Lesson From The Tax Court: FBAR Penalties Are Not Tax Penalties ... Thank Goodness

We often talk about “the IRS” as if it were a person (or animal!).  Or we talk about the “Treasury Department” doing this or that.  But agencies are legal fictions.  They do not exist.  The actual work is done by actual people.  Thus when you read statutes that Congress writes, you see that Congress generally grants powers not to the agency but instead to just a single person, generally “the Secretary” of a department.  That person then delegates the powers to other specific categories of people within the relevant agency.  And those folks often then re-delegate their powers to yet other groups of folks.  It's a trail of delegations.

Specifically, Congress empowers one single person, the Secretary of the Treasury, to perform a lot of functions.  Some of those functions are assessing and collecting internal revenue taxes.  Others involve matters about the federal government’s finances and budget.  The Secretary has delegated to IRS officials the responsibly for assessing and collecting taxes.  But the Secretary has also delegated to the same folks the responsibility for assessing and collection certain non-tax liabilities, such as the penalty for failing to submit a proper Report of Foreign Bank and Financial Accounts (FBAR).

All of this leads to the lesson we learn in Stephen C. Jenner and Judy A Jenner v. Commissioner, 163 T.C. No. 7 (Oct. 22, 2024) (Judge Foley): just because the IRS assesses and collects a liability does not make it a tax liability. The Jenners were assessed a penalty for their failure to submit a proper FBAR.  Under its delegated authority, the IRS then sought to administratively collect the penalties by offsetting part of the Jenners’ Social Security payments through the Treasury Offset Program.  The Jenners sought a Collection Due Process (CDP) hearing.  Both the IRS and the Tax Court said they were not entitled to a CDP hearing because FBAR penalties are not taxes.  There are other reasons why CDP does not apply, but the Court did not get into those.

The bad news from this case is taxpayers like the Jenners have no recourse to the Tax Court to contest an FBAR penalty because … it’s not a tax!  The good news, however, is that the same taxpayers certainly do have the ability to obtain judicial review without having to fully pay the asserted penalty because … it’s not a tax! 

Details below the fold. 

Background: Walking The Delegation Trail
Whenever someone at the IRS does something, they must have authority to do it.  Congress certainly has not given “the IRS” authority to do anything.  Go read title 28 of the United States Code and you will see, repeatedly, that Congress gives all the power and responsibility to someone called “the Secretary.”  That single person to do an amazingly broad array of tasks related to the collection of internal revenue taxes, including income taxes, various excise taxes, gift taxes and the estate tax.  Generally the Secretary has delegated those statutory powers to the Commissioner of Internal Revenue who, in turn, redelegates the powers to various IRS employees.  You find all those delegations collected in the Internal Revenue Manual (IRM) 1.2.2, that is: Part 1 (Organization , Finance, and Management); Chapter 2 (Service-wide Policies and Authorities); Section 2 (Service-wide Delegations of Authority).  Note: whenever the IRS reorganizes, it is useful to review the delegation orders to make sure they have been properly revised to reflect the organizational changes.

Congress has also loaded the Secretary of Treasury with many more responsibilities than just tax collection.  Go read title 31 of the United States Code and you will see, repeatedly, that “the Secretary” is charged (and empowered) to deal with all sorts of other matters involving money, the federal budget, and the management of the federal government’s finances.

So it is in title 31 of the United States Code—and not title 26—that Congress tells “the Secretary” to collect information about the foreign financial holdings of certain groups of people. Specifically, 31 U.S.C. §5314 provides that “the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.”  The statute goes on to empower the Secretary of Treasury to issue regulations.

You find those regulations in 31 CFR Subpart C - Subpart C (“Reports Required To Be Made”).  Among the reports required to be made are the FBARs, as described in 31 CFR 1010.350 (“Reports of foreign financial accounts”).

To enforce this reporting requirement, 31 U.S.C. §5321 authorizes, again, “the Secretary” to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.”  And, again, the regulations delegate that authority to the Commissioner of IRS. 31 CFR 1010.810(g).

