FBAR penalty procedures under Title 31 are similar to federal tax penalty procedures under Title 26. Under both Title 31 and Title 26, the IRS must make a timely assessment of the penalty prior to initiating collection action. However, the two procedures diverge somewhat with respect to collection remedies available to the government. This article discusses FBAR penalty collection procedures and provides some insights on issues that tax professionals should consider when representing taxpayers who have FBAR penalty assessments.
FBAR Collection Procedures.
Prior to beginning a discussion of the FBAR collection procedures, it is important to remember that the IRS has six (6) years to make a timely FBAR assessment. This six-year period begins on the date in which the FBAR should have been filed and runs regardless of whether an FBAR has been filed at all.
Because FBAR penalties are located in Title 31, provisions therein govern collection. Under Title 31, the government may collect FBAR penalty assessments through various means including: (i) administrative (or tax refund) offset (collectively, “administrative offset”); (ii) wage garnishment; and/or (iii) litigation.[i]
The government’s right of administrative offset permits the government to administratively reduce amounts that are already owed by the government to the taxpayer to satisfy all or part of an unpaid FBAR penalty assessment.[ii] For example, the government may use its right of administrative offset to reduce a federal income tax refund[iii] or reduce benefits already owed to the taxpayer under government programs such as Social Security.[iv]
In addition to the right of administrative offset, the government may collect an outstanding FBAR penalty assessment through the use of wage garnishments.[v] Generally, Title 31 permits the government to garnish up to 15% of the taxpayer’s “disposable pay”—i.e., the taxpayer’s compensation (salary, bonus, commission, etc.) from an employer minus health insurance premium deductions and amounts otherwise required by law to be withheld (e.g., federal employment taxes).[vi]
Perhaps the strongest of its collection methods, the government also has the authority to initiate a civil lawsuit against the taxpayer to reduce the FBAR penalty assessment to judgment.[vii] After a judgment is entered against the taxpayer, the government may: (i) file a judgment lien against the taxpayer’s property;[viii] (ii) foreclose on the taxpayer’s property,[ix] or (iii) obtain a post-judgment Writ of Garnishment.[x]
How Long Does the Government Have to Collect FBAR Penalty Assessments?
Title 26 generally permits the IRS ten (10) years from the date of an assessment (tax, penalty, or otherwise) to collect the assessment through administrative means, subject to certain tolling events.[xi] The collection statute of limitations for the FBAR penalty assessment is much different.
First, if the government seeks to collect an FBAR penalty assessment through administrative offset, there is no statute of limitations for collection by statute.[xii] In other words, the government may continue collection via administrative offset until the FBAR penalty assessment is paid in full.
If the government chooses to file a civil lawsuit against a taxpayer to reduce the FBAR penalty assessments to judgment, the government must initiate the lawsuit within two (2) years from the assessment date unless the government obtains a criminal BSA judgment which extends the statute of limitations to file a civil action another two (2) years from the criminal judgment date. In the event the government is successful in obtaining a judgment against the taxpayer, the government can file a judgment lien for twenty (20) years after the judgment date and may extend the judgment lien an additional twenty (20) years if it so chooses.[xiii]
The collection statute of limitations for other collection methods outside the two mentioned above becomes murkier. The government takes the position that there is no statute of limitations for collection regarding these other methods.[xiv] However, federal courts have disagreed, at least with respect to other contexts based on the statutory language of 28 U.S.C. § 2415.
What Can Taxpayers do After an FBAR Assessment has been Made?
In many instances, a taxpayer may not have many good options after an FBAR assessment has been made. As indicated above, the government may initiate a lawsuit against the taxpayer to reduce the FBAR assessments to judgment to obtain more collection methods. If the government fails to initiate a lawsuit after the two-year period, the taxpayer can seek collection alternatives or other remedies with various government agencies—taxpayers should note that by this phase, the IRS has generally transferred collection responsibilities of the debt to another government agency such as the Bureau of Fiscal Services (BFS).
