Monday, March 31, 2014

Guest Blog: Litigating the FBAR Penalty in District Courts and Court of Federal Claims (3/31/14)

I am pleased to offer this guest blog entry written by Robert Horwitz, a guest blogger and prominent practitioner in civil and criminal matters, including the offshore account area.  Robert is an attorney with the Law Offices of A. Lavar Taylor.  Robert's bio is here.  The balance of this blog is his work, except that I have added links to statutes at the end of the blog.  His work is very good.

In recent years, a number of articles have appeared on litigation of the FBAR penalty.  Most of the articles focus on suits by the Government to collect the FBAR penalty or the Tax Court’s lack of jurisdiction over the FBAR penalty.  Caroline D. Ciraolo, in her 2013 Power Point ABA presentation, Assessment and Collections of the FBAR Penalty, here, noted the intriguing possibility of suing for refund of an FBAR penalty under the Tucker Act.  Expanding upon Ms. Ciraolo’s insight, I researched the issue and recently authored an article, Litigating the FBAR Penalty in District Court and the Court of Federal Claims, here,  which appeared in the Q1 2014 edition of the California Journal of Tax Litigation, the publication of the Tax Procedure and Litigation Committee of the Taxation Section of the California Bar.  The article makes the following points:

1. The Tucker Act, 28 U.S.C. §1491,  and the Little Tucker Act, 28 U.S.C. §1346(a)(2), give the Court of Federal Claims and the United States district courts, respectively, jurisdiction to hear cases for money damages against the Government.

2. Under the Little Tucker Act, district courts have jurisdiction over claims against the Government for money damages in amounts not exceeding $10,000.  The Tucker Court gives the Court of Federal Claims jurisdiction over claims against the Government for money damages in any amount founded upon the Constitution, a federal statute or regulation, or a contract.

3. The Tucker Act and the Little Tucker Act also waive sovereign immunity over claims for money damages against the United States where the claimant can “demonstrate that the source of substantive law he relies upon ‘can fairly be interpreted as mandating compensation by the Federal Government for the damage sustained.’”  United States v. Mitchell, 463 U.S. 206, 216-217 (1983).

4. Under “illegal exaction” cases, the Courts have recognized that there is jurisdiction under the Tucker Act in cases where the plaintiff seeks the return of money that was alleged to have been illegally paid to the Government.  An “illegal exaction,” occurs when money has been “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.”  Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005).  The “prototypical illegal exaction claim is ‘a tax refund suit alleging that taxes have been improperly collected or withheld by the government,’” Kipple v. United States, 102 Fed. Cl. 773, 777 (2012)

5. To maintain an illegal exaction claim, a claimant must allege that she paid money to the federal government and seeks the return of all or a part of that sum because it was improperly paid, extracted or taken from the claimant in contravention of the Constitution, a statute or regulation.

6. Because the FBAR penalty is not a tax under Title 26, the Flora rule does not apply.  A person can therefore maintain an action to recover any sum paid toward or offset by the Government against an FBAR penalty.

7. Because of the limited power of the Government to collect an FBAR penalty and the two year period within which it must sue to collect, a person who seeks a refund of monies paid toward an FBAR penalty would be well advised to delay filing suit until more than two years after assessment.  This will assure that the Government cannot counterclaim for the unpaid balance of the assessment, which it could only do if the taxpayer sued within the two year period.

Jack Townsend, in an email, pointed out two questions that were not addressed: whether there was a right to a jury trial in district court and whether a plaintiff would need to exhaust administrative remedies.  The answer to both is no.  As to a jury trial, 28 U.S.C. §2402 provides that “any action against the United States under 28 U.S.C. §1346 shall be tried by the court without a jury” except for a suit for a tax refund.

Before there is exhaustion, there has to be an administrative remedy to exhaust.  There is nothing in Title 31 regarding claiming a refund of any penalty or other debt paid to the Treasury and Treasury has not promulgated any regulations requiring a party to file a claim or otherwise seek relief administratively if he or she claims that an FBAR penalty was wrongfully assessed or collected.  Treasury has not promulgated any regulations requiring a party to file a claim or otherwise seek relief administratively if he or she claims that an FBAR penalty was wrongfully assessed or collected.  Thus, there is no administrative remedy to exhaust before filing a suit for refund of an FBAR penalty payment.

Additionally, the Supreme Court in Darby v. Madigan, 503 US 140 (1991), held that absent a Congressional requirement of exhaustion, whether a plaintiff has to exhaust administrative remedies before suing the Government is a matter of judicial discretion:
The doctrine of exhaustion of administrative remedies is one among related doctrines—including abstention, finality, and ripeness—that govern the timing of federal-court decision making.  Of “paramount importance” to any exhaustion inquiry is congressional intent. Patsy v. Board of Regents of Florida, 457 U. S. 496, 501 (1982).  Where Congress specifically mandates, exhaustion is required. Coit Independence Joint Venture v. FSLIC, 489 U. S. 561, 579 (1989); Patsy, 457 U. S., at 502, n. 4.  But where Congress has not clearly required exhaustion, sound judicial discretion governs.  McGee v. United States, 402 U. S. 479, 483, n. 6 (1971).
The litigation of FBAR penalties is still relatively new territory and much remains for the courts to address.  I want to thank Jack for the opportunity for being a guest blogger.  If anyone has any comments or wants to share any experiences regarding dealing with the FBAR penalty, please email me at

JAT Addendum:  The statutes cited are:

28 U.S.C. §1346, here [Little Tucker Act]
28 U.S.C. §1491, here [Tucker Act]
28 U.S.C. §2402, here [Jury Trial]


  1. Thanks Jack. Opt-out examination feedback: I have not recently seen any feedback from people who have gone through OVDI Opt-out. I would appreciate if people would care to share their
    experience(s). It will be very useful for minnows such as myself (no bad facts but several modest accounts) in deciding the future course of action (whether to opt out or not).
    Is it that many people are still not through the Opt-out process or are too exhausted to write their own experiences?

    Have the examiners been taking a hard stance when trying
    to assert penalties, or have they been reasonable
    and open to negotiating reasonable settlements?

    I sincerely appreciated the past feedback from trailblazers JustMe, Moby, IJ, Sally. Also appreciate previous comments from the office of attorney Parag Patel.

  2. Nice article. Footnote 51 states that an action cannot be successfully maintained if the taxpayer enters into a closing agreement. Query whether this holds true if the closing agreement relies on statutory authority that would not support the penalty imposed (i.e., a "miscellaneous penalty" assessed under Title 26 in OVDP that far exceeds any penalties statutorily provided in Title 26).

  3. Larry, that is a good question. I will direct Robert's attention to it and, hopefully, he will respond.

    I had never focused on the issue before. I guess you are saying that the miscellaneous penalty is not authorized and therefore is illegal. The IRS should not be allowed to assert or retain the penalty amount if it is illegal.

    The question then is the remedy. Is it a tax refund or is it just a garden-variety illegal action?

    Rather than speculate about it, I will defer to Robert.

    Thanks for the comment.

    Jack Townsend


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