Tax Court Rules FBAR Penalties Are Not Taxes, Limiting Taxpayer Rights in Collection Disputes

The U.S. Tax Court has ruled that FBAR penalties do not qualify as taxes. This is determination follows a Collections Due Process (CDP) hearing requested by two married taxpayers who had contested the method of collecting FBAR penalties levied against them. They had previously been informed that the penalties in question had been directly deducted from their social security benefits, which they later challenged in the Tax Court.

The Tax Court denied their request for a CDP hearing on the grounds that FBAR penalties are not considered taxes. As a result, the Court determined that it lacked jurisdiction under Code Sections 6320 and 6330 to rule on the legality of the collection process.

The Tax Court’s ruling that FBAR penalties are not considered taxes is based on the fact that these penalties are authorized and imposed under Title 31, Section 5314(a). For those unfamiliar with the law, the Internal Revenue Code, which governs the actions of the IRS, is found under Title 26. As a result, there are no CDP rights available for the collection of FBAR penalties.

Title 31, Section 5314(a) requires taxpayers to maintain adequate records and files if they do business with or hold accounts at a foreign financial institution. In such cases, the taxpayer must also file Form 114, known as the FBAR, with the Financial Crimes Enforcement Network (FinCEN). The Treasury Secretary has the authority to impose civil penalties on individuals who fail to file the FBAR. Once imposed, FBAR penalties are classified as non-tax debts owed to the United States. If this debt remains unpaid for 180 days, the Secretary may refer it to an executive agency for collection actions, which could include deductions from Social Security payments.

FBAR penalties are not classified as taxes and therefore fall outside the jurisdiction of the Tax Court. As a result, taxpayers do not have CDP rights under Sections 6320 and 6330. If a taxpayer wishes to challenge these penalties, the typical next step would be to pursue the matter in federal district court or the Court of Federal Claims. These courts have the authority to handle monetary claims against the government that are not related to taxes, including disputes over FBAR penalties.

The Tax Court’s recent decision regarding FBAR penalties serves as a crucial reminder of the differences between tax liabilities and financial reporting obligations under U.S. law. Understanding these differences is vital for those with foreign financial accounts, especially as compliance requirements become increasingly complicated.

By staying updated on rulings like this, taxpayers and their advisors can better navigate the complexities of cross-border financial compliance and prepare for the unique challenges associated with international asset reporting. If you or a client have any questions about FBAR reporting or other international tax matters, please feel free to reach out to our Global Business Services team.