Self-Study Article: Litigating the FBAR Penalty in District Court and the Court of Federal Claims

By Robert Horwitz¹

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As a result of a campaign by the Internal Revenue Service ("IRS") against taxpayers who hide assets overseas and fail to report income from offshore accounts, the long-dormant Report of Foreign Bank and Financial Accounts ("FBAR") penalty has become a potent weapon in the IRS’s arsenal. IRS agents examining taxpayers who made quiet disclosures or failed to report income from offshore accounts have been told to be "aggressive,"² leading to the assertion of one or more 50% willfulness penalties under 31 USC §5321(a)(5)(C).³

The only reported decisions in which the courts reached the merits of an FBAR penalty assessment have been ones brought in district courts by the Government to reduce a penalty assessment to judgment.⁴ The Tax Court has held it has no jurisdiction over the FBAR penalty.⁵ A bankruptcy court held that an FBAR penalty could not be discharged in bankruptcy.⁶ Several articles have been written about the litigation of the FBAR penalty, focusing on the published decisions.⁷ This could lead one to conclude that a person against whom an FBAR penalty has been assessed cannot file a lawsuit to seek a judicial determination of his or her liability for the penalty. In the author’s view, such a belief is wrong. Under both the Tucker Act and the Little Tucker Act, the Court of Federal Claims and federal district courts, respectively, have jurisdiction over a cause of action for illegal exaction brought by a person who has paid only a portion of an FBAR penalty assessment.