Taxation

Ca. Tax Lawyer Spring 2014, Volume 23, Number 1

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

By Robert Horwitz1

MCLE credit

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.

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