Tuesday, April 2, 2013

FBAR Penalty Collection -- Beyond the Collection Suit, Administrative Offsets Loom Large and Long (4/2/13; Updated 4/10/13)


A reader named Researcher made a cogent comment the other day that I think is worthy of elevating to a full blog.  Researcher's comment is quoted in full below and may be viewed in the context in which made here.  The context for the comment was the IRM provision, as currently offered on the web, that the IRS has 10 years to collect the FBAR by administrative offset.  The IRM provision is  (11-01-2011), titled FBAR Penalty Statute of Limitations on Collection, here.

Researcher's comment is as follows:
I do not think the 10 year limit on administrative offset payments is valid any more. This is what I found in the law for offsets: 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. 
I think there WAS a 10 year limit on collection via offset, but Congress removed that limit in 2008 or 2009. I think this provision applies to ALL undischarged federal debt for which the 10 year limit had not expired at the time of enactment. (So much for the contention by 'Guest' that it is scaremongering to be concerned about retroactive changes of the law by Congress). Although the IRM section you reference postdates this statute, it probably hasn't been updated and the 10 year limit on collection is not valid any more. 
Now, its easy to avoid getting tax refunds by adjusting withholding, but most people do expect to get Social Security payments (and possibly other federal benefits) in their lifetime. A federal debt that never expires, and moreover accrues interest could easily wipe out a significant chunk of an expected SS pension (although a basic SS amount could still be paid out even under offset). Equally, there is the possibility of such a debt being reported to credit agencies, which could impact a person's credit and mortgage rates etc.
Section 31 USC 3716 is here; subsection (e)(1) is indeed as quoted by Researcher.

Researcher's comment focused my attention on this issue for the first time.  I had accepted the IRM 10-year statement without further ado.  So, I did some more research and, fortunately, found the person who, at least outside the IRS, is the universe's leading expert on the subject -- Caroline Ciraolo, here, of Rosenberg, Martin & Greenberg, Baltimore, Maryland.  Bottom line, Caroline confirms Research's reading of Section 3716(e); she informally also confirmed that the IRS is aware of the error in the IRM.  And, not only that, Caroline has gotten deep into the weeds on this subject.  She has graciously consented to my posting a link to her pdf of a powerpoint presentation titled "Collection of the FBAR Penalty," which may be viewed or downloaded here.  This version of the presentation is dated March 30, 2013.  I understand that she may be updating this presentation in the future, so hopefully she will also permit me to post or link to the updates.  Caroline is the go-to  authority on this subject.

