Our firm has written extensively on FBAR penalties. For example, see our posts on FBAR, Do FBAR Penalties Survive Death? A Texas Court Says “Yes,” The FBAR: Everything You Need to Know, and Federal Court Concludes that FBAR Penalties are not Subject to the Flora Rule. As a quick summary, Title 31 of the United States Code authorizes the United States to impose civil penalties against taxpayers who fail to properly disclose their interests in foreign accounts and certain foreign assets on a timely filed FBAR. The amount of the penalty depends on whether the conduct at issue was “willful” or “non-willful,” with willful penalties being the harshest—i.e., up to 50% of the highest account balances of the foreign accounts that were not properly disclosed for each year of the non-disclosure.
Without doubt, FBAR penalties, particularly those due to willful conduct, are extremely harsh and punitive in nature. Thus, I am not surprised when clients ask me from time to time what could happen after the United States obtains a lawful judgment for the FBAR penalties against them? The simple answer: if payment or payment arrangements are not made, the United States will use all of its expansive resources to collect the penalty through involuntary means, such as seizures of property, garnishment, and other methods. Indeed, the recent decision in Schwarzbaum shows just how far the United States will go to collect on an FBAR penalty judgment against a taxpayer.
The Schwarzbaum Decision.
On October 26, 2021, a federal district court issued its decision in U.S. v. Schwarzbaum, 128 AFTR 2d 2021-6436 (D.C. Fla. 10/26/21). A brief background of the facts in that case follows.
On August 27, 2018, the United States initiated a willful FBAR penalty case against Mr. Schwarzbaum for failing to file FBARs associated with several foreign accounts that he held in Switzerland. After a five-day bench trial, the district court held in favor of the United States and issued a Final Judgment for $12,555,813, plus accrual of late payment penalties and interest. Mr. Schwarzbaum disagreed (obviously!) with the district court’s decision and filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit. When the federal district court issued its decision on October 26, 2021, Mr. Schwarzbaum’s appeal remained pending—that is, the court of appeals had not yet reached a decision on the merits of Mr. Schwarzbaum’s case.
Mr. Schwarzbaum failed to pay on the final judgment against him. In addition, he failed to request a stay of the execution of the judgment pending his appeal. Accordingly, the United States initiated post-judgment discovery, which revealed that although Mr. Schwarzbaum had little assets in the United States, he had more than a sufficient amount of assets in Swiss bank accounts to satisfy in full the judgment against him. After learning of this information, the United States sought an order from the court that would require Mr. Schwarzbaum to repatriate sufficient funds from those foreign accounts to the United States to satisfy the judgment. Mr. Schwarzbaum contended that the federal district court lacked the authority to order a repatriation of his assets located in a foreign country.
The FDCPA and the All Writs Act.
The United States contended that the court had the authority to issue a repatriation order under the Federal Debt Collection Procedures Act (“FDCPA”) and the All Writs Act. Under the FDCPA, the government argued, the federal court may issue various writs, including writs of execution and writs of garnishment. See 28 U.S.C. § 3202(a) (“All property in which the judgment debtor has a substantial nonexempt interest shall be subject to levy pursuant to a writ of execution.”); 28 U.S.C. § 3205 (“A court may issue a writ of garnishment against property (including nonexempt disposable earnings) in which the debtor has a substantial nonexempt interest and which is in the possession, custody, or control of a person other than the debtor, in order to satisfy the judgment against the debtor.”). The government conceded that the FDCPA did not specifically authorize orders of repatriation—however, the government contended that the legislative history and the statutory language of the FDCPA supported such a request as the FDCPA incorporated the All Writs Act.
The All Writs Act permits federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions and aggregable to the usages and principles of law.” See 28 U.S.C. § 1651. And, under the FDCPA, it further provides that “[a] judgment may be enforced by any of the remedies set forth in this subchapter. A court may issue other writs pursuant to section 1651 of title 28, United States Code, as necessary to support such remedies.” 28 U.S.C. § 3202(a). Although the statutory language itself supported the government’s contentions, the legislative history provided further support: the legislative history suggested that Congress had incorporated the All Writs Act in section 3202(a) to “allow broad flexibility in enforcing judgments.” Federal Debt Collection Procedures Act, Subcomm. on Economic and Commercial Law of the Comm. on the Judiciary (June 14, 1990). And, the FDCPA also provides that “[t]he court may at any time on its own initiative or the motion of any interested person, and after such notice as it may require, make an order denying, limiting, conditioning, regulating, extending, or modifying the use of any enforcement procedure under this chapter.” 28 U.S.C. § 3013.
Decision of the Court.
Given the above authorities, the district court concluded that it had authority to issue a repatriation order against Mr. Schwarzbaum. Indeed, the federal court reasoned that although the funds may be located outside the United States, the court had personal jurisdiction over Mr. Schwarzbaum, which was sufficient to require the order associated with foreign assets. The federal court also supported its conclusion based on other federal court decisions that had similarly concluded that they all had authority to require a taxpayer to repatriate funds from overseas:
The courts in McNulty, Ross, and Grant derive their authority from 26 U.S.C. §§ 7402 and 7403 of the Internal Revenue Code. In those cases, ‘that authority extends to orders of repatriation of funds held in foreign countries, and district courts have repeatedly ordered that assets such as those held in foreign bank accounts be repatriated to pay down tax owed to the federal government.’
The language of the IRC relied upon in the cases supporting the Court’s authority to order repatriation, and the FDCPA is similar. Under the tax code, district courts have jurisdiction to issue writs and other orders ‘necessary or appropriate for the enforcement of the internal revenue laws.’ 26 U.S.C. § 7402(a). Similarly, under the FDCPA, “a court may issue other wirts pursuant to [the All Writs Act] as necessary to support such remedies’ set forth by the subchapter of the FDCPA that authorizes garnishment and execution. 28 U.S.C. § 3202(a). This statutory language, paired with the All Writs Act’s authorization of ‘all writs necessary or appropriate in aid of . . . jurisdiction,’ is comparable to the statutory authority from which the courts in McNulty, Ross, and Grant derived the ability to reach assets overseas.
The recent decision in Schwarzbaum is a stark reminder that the United States will use all of its resources to satisfy an FBAR judgment. Indeed, with the repatriation order, Mr. Schwarzbaum must either repatriate the funds or risk contempt of court and potential jail time. Given the incredibly broad authority the United States has to collect on its judgments, taxpayers would be wise to raise all challenges to the FBAR penalty determinations early in the administrative assessment stage and, if required, later in the FBAR court proceedings. To the extent the United States obtains a lawful FBAR penalty judgment, taxpayers would also be wise to attempt to work on a payment resolution with the United States to avoid seizures, garnishments, and other federal court orders.