Tuesday, May 11, 2021

Ct of Claims - FBAR Penalties Are Not A Tax Subject To The Full-Payment Rule

The Court of Federal Claims has held that penalties assessed for failure to file a Report of Foreign Bank and Financial Accounts (FBAR or FinCEN Form 114) are not internal revenue taxes subject to the full-payment requirement.

The Bank Secrecy Act (BSA) requires "United States persons" who have relationships with foreign financial agencies to disclose these relationships to the U.S. Department of Treasury (Treasury Department) on an FBAR. (31 U.S.C. §5314(a); 31 CFR §1010.350Civil money penalties may be imposed under the BSA on any person who fails to file a required FBAR. The Treasury Department may sue for collection of the penalty. (31 U.S.C. § 5321)

Although the BSA is in title 31 of the U.S. Code, the authority to enforce 31 U.S.C. §5314 and collect FBAR penalties under 31 U.S.C. § 5321 has been delegated to IRS. (31 CFR § 1010.810(g))

The Court of Federal Claims has jurisdiction in any civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, any penalty claimed to have been collected without authority, or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws (28 U.S.C. § 1346(a)(1))

Courts lack jurisdiction of suits for refund of income tax unless the taxpayer has paid the entire amount of the assessment against it. (Flora v. United States (S Ct 1960) 5 AFTR 2d 1046(S Ct 1958) 1 AFTR 2d 1925)

The Court of Appeals for the Third Circuit has stated in a footnote that it was "inclined to believe" that FBAR penalties are internal revenue taxes within the scope of 28 U.S.C. § 1346(a)(1), and are therefore subject to the Flora full payment rule. (Bedrosian v. U.S. (CA 3) 122 AFTR 2d 2018-7052)

In this case the IRS assessed a $752,920 penalty against Raghuveer Mendu for failing to file an FBAR with respect to foreign bank accounts that he had signatory authority over.

Mendu made a $1,000 partial payment against this penalty and filed suit in the Court of Federal Claims, alleging that the FBAR penalty assessed against him was erroneous and resulted in an illegal exaction of his $1,000 partial payment.

The government filed a counterclaim seeking payment of the entire FBAR penalty plus interest.

Mendu then filed a motion to dismiss his own claim, contending that the Court of Federal Claims lacked jurisdiction over it because the full-payment rule applied.

The Court of Federal Claims stated that the structure of the BSA indicated that the FBAR was not an internal revenue tax, as it was part of Title 31 of the United States Code ("Money and Finance"), not the Internal Revenue Code in Title 26. Congress's placement of FBAR penalties outside Title 26 means that they are not subject to various cross-references that equate penalties contained in Title 26 with taxes. The court noted that both Mendu and the government acknowledged they were unable to find any example of a penalty outside the Code that was subject to the Flora full-payment rule.

The Court of Federal Claims said that the Third Circuit's footnote in Bedrosian was unpersuasive. Jurisdiction was not at issue in Bedrosian, the Third Circuit dealt with the full-payment issue in a cursory fashion, and it said it left a definitive holding on the issue for another day.

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