FBAR penalties are not taxes imposed by the Code

The Tax Court held that FBAR penalties are not a tax imposed by the Code and, therefore, are not subject to the requirements of Secs. 6320 and 6330.

Facts: Stephen C. and Judy A. Jenner were assessed foreign bank account reporting (FBAR) penalties for 2005 through 2009 for their alleged failure to timely file foreign bank account reports as required by 31 U.S.C. Section 5321. In November 2022, Judy Jenner received a letter from Treasury’s Bureau of the Fiscal Service (BFS) informing her that the Treasury Offset Program (TOP) would be withholding funds from her monthly Social Security benefits. A week later, Stephen Jenner received a nearly identical letter from BFS informing him that TOP would also be withholding funds from his monthly Social Security benefits. Both letters directed the Jenners to contact BFS’s Debt Management Servicing Center (DMSC) “to prevent the collection activity.”

In December 2022, the Jenners both submitted a request to DMSC for a Collection Due Process (CDP) hearing relating to the FBAR penalties assessed against them. The Jenners followed up on the requests in April 2023, asking the IRS’s BSA/Currency Transaction Report Operations Center if it had received their CDP requests. The IRS replied, in a letter a month later, that the Jenners did not qualify for a CDP hearing “because the FBAR penalties assessed against them were not taxes and not subject to the requirements of [Sec.] 6330.”

In June 2023, the Jenners filed a petition with the Tax Court alleging that they were denied their CDP rights pursuant to Sec. 6330. The IRS filed a motion to dismiss for lack of jurisdiction, contending that the collection of FBAR penalties is not subject to the notice and other requirements of Sec. 6330.

Issues: The only issue before the Tax Court was whether FBAR penalties are subject to the requirements of Secs. 6320 and 6330. If they were not, the Tax Court did not have jurisdiction under Sec. 6330(d)(1).

FBAR penalties are authorized and imposed by Title 31, Money and Finance, of the U.S. Code. Under 31 U.S.C. Section 5314(a), each U.S. person must “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.” Any U.S. person meeting this definition must file Financial Crimes Enforcement Network (FinCEN) Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR), with FinCEN. Title 31 U.S.C. Section 5321(a)(5)(A) provides that a civil penalty may be imposed on any individual who fails to file the requisite Form 114.

Treasury delegated to FinCEN the authority to enforce the provisions and impose civil penalties for violations of 31 U.S.C. Section 5314, and FinCEN redelegated this authority to the IRS. However, even with this redelegation of authority to the IRS, Title 31 and its regulations still govern how FBAR penalties are assessed and collected. The IRS has authority under 31 U.S.C. Section 5321 to assess FBAR penalties, and, once assessed, they become a nontax debt to the United States. Pursuant to 31 U.S.C. Section 3711, if the debt remains delinquent for more than 180 days, Treasury may refer it to an executive agency to take appropriate collection action.

The Tax Court, under Sec. 7442, is a court of limited jurisdiction, and it has consistently held that its jurisdiction is contingent upon the issuance of a “valid notice of determination” (Goza, 114 T.C. 176 (2000)). Furthermore, a taxpayer may file a petition with the court only “where the administrative determination concerns a tax over which the Court generally has jurisdiction” (id).

The Jenners claimed that the letter they received from the IRS denying their CDP hearing provided the “requisite determination” pursuant to Sec. 6330(d)(1) to invoke the Tax Court’s jurisdiction. They further argued that the CDP procedures in Sec. 6330 are not limited to Title 26 liabilities (i.e., liabilities under the Code); the administrative offsets on their Social Security benefits were levies by the IRS that entitled them to a CDP hearing; and that there was no “rational distinction” between levies to collect Title 26 liabilities and FBAR penalties. Thus, the Jenners concluded that “the CDP procedures in [Sec.] 6330 apply to any type of liability … to the extent the [IRS] files a lien or intends to levy.” The court held these arguments to be without merit.

The Tax Court explained that a necessary component of any determination notice pursuant to Sec. 6330 is that it relates to an unpaid tax. Therefore, as it had previously held, the underlying tax liability is the amount “a taxpayer owes pursuant to the tax laws that are the subject of the Commissioner’s collection activities” (Mason, 132 T.C. 301 (2009), quoting Callahan, 130 T.C. 44 (2008)). Therefore, the court found the statutes pertaining to the CDP procedures and lien and levy collection mechanisms “all explicitly pertain to ‘tax'” (quoting Williams, 131 T.C. 54 (2008)).

The Tax Court found that since FBAR penalties are not imposed by the Code, under Sec. 6201(a) they are not taxes. Also, they “are not subject to the various statutory cross-references that equate ‘penalties’ with ‘taxes,'” (quoting Mendu, 153 Fed. Cl. 357 (2021)) because they are not imposed under the Code. In addition, the court stated, nothing in 31 U.S.C. Section 5321(a) provides that an FBAR penalty is “deemed a tax” or shall be assessed or collected “in the same manner as a tax.”

Having found that FBAR penalties are not a tax, the Tax Court determined that Secs. 6321 and 6331 did not apply to the Jenners. In addition, as the court had noted in Williams, the collection mechanism authorized by the FBAR statute is a civil penalty, not a lien or levy as defined under the Code. Therefore, no lien or levy to collect FBAR penalties could be assessed against them under Title 26.

The court further observed, with respect to the Sec. 6320 and 6330 notice requirements, that Sec. 6320(a)(1) provides, for liens, that the IRS “shall notify in writing the person described in [Sec.] 6321,” who is any person “liable to pay any tax” and who “neglects or refuses to pay the same after demand.” Sec. 6330(a)(1) provides that no levy shall be made on property of “any person unless the [IRS] has notified such person in writing.” Under Regs. Sec. 301.6330-1(a)(3), Q&A-A1, the person described in Sec. 6330(a)(1) is the same as the person described in Sec. 6331(a), which is the “person liable to pay the tax due after notice and demand who refuses or neglects to pay.” Thus, in the absence of a lien or levy for a tax, the notice requirements of Secs. 6320 and 6330 do not apply.

In summary, the Tax Court stated that “Title 31 expressly provides the assessment and collection procedures for FBAR penalties, and there is no statutory, regulatory, or judicial authority providing that these penalties are subject to [Secs.] 6320 and 6330.” Because FBAR penalties are not taxes, the court concluded that the IRS was under no obligation to provide the Jenners with a CDP hearing.

Holding: The Tax Court held that FBAR penalties are not taxes imposed by the Code and thus are not subject to the requirements of Secs. 6320 and 6330. Accordingly, the court further held that it did not have jurisdiction under Sec. 6330(d)(1).

Jenner, 163 T.C. No. 7 (2024)

— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.