No Collection Due Process hearing for FBAR penalties

The Tax Court held that the taxpayers were not entitled to a Collection Due Process (CDP) hearing under Secs. 6320 and 6330 for foreign bank account report (FBAR) penalties because they are not taxes imposed by the Code.

Background

Married taxpayers Stephen and Judy Jenner were assessed penalties for failing to timely file FBARs for the years 2005 to 2009. Treasury’s Bureau of the Fiscal Service (BFS) informed them that, under the Treasury Offset Program (TOP), to collect these outstanding penalties, it would withhold funds from each of their monthly Social Security benefits. BFS told the Jenners in the letters to contact its Debt Management Servicing Center (DMSC) to prevent the collection activity.

The Jenners each requested a CDP hearing for the FBAR penalties from the DMSC. Afterward, when the Jenners asked the IRS whether it had received their CDP requests, the Service replied that they did not qualify for CDP hearings under Sec. 6330 because the FBAR penalties assessed against them were not taxes.

In response, the Jenners filed a petition with the Tax Court alleging that they were denied their CDP rights pursuant to Sec. 6330. The IRS filed a motion to dismiss for lack of jurisdiction, contending that the collection of FBAR penalties is not subject to the notice and other requirements of Sec. 6330.

The Jenners argued that Sec. 6330 did apply. According to the couple, the letter they received from the IRS notifying them that they did not qualify for a CDP hearing was a determination under Sec. 6330(d)(1) that invoked the Tax Court’s jurisdiction. They further argued that: (1) nothing in Sec. 6330 limits the CDP procedures to Title 26 (Internal Revenue Code) liabilities; (2) the administrative offsets on their Social Security benefits were levies by the IRS that entitled them to a CDP hearing; and (3) there is no “rational distinction” between levies by the IRS to collect Title 26 liabilities and levies to collect FBAR penalties. Thus, they contended, the CDP procedures in Sec. 6330 apply to any type of liability to the extent the IRS files a lien or intends to levy.

The FBAR penalties are authorized and imposed by Title 31, Money and Finance, of the U.S. Code. Title 31 U.S.C. Section 5314(a) provides that each U.S. person must “keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.” The Title 31 regulations state that any person that meets the above definition must file Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), with FinCEN. If a person does not meet this requirement, Treasury may impose a civil penalty on the person.

Treasury delegated the authority to enforce these provisions and impose civil penalties for violations of 31 U.S.C. Section 5314 to FinCEN, which subsequently redelegated this authority to the IRS. Notwithstanding this redelegation, Title 31 and its accompanying regulations govern how FBAR penalties are assessed and collected. Title 31 U.S.C. Section 5321(b) (1) grants Treasury the authority to assess FBAR penalties. Upon assessment, FBAR penalties become a nontax debt to the United States, and once that debt has been delinquent for more than 180 days, Treasury may refer the debt to an executive agency to take appropriate collection action (31 U.S.C. §§3711(g)(1), (4), and 3701(a)(8)).

Title 31 U.S.C. Section 3716 grants executive agencies the authority to collect outstanding debts through administrative offsets and provides the notice and other requirements that must be followed prior to collection. Title 31 U.S.C. Section 5321(b)(2) provides that Treasury may commence a civil action to recover FBAR penalties.

The Tax Court’s decision

The Tax Court held that FBAR penalties are not taxes imposed by the Code and are therefore not subject to the requirements of Secs. 6320 and 6330. Consequently, the court held further that it lacked jurisdiction over the Jenners’ case.

The Tax Court first noted that it is a court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by Congress. Sec. 6330(d)(1) grants the court jurisdiction, and it has consistently held that jurisdiction under that provision is contingent on the issuance of a valid notice of determination (Goza, 114 T.C. 176 (2000)). The court has further explained that “a taxpayer may only file a petition for review with this Court where the administrative determination concerns a tax over which the Court generally has jurisdiction” (id. At 182).

The Tax Court found that the Jenners’ arguments regarding its jurisdiction over FBAR penalties were “specious.” As the court explained, a necessary component of any determination made pursuant to Sec. 6330 is that it relate to an unpaid tax. The tax making up the underlying liability is the amount a taxpayer owes pursuant to the tax laws that are the subject of the IRS’s collection activities.

FBAR penalties, under Sec. 6201(a), are not imposed by the Code and are not taxes. Sec. 6201(a) provides that:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by [Title 26].

Therefore under Sec. 6201(a), FBAR penalties, which are not imposed under Title 26, are not subject to the various statutory cross-references that equate penalties with taxes. In addition, the court stated that nothing in 31 U.S.C. Section 5321(a) provides that an FBAR penalty is deemed a tax or that it is required to be assessed or collected in the same manner as a tax.

As a result, Secs. 6321 and 6331 do not apply to, and no lien or levy is authorized for, FBAR penalties because FBAR penalties are not taxes. Rather, the court found, the collection mechanism authorized in the FBAR statute for an FBAR penalty is not a lien or a levy but a civil action to recover a civil penalty.

In conclusion, the Tax Court stated, “In short, Title 31 expressly provides the assessment and collection procedures for FBAR penalties, and there is no statutory, regulatory, or judicial authority providing that these penalties are subject to sections 6320 and 6330. … Accordingly, the IRS was under no obligation to provide petitioners with a CDP hearing.”

Reflections

If the Tax Court had agreed with the Jenners and held that they were entitled to a CDP hearing, it seemingly would have done them no good in the end. The background of the court’s opinion does not indicate that Treasury did anything wrong in withholding funds from the Jenners’ Social Security benefits through TOP. Therefore, the IRS would likely have upheld its actions in the CDP hearing, and the Tax Court likely would have approved the IRS’s determination.

Jenner, 163 T.C. No. 7 (2024)

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.