In a recent decision, the Sixth Circuit Court of Appeals denied Senator Rand Paul’s (and a host of joined plaintiffs’) effort to enjoin the enforcement of the Foreign Account Tax Compliance Act (FATCA) and foreign bank account reporting (FBAR) rules, as well as challenges to numerous intergovernmental agreements (IGAs) implementing FATCA reporting. The circuit court upheld the lower court’s ruling that the plaintiffs lacked standing to go forward with their claims. The plaintiffs raised challenges to the FATCA, IGAs, and FBAR laws on multiple grounds (varying by plaintiff), including Senator Paul’s assertion that he was “denied the opportunity to exercise his constitutional right as a member of the U.S. Senate to vote against the FATCA IGAs” and that he would vote against the IGAs if they were submitted to the Senate for advice and consent under Article II of the Constitution.[1] The IGAs have never been so submitted.
Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA requires both individual taxpayers and foreign financial institutions (FFIs) to comply with account-reporting requirements or face penalties for noncompliance. For instance, FFIs are required to withhold 30% of every payment made to a noncompliant (or “recalcitrant”) account holder. FATCA withholding provisions are, in essence, designed to enforce reporting requirements. To implement FATCA worldwide, the Treasury and IRS have entered into intergovernmental agreements (IGAs) with many countries in order to facilitate the disclosure of financial-account information. These IGAs have never been submitted to the Senate for advice and consent.
Separate and apart from FATCA, the Bank Secrecy Act imposes a foreign bank account reporting (FBAR) requirement on Americans who have aggregate foreign-account balances exceeding $10,000. The potential penalty for a willful failure to file an FBAR is a whopping 50% of the value of the reportable accounts or $100,000, whichever is greater. See some of our prior posts on FBAR reporting for more, How the FBAR’s “Willfulness” Element Has Recently Evolved; Foreign Bank Account Reporting–The FBAR; Litigating FBAR Penalties: The Burden of Proof and the Meaning of Willfulness. FBAR enforcement has been on the rise in recent years—and that is an understatement.
The plaintiffs raised challenges to five distinct sets of laws: (1) FATCA’s individual-reporting requirements; (2) FATCA’s “FFI Penalty”; (3) FATCA’s “Passthru Penalty”; (4) the IGAs; and (5) the FBAR Willfulness Penalty. (I have provided a short synopsis of those laws below, following a brief overview of the legal concept of “standing,” a threshold requirement necessary for a plaintiff to maintain a suit.) The plaintiffs originally brought suit in the District court for the Southern District of Ohio in 2015. That court denied their motion for a preliminary injunction, and granted the government’s motion to dismiss, finding that the plaintiffs lacked standing to pursue their challenges. The plaintiffs appealed that decision, prompting the recent opinion from the Sixth Circuit COA, which agreed that the plaintiffs lacked standing.
As always, the standing analysis begins from the premise that federal courts are courts of limited jurisdiction. Federal courts have constitutional authority to decide only “cases” and “controversies” within the meaning of Article III of the Constitution. U.S. Const. art. III § 2; see Muskrat v. United States, 219 U.S. 346 (1911). The standing requirement is “rooted in the traditional understanding of a case or controversy.” Spokeo, Inc. v. Robins, ––– U.S. ––––, 136 S.Ct. 1540 (2016). To maintain a suit, a plaintiff must have “alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues” before the court. Baker v. Carr, 369 U.S. 186, 204 (1962). At its heart, the standing requirement is part of our separation-of-powers framework.
The circuit court entered into an in-depth analysis of the standing issue and these bedrock principles, ultimately finding that the plaintiffs lacked sufficient standing to maintain their claims. Further elaboration of that analysis is beyond the scope of this post. What follows is a brief overview of the several sets of laws that were challenged by the plaintiffs in the case.
FATCA’s individual-reporting requirement
FATCA requires that United States taxpayers with “specified foreign financial assets” file an annual report with their tax return disclosing the name and address of the financial institution that maintains each specified account; the name and address of any issuers of specified stocks or securities; information necessary to identify other specified instruments, contracts, or interests and their issuers; and the maximum value of each specified asset during the taxable year. 26 U.S.C. § 6038D(b)–(c). The reporting requirement applies to any United States taxpayer when the “aggregate value of all [specified] assets exceeds $50,000 (or such higher dollar amount as the secretary may prescribe).” § 6038D(a). Failure to report such assets carries a potential penalty of up to $10,000 per violation plus 40% of the amount of any underpaid tax “attributable to” the assets for which disclosure was required. 26 U.S.C. §§ 6038D(d), 6662(j)(3). A reporting failure may also extend the statute of limitations applicable to the taxpayer.
FATCA’s Institutional-Reporting Requirements, the FFI Penalty, and the Passthru Penalty
FATCA also imposes an institutional-reporting requirement on FFIs, which an FFI can satisfy in one of three ways set forth in 26 U.S.C. § 1471(b)(1), (b)(2), and (b)(3). A “foreign financial institution” (FFI) is “any financial institution which is a foreign entity.” 26 U.S.C. § 1471(d)(4). Financial institutions include any entity that “accepts deposits in the ordinary course of a banking or similar business,” “holds financial assets for the account of others” “as a substantial portion of its business,” or “is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities …, partnership interests, commodities …, or any interest” in the same. 26 U.S.C. § 1471(d)(5). If an FFI fails to meet FATCA’s institutional-reporting requirement in one of these three ways, then the FFI is subject to having “a tax equal to 30 percent” deducted and withheld from all withholdable payments sent to the FFI. 26 U.S.C. § 1471(a).
The IGAs
Treasury has reached agreements with many foreign governments to “facilitate the implementation of FATCA.” 26 C.F.R. § 1.1471-1(b)(79). These intergovernmental agreements (IGAs) take two forms: “Model 1” IGAs and “Model 2” IGAs.
Under a Model 1 IGA, the foreign government agrees to collect the financial information that FATCA would otherwise require FFIs to report, and the foreign government itself reports that information directly to the IRS. Under a Model 2 IGA, the foreign government agrees to modify its laws to the extent necessary to enable its FFIs to report their United States account information directly to the IRS. A list of countries with such IGAs is available here.
The FBAR Willfulness Penalty
The Bank Secrecy Act requires any United States person with “a financial interest in or signature authority over at least one financial account located outside of the United States” to file FinCEN Form 114 (also referred to as the FBAR) with Treasury annually. Reporting is required for accounts held during the previous calendar year if “the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.” See 31 U.S.C. § 5314; 31 C.F.R. §§ 1010.306(c), .350. The potential penalty for a willful failure to file an FBAR is 50% of the value of the reportable accounts or $100,000, whichever is greater.
[1] It is worth noting that Senator Paul also introduced a bill to repeal FATCA in April 2017. S. 869, 115th Cong. (2017).
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