Friday, March 5, 2010

FBAR Penalties and Excessive Fines (3/5/10)

A commenter requested further discussion as to the possibility of an excessive fines problem for the FBAR penalties. In an earlier blog here, I had advised readers of this article on the subject: Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty (J. Tax Prac. & Proc. Dec. 2009-Jan. 2010), here. The commenter said:
Could you share your thoughts in a new thread on the third article here, Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty. The article seems to conclude that the 50% FBAR penalty is an unconstitutional punishment. But no one appears to have contested the constitutionality of it in the plea deals brought so far, because those individuals could face greater criminal charges if they do not accept the proposed civil punishment. Your thoughts on the legality of the 50% FBAR penalty?
Now, usually, someone does not have to ask for my thoughts. I usually give them before someone asks for them (and, sometimes, before I even think them). My thoughts are not really different and certainly not better that Steve's and Barbara's. But here goes, since you asked:

1. We need to keep in mind that the framework for this discussion is the Bajakajian case discussed in the article. In that case, the 100% penalty on the amount that should have been reported in the CMIR was deemed excessive under the facts of the case (just a footfault, albeit intentional and important, as to reporting, but no other illegality involved). By contrast the fines we are talking about here are 50% fines per incident, rather than the 100% fine per incident involved in Bajakajian and other illegality (income tax misconduct) is involved. That does not mean the Eight Amendment concerns are not involved, but the facts and amounts are materially different.

2. The conduct punished in the extant criminal cases is multiple incidents (years in the case of the FBARs) with the 50% applying to a single year, albeit the highest year. The Government could have gotten to the same number by applying a lesser penalty rate to each of the years.

3. For this reason, the effective penalty rate over all incidents (years) is much less than 50% unless you assume the unlikely case that only one year was involved. Let me illustrate, assume that 6 years are involved, with the highest year being $1,000,000 and all others years having $500,000 each and that the penalty is thus 50% of the highest year or $500,000. The penalty is thus 14%, hardly an excessive penalty in my mind. (I must resist the temptation to think that the The framers of the constitution (or Bible or what have you) must have had my mind in mind when drafting the respective tome.)

4. While I have not gone through all possible iterations, my gut (perhaps the same as my mind, but in any event also not the framer's gauge) tells me that conceivable iterations where the Government would make its discretionary call to prosecute are unlikely to dramatically affect the conclusion, at least in terms of the Eighth Amendment's Excessive Fines Clause as discussed in Bajakajian. Where it would dramatically affect the percentage forfeited because one of the years (the highest year) is dramatically out of sync with the other years or only 1 or 2 years are involved, then I question whether DOJ Tax would prosecute or insist on an out of whack penalty.

5. And, beyond that, the 50% penalty for the highest year is being extracted as a plea agreement in which the Government is giving up a number of other criminal charges that even could affect sentencing in some of the cases. It is just a deal that the defendants find acceptable regardless of whether they might have some outlier argument to make against any particular term of the deal considered in isolation.

6. I cannot wholly discount the possibility that DOJ Tax would prosecute a single year. Maybe the Government believes a drug dealer is involved and can't nail the defendant for that, so it takes what it can. But, in the run of the mine tax motivated FBAR failure to file case, one year is unlikely to make the prosecutorial discretion cut. And even then, to go back to Bajakajian, the penalty is one-half (50% rather than 100%) and other illegality is involved (at least one tax offense since, as of now, the Government is not prosecuting except where there is a tax crime and the hypothesized drug dealer will have almost certainly committed a tax crime). My same gut tells me that this may not offend the sensibilities of the Supreme Court in the same way the Bajakajian facts did.

To paraphrase the saying, my gut is often wrong but never in doubt (or turmoil). There you have it for what it is worth.