The penalty amount for non-willful violations is a flat $10,000 per violation.  The Supreme Court has recently interpreted that to mean a maximum of $10,000 per FBAR because the “statutory obligation is binary.  Either one files a report in the way and to the extent the Secretary prescribes, or one does not.”  Bittner v. United States, 598 U.S. 85 (2023) (internal quote marks omitted).

Taxpayers make their FBAR reports on Form 114 and submit them electronically to the Financial Crimes Enforcement Network (FinCEN), which is an organization within the Department of Treasury,  just like the IRS.  Only FinCEN is much smaller!  It has only about 300 employees, according to its website.

The relative size may be part of why the Secretary of Treasury has delegated power to enforce the FBAR reporting requirement to the Commissioner of the IRS who has re-delegated them to various IRS employees.  See IRM 1.2.2.15.13.  To help monitor FBAR reporting, the IRS requires taxpayers to disclose their FBAR reporting requirement on various tax reporting forms, such as Schedule B (question 7a) on the famous Form 1040.

Assessing the FBAR penalty is straightforward.  If and when the IRS detects a violation of the FBAR reporting requirements, it has authority to assess the penalty, but again that authority trickles down the delegation trail from title 31, specifically §5321.  Details on how the IRS performs the assessment function are found in IRM 4.26.17.

Collecting the FBAR penalty is not so straightforward, precisely because the IRS does not treat it as a tax.  The IRS has more limited authority to collect non-tax debts than it has to collect taxes.  To collect taxes, title 26 creates a lien in favor of the government (§6321) and gives the IRS the ability to seize any property or rights to property of the taxpayer (§6331).  Actually, again, the statutes give authority to “the Secretary” who has then delegated that authority to the Commissioner who has redelegated it to various IRS personnel, see IRM 1.2.2.6.3 (11-08-2007).

To collect non-tax debts, the IRS generally has two options: First, it can refer the debt to the Department of Justice to file a collection suit.  This first option is sometimes problematic.  First, the Department of Justice is not always willing or able to file collection actions.  Second, even when it acts, it can take years to get a final judgment that can be collected.  During those years the debtors do not fear the reaper.  Those years give debtors time to engage in “asset protection” measures to defeat collection.  An example is United States v. Brandt, 2018 WL 1121466 (S.D. Fla. 2018) (sorry, I can find no free link).  There Mr. Brandt failed to file FBARS in 2006 and it took until 2018 for the U.S. to even secure a default judgment against him.  Sure, it’s a judgment for over $3 million, but that delay gave Mr. Bandt, who lived in Switzerland, about a dozen years to protect his assets from eventual collection.  For a more recent example, see United States v. Koluk, 2024 WL 4373414 (S.D. Fla. 2024) (another default judgment granted, in 2024, for FBAR penalties related to years 2016, 2017 and 2018).

The second collection option for the IRS is offset.  The IRS has a statutory power only to offset tax liabilities.  §6402.  However, the federal government also has a common law power to offset non-tax debts owed to the federal government against payment obligations owed by the government to the debtor.  See In re Chateaugay Corp. 94 F.3d 772 (2nd Cir. 1996) (IRS has common law right to offset non-tax debts against tax refunds).  To collect non-tax debts the government uses the Treasury Offset Program, managed by a different part of the Treasury Department, the Bureau of Fiscal Services (BFS). After sending notice of the FBAR penalty assessment and the amount due to the person against whom the assessment was made, the IRS refers FBAR penalty assessments to the BFS. See IRM 4.26.17.4.4(3), (6), and (7); see also 31 U.S.C. §3711(g)(1) and (4)

We can learn how all of this works together in today’s Lesson From The Tax Court.

Facts
Mr. and Ms. Jenner failed to comply with their FBAR reporting requirements between 2006 and 2009.  Judge Foley’s opinion is silent on when the IRS assessed the FBAR penalties or in what amount.  So we do not know that information.  Apparently between 2009 and 2022 nothing happened to collect those penalties.  The Jenners did not fear the reaper.

What we do know is that in November of 2022 each of the Jenners received a letter from the Bureau of Fiscal Services telling them that “funds may be withheld from your social security benefit payment” through the Treasury Offset Program to pay the FBAR penalties.  So now the Jenners had something to be collected.  They feared the reaper.