For the definitive statement as of now, I refer you to Caroline's presentation.  However, I do offer the following which is a high level summary I have just included as revisions to my Federal Tax Crimes and Federal Tax Procedure books.\
The FBAR civil penalty statute of limitations is six years for the assessment.n443  After timely assessment, Treasury has two enforced collection procedures.  First, Treasury may sue for collection, provided it brings suit within two years of the later of date of assessment or the date the person was convicted of an FBAR violation.n444  If Treasury obtains a judgment in that suit, Treasury will then have the judgment remedies applying to judgments generally.  Second, under its general statutory authority to offset debts owed by a person to a Government agency against debts any Government agency owes that person, Treasury may offset against a person’s FBAR liability against payments the person is otherwise due from the federal government.n445  For example, the Treasury can offset refunds due the taxpayer against the FBAR liability.n446  Government claims subject to right of offset have no statute of limitations, even if it has a statute of limitations for any other collection measure.n447
  n443 31 U.S.C. § 5321(b)(1).
  n444 31 U.S.C. § 5321(b)(2).
  n445 31 U.S.C. § 3711(g)(9).  FBAR penalties constitute debts owed to federal agency. 31 U.S.C. § 3701(b)(1)(F) (2001) (debts include “any fines or penalties assessed by an agency”);see also United States v. Simonelli, 614 F. Supp. 2d 241, 246 (D. Conn. 2008) (FBAR penalty is a civil penalty, not a tax penalty).  Related to this offset authority is authority to garnish periodic payments due by the federal government, such as Social Security payments, but these may be subject to restrictions.  31 U.S.C. § 3720D.  For the current definitive treatment of this offset authority for FBAR collections, see Caroline D. Ciraolao, Collection of the FBAR Penalty (3/30/13).  (I have posted a discussion of this issue with a link to Ms. Caraolo’s presentation on my Federal Tax Crimes Blog in a posting titled FBAR Penalty Collection -- Beyond the Collection Suit, Offsets Loom Large and Long (4/2/13).
  n446 § 3711(g)(9)(B); 31 C.F.R. § 5.4(a)(6).  Tax refund offsets may be used only after an attempt to collect directly from the debtor. 31 U.S.C. § 3720A(b)(5); 31 C.F.R. § 285.2(d).
  n447 31 U.S.C. §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.”); and 31 C.F.R. § 285.5(d)(3)(v) (“Debts may be collected irrespective of the amount of time the debt has been outstanding.”).   Note that the IRM says that the offset period is 10 years for FBAR offsets.  IRM  (11-01-2011), titled FBAR Penalty Statute of Limitations on Collection.  However, my understanding is that this IRM provision was based upon § 3716(e) as it existed prior to amendment in 2008.  Prior to amendment there was a 10 year offset period.  After the amendment there is no limitations period to offset payments due the person against payments the person owes the U.S. for nontax debts.  I discuss the offset authority generally and for refunds in the text below, beginning at p. ___.
Finally, I offer these, perhaps trivia, points that I picked up in my meanderings on this issue.
  • The administrative offset is administered through what is known as the Treasury Offset Program (TOP).  TOP is described on the Treasury Financial Management Service website here.  I found this brief summary of TOP:
The Treasury Offset Program. FMS operates TOP to carry out offsets under the Internal Revenue Code and other laws. TOP is a centralized offset program by which FMS offsets payments to collect delinquent debts owed to Federal agencies and States. TOP currently works as follows. FMS maintains a database containing information about delinquent debts submitted and updated by Federal and State agencies. Before Federal payments, including Federal tax refund payments, are disbursed to a payee, FMS compares the payee information with debt information in the TOP delinquent debt database. If the name and taxpayer identifying number (TIN) associated with a payment match the name (or derivative of the name) and TIN associated with a debt, the payment is offset in whole or part to satisfy the debt. FMS transmits amounts collected to the appropriate agencies or States owed the delinquent debts after deducting a fee charged to cover the cost of the offset program. Information about a delinquent debt or past-due, legally enforceable debt will remain in the debtor database for offset as long as the debt remains past due and legally collectible by offset.
  • I quote below a brief summary of TOP in In re Abbott, Jr.,  (Bankrukptcy Court ED NC 7/3/12),  2012 TNT 130-7 (footnotes omitted)
The TOP derives its non-bankruptcy authority to intercept federal tax refunds to offset prior federal debt from 26 U.S.C. § 6402(d) and 31 U.S.C. § 3720A. The Secretary of the Treasury's ("Secretary") authority to issue a refund derives from 26 U.S.C. § 6402, which says: "[i]n the case of any overpayment, the Secretary . . . shall, subject to subsections (c), (d), (e), and (f)[,] refund any balance to such person." 26 U.S.C. § 6402(a). Under subsection (d), the Secretary must reduce the amount of a person's tax overpayment by the amount of any past-due legally enforceable debt the person owes to a federal agency and notify the person that his tax overpayment has been reduced by the amount necessary to satisfy the debt. See § 6402(d). Section 3720A also requires that the federal agency give notice to the debtor before requesting setoff with the Secretary. See 31 U.S.C. § 3720A (a)-(b); see also Shortt, 277 B.R. at 689. As the Second Circuit explained in Aetna Casualty & Surety Co. v. LTV Steel Co. (In re Chateaugay Corp.), 94 F.3d 772, 778-79 (2d Cir. 1996): "Section 6402(d) authorizes the Secretary of the Treasury to set off a tax refund against the taxpayer's debt to another Federal agency. Section 3720A provides the procedural framework for that setoff." Id. 
Due to the mandatory action required of the Secretary under § 6402(d) and § 3720A, the TOP setoff of the debtor's federal tax refund was valid and enforceable. Because the setoff was valid, the debtor never became entitled to any tax refund. The Secretary was required to reduce the overpayment to zero because the debtor owed FNS in excess of his tax refund. See Lyle, 324 B.R. at 131. Nothing remained to become property of the estate after the Secretary's mandatory reduction of the debtor's tax refund. See, e.g., id. Since the debtor's tax refund never became property of the estate, the U.S. Treasury is under no obligation to turn over the funds.
  • Administrative Wage Garnishment is discussed in a Treasury Q&A, here - from that site:
1. What is Administrative Wage Garnishment (AWG)?  Under federal law, a federal agency may, without first obtaining a court order, order an employer to withhold up to 15% of your wages for payment to the federal agency to satisfy a delinquent non-tax debt. See 31 U.S.C. § 3720D; 31 CFR § 285.11. 
2. When can a federal agency use AWG? A federal agency can use AWG to collect delinquent debt if you are employed and not paying a debt as agreed. AWG may be used to collect a debt even if state law does not allow wage garnishment. A federal agency may not garnish your wages if you have not been in your current job for at least 12 months and you were involuntarily separated from your previous job.


  1. SeniorResearcherApril 2, 2013 at 9:41 AM

    How Can the IRS Enforce Tax Collection Overseas?


  2. zagennn.germaine@gmail.comApril 2, 2013 at 2:35 PM

    We will be in the 28% 2013 tax brackets.
    I'm happy because we are skating close to the edge and the 2014 changes will
    keep us in the same tax bracket.

  3. Thanks. It's important to note that the article linked refers to taxes. The FBAR penalty is not a tax and any judgement would not be a tax, but similiar to a judgement from any other creditor.

  4. update on Proving Wilfullness in Civil FBAR Cases by Steven Toscher and Lacey Strachan
    April 2013

  5. could it be that now that the 10 year limitation clause expired it becomes subject to any existing civil tort statue of limitations?


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