Addendum 3/5/10

After preparing the foregoing discussion, I read the following article:  Courtney J. Linn, Redefining the Bank Secrecy Act, Currency Reporting and the Crime of Structuring, 50 Santa Clara L. Rev. 407 (2010).  The author at pp. 501 - 507 discusses the implications of Bajakajian to BSA reporting requirements and related criminal provisions for structuring in the context of United States v. Ahmad, 213 F.3d 805, 815 (4th Cir. 2000), a structuring case.   In Ahmad, the court determined that the $85,000 was subject to civil forfeiture and then turned to whether the forfeiture of the entire amount subject to civil forfeiture was an excessive fine under Bajakajian concepts.  The Ahmad court found Bajakajian distinguishable because it involved a single incident whereas the violations in Ahmad involved more than one incident.  Further, "Ahmad's structuring constituted part of a complicated larger scheme related to customs fraud violations."  Whereas Bajakajian involved only the loss of information to the Government, "Ahmad's deposit structuring activities not only caused the government to lose information, but also implicated an intermediary actor ... and affected its legal duty to report certain transactions [to Customs]."  In praising this aspect of Ahmad, the author reasons (footnotes omitted and emphasis supplied):
More compelling was the fact that Ahmad's structuring conduct related to a larger scheme involving the evasion of custom tax duties. In Bajakajian, the defendant did not "fit into the class of persons for whom the statute was principally designed: He is not a money launderer, a drug trafficker, or a tax evader." The funds were lawfully derived and the defendant intended to use the money to repay a legitimate debt. In contrast, Ahmad acknowledged that he transferred some of the funds from his illegally structured deposits into an account used to further a customs fraud scheme. Congress enacted the CTR requirement precisely out of concern that large unreported currency transactions enabled tax evasion and similar crimes. This fact, more than the other marshaled by the Ahmad court, distinguishes Ahmad from Bajakajian. Indeed, the handful of post-Bajakajian decisions involving forfeitures for reporting violations can largely be synthesized on this ground. Courts tend to uphold the forfeiture against excessive fines challenges when the reporting violation relates to a central purpose of the BSA and tend to mitigate it when it does not.

Hope this helps move the discussion forward.


  1. Your comments seem to suggest that the FBAR penalty is remedial. The key point of the Toscher article seems to be that the FBAR penalty is being used as additional punishment and is NOT remedial, which raises a number of issues. The remedial function occurs separately with the payment of past due taxes, interest, and penalties.

  2. Anonymous,

    I think your point is a good one, although I have never understood the precise distinction between remedial and punitive.

    Whatever that distinction is, however, I don't think it is presented in the context of the guilty pleas in which the defendants agree to pay the FBAR penalty or in the context of the voluntary disclosure where the taxpayer agrees to the FBAR penalty. In each of these regards, the defendant or taxpayer, respectively, may decline the deal offered and slug it out on whether the FBAR penalty the IRS asserts is an excessive fine (as well as on the other points that would have otherwise been settled by the deal).

    Also, are you suggesting that once the IRS has its pound of flesh measure by tax, penalties and interest, the IRS (or fisc or public) is entitled to nothing more in the way of a penalty or remedy for the taxpayer's failure to properly answer the question on the 1040 and file the related FBAR? I am not sure I agree with that notion. And, if I am right, then it is only a question of setting the measure of a fair remedial or punitive amount; I am not sure that any of the indications as to what that amount is that the IRS insists upon (either by guilty plea or in the voluntary disclosure program) rises to a level that offends my sensibilities. Of course, the question is whether it would offend some court's sensibilities. I don't think so. But, then, I am often wrong.

    As you have perceived, this is not a considered legal analysis but a kind of gut check.

    Jack Townsend

  3. I find this part of the article puzzling:

    "Let me illustrate, assume that 6 years are involved, with the highest year being $1,000,000 and all others years having $500,000 each and that the penalty is thus 50% of the highest year or $500,000. The penalty is thus 14%, hardly an excessive penalty in my mind."

    But isn't the $500,000, peaking at $1,000,000 due to, say, a stock price spike, the same actual asset throughout, rather than something to be summed annually?

    An individual invests $500,000 in a fund. It goes up, it goes down, and at the end of six years it's back to $500,000. They sell for no overall gain. The penalty is $500,000. That's 100%, not 14%. Even if it goes up and stays up, the penalty is still 50%.

  4. This seems like an incredibly ill conceived penalty structure. To take the last comment one step further, it is entirely possible that the highest account value was 6 years ago and the investments have since dwindled. (Just think of your own retirement account!). Or what about a stock that has a pop on takeover speculation and then comes crashing back down. In cases where no profits were realized (ie long term investments), this is basically a tax on unrealized profits...which may not exist today even if you tried to realize them!! Taxing realized profits and income is the basis of our system. Taxing unrealized profits at a past point in time is something else entirely for which I am not aware of any precedent. I'm sure there will be many instances in which the funds no longer exist to pay 50% of the highest value, so the government will end up confiscating 100% of the most recent balance which sounds highly unconstitutional to me. A more pragmatic approach might be a percentage of the most recent balance on the date on which the penalty was agreed to by the responsible party because that would still leave the taxpayer with the incentive to maximize the account value to the benefit of the U.S. Treasury as opposed to simply declaring bankruptcy and leaving the Treasury and the economy worse off.

  5. I believe the question still remains:

    Are the Tax Penalties and Fines excessive, and can suit be brought for violation?

    For example:
    You owe "The Company" $10,000, which you fail to pay on time. "The Company" assess a $5,000 late payment fee.

    That is clearly excessive.

    Somehow when we replace "The Company" with "Taxes" it becomes reasonable, lest "The Company" arrests you.