In response to these letters the Jenners inexplicably attempted to request a Collection Due Process hearing.  I say “inexplicably” for reasons I will explain below.  The IRS sent them a letter explaining why they were not entitled to a CDP hearing and in response they, again inexplicably, petitioned the Tax Court, represented by the indefatigable Steve Mather.

Lesson: IRS Involvement Does Not Make FBAR Penalties Taxes.
The Jenners’ argument on why they were entitled to a CDP hearing stood on two shaky legs.  First, they had to argue that the SSA offsets were really levies.  Remember that CDP rights are triggered only when the IRS either proposed to levy a taxpayer’s assets (§6330) or files a Notice of Federal Tax Lien (§6320).  Accordingly Mr. Mather’s brief attempted to characterize the letters from the Bureau of Fiscal Services as proposals to “levy” the Jenners’ SSA payments.

The second leg of their argument was that the FBAR penalties were taxes.  Again, when you read the CDP provisions, you see they are triggered only when the taxpayer wants to dispute the collection of “an unpaid tax.”  §6330(a)(3).

Judge Foley does not address the first leg of the argument, aside from calling it "specious."  It's not, actually, although it is extraordinarily weak.  When I was in Chief Counsel we had robust debates about whether the collection of payments that another component owed a taxpayer who owed taxes were offsets or levies.  We eventually concluded they were offsets but the matter was not entirely free from doubt.

Judge Foley, however does not need to address the levy argument because he cuts off the second leg of the argument, teaching us our lesson: FBAR penalties are not taxes subject to the CDP rules.

“A necessary component of any determination made pursuant to section 6330 is that it relate to an unpaid tax. We have previously explained that the tax making up the underlying liability is the amount a taxpayer owes pursuant to the tax laws that are the subject of the Commissioner’s collection activities. 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’”

“Because FBAR penalties are not imposed pursuant to Title 26, they “are not subject to the various statutory cross-references that equate 'penalties' with 'taxes.'” In addition, nothing in 31 U.S.C. §5321(a) provides that an FBAR penalty is deemed a tax or that it is required to be assessed or collected “in the same manner as a tax.”

Op. at 4-5 (citations omitted).

Comment 1:  Inexplicable!
While our lesson is seemingly bad news for the Jenners, it may actually be good for most taxpayers that FBAR penalties are not taxes.  Two reasons.  First, it means the IRS cannot use its lien and levy powers to administratively collect.  So the IRS cannot seize their bank accounts, or investment accounts, or property!  As I explain above, the IRS has only two collection options: filing suit (if it can convince the Department of Justice to do so), or offset.

It's the second reason why today’s lesson is potentially good news, however, that makes me confused on why attorney Mr. Mather attempted to invoke CDP rights for the Jenners: they have a perfectly good route to judicial review through the U.S. Court of Federal Claims.  Even better, such a suit is not subject to any full-payment rule!

The Tucker Act, 28 U.S.C. §1491 gives the Court of Federal Claims jurisdiction “to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” In other words, as the former Claims Court put it, the Court has jurisdiction over any complaint from a citizen that the federal government has their money in its pocket and needs to give it back.  The seminal case remains Eastport S.S. Corp. v. United States, 372 F.2d 1002 (1967).

As I read Mr. Mather’s brief, the basis for the Jenner’s complaint is that the IRS missed the limitation period for assessing the FBAR penalties.  After that period had expired, the IRS somehow persuaded the Jenners to sign retroactive consents extending the limitation period, seemingly as a condition to participate in the offshore voluntary disclosure program (“OVDP”).  When that process failed, the taxpayers apparently wanted to contest the validity of their consents.  That seems the basis for their assertion that the FBAR assessment was really a FUBAR assessment.

