.2(f)

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Collection Tools Administrative Offsets: Federal Benefit Payments

• BFS can offset covered benefit payments including amounts payable under SSA (other than SSI payments), part B of the Black Lung Benefits Act, or any law administered by Railroad Retirement Board (other than tier 2 benefits). 31 CFR 285.4(c)

• Before offsetting a covered benefit payment, disbursing official shall notify payee in writing of offset date. 31 CFR 285.4(f)

• Notice shall include type of payment to be offset, identity of creditor agency, and contact point within the creditor agency

• Non-receipt by debtor of notice does not impair legality of offset

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Collection Tools Administrative Offsets: Federal Benefit Payments

• Offsets of covered benefit payments are subject to limitations. 31 CFR 285.4(e) The amount offset from a monthly covered benefit payment will be the lesser of:

• Amount of debt with interest, penalties and costs; • 15% of the monthly covered benefit payment; or • Amount by which monthly covered benefit exceeds $750

• Creditor agencies may collect any debt through federal salary

offset. 5 USC 5514(a)(1); 31 CFR 5.12; 31 CFR 285.7

• “Centralized salary offset” is conducted via centralized salary offset computer matching. 31 CFR 285.7(a)

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Collection Tools Administrative Offsets: Federal Salary Payments

• Salary deductions are made from a federal employee’s basic pay, special pay, incentive pay, retired pay, retainer pay or other authorized pay from federal employment. 5 USC 5514(a)(1); 31 CFR 5.12; 31 CFR 285.7(d)(3)(iii)

• Government may withhold up to 15% of the debtor’s disposable pay, meaning the wages remaining after legally-mandated withholdings are deducted. 5 USC 5514(a)(1)-(5)(A); 31 CFR 5.12(g)(3); 31 CFR 285.7(g)

• Before offsetting a salary payment, the disbursing official shall notify the federal employee in writing of the start date and amount of the deductions. 31 CFR 285.7(i)(1)

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Collection Tools Administrative Offsets: Federal Salary Payments

• After each offset, disbursing official shall notify federal employee in writing that an offset has occurred including a description and amount of offset, as well as identity of creditor agency and contact at agency who will address concerns unless information previously provided. 31 CFR 285.7(i)(2)

• Disbursing official will advise each creditor agency of the names, mailing addresses, and TINs of the debtors from whom amounts of past-due, legally enforceable debt were collected and of the amounts collected. 31 CFR 285.7(i)(3)

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Collection Tools Other Than Offset Administrative Wage Garnishments

• U.S. government may garnish wages of non-government employees to collect any debt. 31 USC 3720D(a); 31 CFR 285.11(d). Treasury entities may use administrative wage garnishment to collect delinquent Treasury debt unless debtor is making timely payments under installment agreement. 31 CFR 5.13(a) (ref 31 CFR 5.6)

• At least 30 days before garnishment (31 CFR 285.11(e), 31 CFR 5.13 (ref 31 CFR 5.4)), the agency (or BFS) shall notify debtor in writing:

• Nature and amount of the debt

• Intent to initiate proceedings to collect through deductions from pay until debt is satisfied

• Explanation of rights (right to inspect/copy agency records, enter into repayment agreement, and hearing on existence or amount of debt, or the terms of proposed repayment schedule)

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• Debtor must file written request for hearing (31 CFR 285.11(f)) • The hearing may be oral (in-person or by phone) or written • If received within 15 business days of mailing notice,

withholding order will not be issued until hearing held and decision rendered

• Late requests will result in hearing but withholding order will be issued unless agency determines that delay due to factors beyond debtor’s control or believes that delay is justified

• Agency has burden to prove existence and amount of debt; debtor must prove by preponderance that debt does not exist, amount is incorrect, repayment schedule is unlawful, or financial hardship

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• Hearing official shall issue a written opinion not later than 60 days after request for hearing; if agency cannot meet this deadline, any withholding order must be suspended until a decision is rendered

• The decision will be a final agency action for purposes of judicial review under the Administrative Procedures Act

• Agency will send a withholding order to the debtor’s employer:

• Within 30 days after debtor fails to make timely request for hearing, or

• If timely request for hearing is made, within 30 days after a final decision is made, or

• As soon as reasonably possible thereafter

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• Withholding order shall contain signature (or image of signature) of head of agency or delegate and only information necessary for employer to comply (name, address, SSN, and instructions)

• Garnished amount is lesser of (31 USC 3720D(a); 31 CFR 285.11(i):

• Amount on garnishment order up to 15% of disposable pay, or • Amount in 15 USC 1673(a)(2) (restriction on garnishment) – the

amount by which disposable pay exceeds amount equivalent to 30 times minimum wage

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• Government may not garnish wages if debtor is involuntarily separated from employment until debtor has been reemployed continuously for at least 12 months. 31 CFR 285.11(j)

• In the case of financial hardship, the agency must decrease amount garnished to reflect the debtor’s financial condition. 31 CFR 285.11(k)

• Employer liable for failure to comply with withholding order (amount withheld, attorneys’ fees, costs, and, in the court’s discretion, punitive damages)

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Collection Tools Other Than Offset Private Collection Agencies

• Government may also contract with a third party for collection services to recover any debt owed to the U.S. 31 USC 3718(a); 31 CFR 5.15; 31 CFR 285.12(c)(2)

• BFS maintains a list of approved private collection agencies

• A debt collection contract may provide for a fee payable to the collection agent from the amount recovered. 31 USC 3718(d)

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Collection Tools Other Than Offset Consumer Reporting Agencies

• Delinquent debts are reported to credit bureaus pursuant to 31 USC 3711(e), 31 CFR 901.4, 31 CFR 285.12(c)(2) and 31 CFR 5.14

• The government must send notice to the debtor at least 60 days prior to reporting a delinquent debt to a consumer reporting agency. 31 CFR 5.14, 5.4

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Post-Judgment Proceedings • A judgment in favor of the United States creates a lien in favor of

the United States upon filing of a certified copy of the abstract of judgment. 28 USC 3201(a).

• The lien lasts for 20 years and can be renewed for an additional 20 years. 28 USC 3201(c).

• A defendant against whom the United States has a judgment lien cannot receive any grants or loans made, insured or financed by the United States. 28 USC 3201(e).

• United States can execute judgment against the judgment debtor’s real and personal property and obtain a writ of garnishment. 28 USC 3201(f), 3202, 3203, 3205.

• United States can use discovery tools to locate assets of a judgment debtor.

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CURRENT ISSUES AND BEST PRACTICES

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• Interviews • Due diligence and more due

diligence • Payment • FOIA requests • Treaty request documents • Tolling provisions

Current Issues and Best Practices

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Thank you!!

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Summer of Norman, Wadhan, Colliot: Defending Title 31 FBAR ... · IRM 4.26.1.1(3) (05 -23-2014) • The mission of the BSA Program is to safeguard the financial system from the abuses

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