    It's blatant: We have a lack of protection against excessive fines as a result of fear, irrespective of constitutional violation.

    So the question: Is it possible to file a class-action suit on behalf of "We, the People"?

  6. Hello,

    I owed about $15000 in back tax on a UK account from the 44 years I lived there. Now paid in full, before I even heard of an FBAR. I sold my only UK home when I excitedly was awarded a Green Card and banked the money until I GOT the Green Card. Balance on all my Uk worldy goods, built up over 40 years - about $500,000. None earned in USA.
    Penalty, the famous 20%, $107,000.

    Just don't see thats a fair outcome for not filing papers. No-one I speak to does, but they don't have any sway with the IRS...

  7. My parents created some savings accounts for me in India several years ago. I didn't have much knowledge of these. I moved to the US and worked hard and payed all my taxes. Settled down and obtained citizenship. Meanwhile accounts in my name in India have grown quite a bit. Just found out about these. Parents put away quite a bit of their hard-earned savings to help me but didn't realize reporting requirement implications in the US. Now I'm faced with a huge penalty on the India accounts that I did not know about and are fully tax-paid in India. Naturally, parents are pretty distressed at losing so much due to misunderstanding. Lawyer says lower 5% penalty not likely since IRS very strict about that. Many more in a similar situation as me. So I end up due to a misunderstanding, paying 25% on an already tax-paid amount which is the same paid by a fraudulent tax evader who has completely bypassed the US tax authorities.

  8. Agree...

    OVDI is far from fair to immigrants as far as policy is concerned. As matter of law, it does treat all the same regardless one's understanding of US tax law. That is fair enough.

    I am sure a lot people may get away with their problems by hiding. IRS just can't catch everyone.

    Just think it as doing the right thing for for yourself with peace in mind and for this country that you have made a new home.

  9. The OVDI is also unfair to citizens who reside elsewhere. I have resided in Canada for 34 years. All of my accounts are "foreign" accounts, which is really the functionally convenient thing to do as a resident. 3 of my accounts are accrued pension benefits from former employment that I chose to manage on my own. I'm facing a 5% penalty on everything though I'm not a tax evader. This is an issue facing millions of citizens who have chosen to reside abroad.

  10. Anon's comment on 5% everything even when there is no tax evasion isn't the worst of it. Imagine you move the same money between several accounts, i.e you have $10,000 in a checking account, move it to a regular trading account, and then switch it again. You now have 3 accounts, all at $10,000 max, so $30,000 even though it's the same $10,000.

    Add in that the various penalty calculations take into account the number of accounts, plus the highest price of the account, the amount of penalties for simply non-reporting, could well exceed %100 of the principle, even if not even one dime has been made.

  11. Can anyone recommend an attorney to champion a class-action lawsuit against the IRS regarding the draconian FBAR penalties they are sticking Americans with? I'm in the OVDI program, and it makes me sick to have to pay this fine on top of the regular interest and penalties on unpaid taxes. Unreported income is unreported income, and to arbitrarily differentiate some of it because of its location is unconstitutional, to say the least.

  12. To Victim of the IRS...August 30, 2011 6:48 PM

    Look at the attorney list that Jack has in the upper right hand corner under HOME. I suppose you could check with some of those, but I doubt you would get any to take up that cause. They are too busy with paying clients helping them navigate the OVDI process.

    I do agree with you about the unreported income. But it is far from arbitrary. It has a special FBAR statute that gives them the Hammer to apply heavy finds to this class of failure. Without it, your income would be treated no differently than if you were now disclosing capital gains that you had failed to report in the past. Not sure their application of the FBAR statute would be considered unconstitutional, but what do I know? I would love to seen someone take it on, but I doubt it will happen.

    I certainly understand your frustration, especially when our head of Treasury, Tim Geithner, had a big tax failure, and didn't have similar penalties apply for that under reporting because it did not have an FBAR attached to it. It's not right, but it is cliche' to say, "Life and taxes are not fair."
    You will note, that Corporations don't have to pay taxes on their overseas income either. Our tax law is all about the special interest exceptions.

  13. "Can anyone recommend an attorney to champion a class-action lawsuit against the IRS regarding the draconian FBAR penalties they are sticking Americans with"

    I would suggest googling 'Sovreign Immunity' beore wasting money on that.

  14. Victim of IRS....

    I just found this post, that you might be interested in reading. Look for the comment by John Nolan August 27, 2011 | 3:19 am
    It is about 4th up from the bottom..

    Maybe John Nolan is your man!! :-)

  15. I would join such a suit without a second thought. I would gladly contribute funds towards it even though my case is closed and settled. What the U.S. government is doing here is simply wrong. Please, someone initiate and organize such a class action suit.

  16. I would like to such conversation . Thanks every one. Please share about FBAR Amnesty.


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