FBAR reporting requirement is not unconstitutional

A district court held that an individual who argued that the reporting requirements of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) violated several of the Bill of Rights amendments to the U.S. Constitution had failed to state a claim on which relief could be granted and dismissed his case.

Background

George Mano is a U.S. citizen who in March 2013 moved to Japan and began working at Tenri University. His monthly paycheck from Tenri was deposited in a foreign bank account, but during his time working at the university, his monthly pay never exceeded $10,000. After receiving his pay, Mano generally wired the bulk of his monthly income to a different bank account based in the United States. Consequently, the balance of his foreign bank account remained below $10,000. However, this changed in 2021.

In May 2021, when Mano reached 60 years old, he was subject to an “initial retirement” at Tenri University and received a $35,042 lump sum of “severance pay.” This caused the balance of Mano’s foreign bank account to exceed $10,000, which obligated him for the first time to file an FBAR with Treasury. The FBAR requires an individual to reveal, among other things, the foreign financial institutions at which he or she has an account, the type of account, the account number, and the maximum value of the foreign account.

Mano, like probably most individuals, did not want to file an FBAR. In May 2022, proceeding pro se, he initiated a suit in district court seeking an injunction prohibiting Treasury and the IRS from enforcing the FBAR filing requirement against him. Taking a different tack than most individuals, he argued the reporting requirement violated his rights under the Fourth, Fifth, Ninth, and Tenth amendments.

Treasury moved to dismiss Mano’s complaint for, among other things, lack of subject-matter jurisdiction (i.e., he did not have standing) and failure to state a claim.

The district court’s decision

The district court held in favor of Treasury. It determined that while it did have subject matter jurisdiction over Mano’s case, he had failed to state a claim on which relief could be granted with his various constitutional claims.

Standing: The district court explained that, under Supreme Court precedent, the minimum constitutional requirements for standing contain three elements. A plaintiff must have: (1) a concrete and particularized injury in fact that is actual or imminent, not conjectural or hypothetical; (2) that is fairly traceable to the challenged action of the defendant; and (3) will likely be redressed by a favorable decision.

Looking at Mano’s claim, the court found that he alleged that filing an FBAR would require him to reveal his private bank account information, which would be an injury to him in fact and would be traceable to the action (the requirement to file an FBAR) that he challenged. Also, he sought an injunction prohibiting Treasury from enforcing the filing requirement against him, so his claimed injury would be redressed by a favorable decision by the court. Thus, the court concluded that Mano had standing and then moved to discussing whether the requirement violated his constitutional rights.

Fourth Amendment: Mano argued that the FBAR requirement violated the Fourth Amendment’s prohibition against unreasonable searches and seizures. Treasury argued, and the district court agreed, that under Supreme Court precedent in California Bankers Association v. Shultz, 416 U.S. 21 (1974), the FBAR requirement did not violate the Fourth Amendment.

In California Bankers, a group of bank depositors brought a Fourth Amendment challenge to now-superseded regulations under the Bank Secrecy Act (BSA) that required “United States citizens, residents, and businessmen to file reports of their relationships with foreign financial institutions.” The Supreme Court stated in its opinion that “the Fourth Amendment does not prohibit all requirements that information be made available to the Government” and emphasized that Congress has plenary authority to regulate foreign commerce and to delegate significant portions of this power to the executive branch of the federal government. As the statutory authorization for the regulations in question was based on Congress’s conclusion that U.S. residents were using foreign financial institutions to circumvent the enforcement of the laws of the United States, the Court determined the regulations were reasonable in the light of the statutory purpose and found no reason to invalidate them if reporting of income may be required as an aid to enforcement of the federal revenue statutes.

The district court found that the reporting requirement under current BSA regulations that Mano claimed violated the Fourth Amendment was materially identical to the one at issue in California Bankers. Thus, the court held that Mano’s Fourth Amendment challenge failed.

Fifth Amendment: The Fifth Amendment provides that “[n]o Person … shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law.” Mano alleged in his complaint that the FBAR filing requirement violates the Due Process Clause, and, in his response brief, he further claimed that the filing requirement violated his privilege against self-incrimination.

The district court first found that Mano had put forward no argument in response to Treasury’s contention that he had failed to state a claim under the Due Process Clause, so he waived that claim. The court also found that, having brought up the self-incrimination claim in his reply brief, he had done so improperly.

Even if the claim had been properly raised, the court found that it was foreclosed by the holding in In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012), in which the Seventh Circuit (the appellate circuit the district court is a part of) held that compulsory production of foreign bank account records required to be maintained under the BSA did not violate an individual’s privilege against self-incrimination. Because the information Mano was required to submit through the FBAR was identical to that sought in the subpoena in the earlier case, the court held he could not avoid filing an FBAR by asserting his Fifth Amendment privilege against self-incrimination.

Ninth and Tenth amendments: Mano also alleged the FBAR filing requirement violated his right to privacy under the Ninth and Tenth amendments. The district court found, citing Seventh Circuit cases, that neither amendment gave him a right to privacy. Thus, it held that Mano had failed to state a claim to relief under the Ninth or Tenth amendment.

Reflections

At this point, all even remotely plausible arguments that an individual does not have to file an FBAR have been taken up by the courts and found lacking, so taxpayers are unlikely to win future challenges. Given that the average taxpayer is still largely unaware of the FBAR requirements and the harsh and inflexible penalties assessed for failing to meet them, practitioners should make sure new clients are adequately informed of the requirements and periodically remind clients of them to avoid unpleasant surprises.

Mano v. Yellen, No. 1:22-cv-0137-RLY-MJD (S.D. Ind. 8/1/23)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.