In normal federal tax cases, section 7122 of the Code permits taxpayers to compromise their federal tax debts with the IRS. Because section 7122 of the Code only applies to Title 26 income taxes (and not Title 31 FBAR penalties), however, the IRS will not entertain an offer in compromise with the taxpayer regarding FBAR penalties.[xv]
All is not lost, though. The government does provide a similar analog in the FBAR penalty context, although the government decision-maker depends largely on the FBAR penalty amounts at issue. If the FBAR penalty assessments are $500,000 or less, BFS has authority to compromise the penalties pursuant to a delegation order from the Department of Justice (DOJ).[xvi] If the amounts are more than $500,000, DOJ must provide its approval.[xvii]
BFS also has the authority to suspend or terminate collection action if the principal balance of the FBAR penalties does not exceed $500,000. For other amounts, the DOJ must approve the collection suspension or termination. Installment agreement payment options are also available.
If the government files suit against the taxpayer within the required two-year period, taxpayers should bear in mind that DOJ has the authority to settle the lawsuit on terms agreeable to the DOJ. Taxpayers should also bear in mind that they are not required to take a wait-and-see approach to determine whether a suit will be filed or not against them—rather, taxpayers are permitted to pay all or part of the FBAR penalty and file a refund suit against the government.[xviii] This option may make sense if the taxpayer wants a jury trial, as government-initiated lawsuits are not permitted jury trials.[xix] However, any advantages to filing suit first should be weighed against the very real risk that the government will file a counterclaim to reduce all of the FBAR penalty assessments to judgment, resulting in the additional collection measures available to it discussed above.
As discussed in this article, the government has a vast array of collection tools available to recover FBAR penalty assessments. In many cases, these collection tools continue in perpetuity until the FBAR penalty assessments are either collected or compromised. Accordingly, taxpayers with proposed FBAR penalties should consult early with a tax professional to determine the best manner in which to resolve the FBAR penalties through contesting the assessment and, if unsuccessful, through attempting to resolve the FBAR penalty assessments without the government’s resort to collection procedures.
[i] 31 U.S.C. § 3711(g)(9).
[ii] Id.; see also 31 U.S.C. § 3716.
[iii] 31 U.S.C. § 3720A.
[iv] 31 U.S.C. § 3716(c)(3)(A).
[v] 31 U.S.C. § 3720D; 31 C.F.R. § 285.11.
[vi] 31 C.F.R. § 285.11(c).
[vii] 31 U.S.C. § 5321(b).
[viii] 28 U.S.C. § 3201.
[ix] 28 U.S.C. § 3201(f), § 3202(e).
[x] 28 U.S.C. § 3205.
[xi] I.R.C. § 6502.
[xii] 31 U.S.C. § 3716(e)(1); 31 C.F.R. § 285.5(d)(3)(v) (“Debts may be collected irrespective of the amount of time the debt has been outstanding.”).
[xiii] 28 U.S.C. § 3201(c).
[xiv] IRM pt. 188.8.131.52.1.3 (12-11-2019).
[xv] IRM pt. 184.108.40.206 (02-18-2016); IRM pt. 220.127.116.11.2 (09-24-20).
[xvi] See TFM, Chapter 5000, Treasury Financial Manual (TFM).
[xviii] Norman v. U.S., No. 15-872T, 2016 WL 1408582 (Fed. Cl. Apr. 11, 2016) (jurisdiction under the Tucker Act); see also Landa v. U.S., 153 Fed. Cl. 585, 592 (Fed. Cl. 2021); Jarnagin v. U.S., 134 Fed. Cl. 368 (Fed. Cl. 2017); Jones v. U.S., No. SACV 19-00173 JVS, 2020 WL 4390390 (C.D. Cal. May 11, 2020).
[xix] See 28 U.S.C. § 2402.