They can do that in Court of Federal Claims!  Other folks have done exactly that.  An example is Jarnagin v. United States, 134 Fed.Cl. 368 (Ct. Fed. Claims 2017).  There, the Jarnagins claimed the FBAR penalty assessment was unlawful because they had reasonable cause for failing to file an FBAR and the IRS misapplied the statute in finding otherwise. The Court of Federal Claims held that “because the Jarnagins claim that the penalty was exacted in contravention of that statute, the Jarnagins' claim is one for an illegal exaction and the Court has subject matter jurisdiction over it.”

But wait, it gets better!  If FBAR penalties were taxes, then the Jenners would have to fully pay the assessment and make an administrative claim for refund before they could sue.  Flora v. United States, 357 U.S. 63 (1958).  But they don’t have to do any of that when suing on a non-tax claim in the Court of Federal Claims.  They can just pay a little bit of the penalty (which apparently they have been doing through the SSA offsets) and just go directly to the Court of Federal Claims to challenge what they will claim is an illegal exaction.

Again, taxpayers have done exactly that.  In Mendu v. United States, 153 Fed.Cl. 357 (2021), Mr. Mendu was assessed an FBAR penalty of over $750,000.  He paid $1,000 and filed suit in Court of Federal Claims.  Naturally the government counter-claimed for the unpaid penalty but the critical lesson is that the Court held that because the FBAR penalties were not taxes, then the Flora full payment rule did not apply and the Court had jurisdiction over Plaintiff’s claim (and the counterclaim).  But you do need to be careful what you ask for.  Apparently, Mr. Mendu changed his mind about wanting judicial review and tried to voluntarily dismiss his case after the government counterclaimed.  That’s how the issue arose.  Too late!

So why on earth would the Jenners attempt to invoke CDP rights when they could simply file suit in Court of Federal Claims?  Inexplicable!  Actually, there may be a good reason that I simply cannot see and I would welcome any thought readers might have on the subject.  It might be for the same reason Mr. Mendu tried to scramble out of court: once the government counterclaims then he would have a judgment against him and the government could now collect that judgment by levy as well as set-off.  So if the Jenners had a really, really weak argument on the merits, then perhaps they would want to avoid giving the government the opportunity to obtain a judgment against them.

I note that the limitation period for bringing a Tucker Act claim is six years from the date the claim first arises.  28 U.S.C. §2401.  If that date is in February of 2022, then the Jenners still have time, despite wasting some 16 months in Tax Court (they filed their petition on June 5, 2023, the government moved to dismiss on July 19, 2023 and the Court issued its decision on October 22, 2024).

Comment 2: More Good News!
Another reason why the Jenners might be happy to have lost (!) is that since FBAR penalties are not taxes, they do not count towards passport restrictions.  That is, as another method to encourage payment of tax debts, Congress has authorized the Department of State to withhold passport approval or renewal when the IRS sends a notice that a taxpayer has a “seriously delinquent tax debt.” §7345(b)(1).  For details see Lesson From The Tax Court: The Limited Review Of Passport Revocation Certifications, TaxProf Blog (Feb. 21, 2023).

But the IRS takes the position that FBAR penalties do not count towards determining whether a taxpayer has a “seriously delinquent tax debt.” Chief Counsel Notice 2018-005 (Apr. 5, 2018) (and neither do criminal restitution or past-due support payments).

Comment 3:  Some Non-Tax Penalties Are Subject to CDP Rules
As the government points out in its brief, Congress often delegates responsibility to the IRS to assess or collect other liabilities that are not taxes.  In such cases, however, Congress often explicitly provides that such liabilities are to be assessed and collected as if they were taxes.  The government’s brief gives as examples, the power to assess and collect past-due child support, §6305(a), and the power to assess and collect criminal restitution obligations, §6201(a)(4).  Notice those amounts do not count for passport revocation, even though they are treated as taxes for CDP purposes.  And, of course, there are all those assessable penalties (47 of them?) listed in Chapter 68, Subchapter B, which §6671 says are to be assessed and collected in the same manner as tax and explicitly directs that “any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.”

Bottom line: FBAR penalties are not tax penalties and are not collected like taxes.  While that shuts off the CDP route to judicial review, it really may not be such bad news because when one door closes another opens, here the door to the Court of Federal Claims. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return on the first Monday of each month (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.

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