Posted by: Robert Horwitz | December 23, 2018

Third Circuit Throws a Curve Ball on FBAR Penalties by Robert S. Horwitz

In Bedrosian v United States the plaintiff paid 1% of a $975,789 FBAR penalty.  Not disputing jurisdiction, the Government counterclaimed for the unpaid balance with interest.  The district court held that Bedrosian was not liable for a willful FBAR penalty, even though he had known about the FBAR filing requirement.  The Government appealed to the Third Circuit.

On appeal, the parties agreed that the Little Tucker Act, 28 U.S.C. §1346(a)(2)  gave the district court jurisdiction, since it was a claim against the United States that did not exceed $10,000.  The Third Circuit issued its opinion, here, yesterday  Addressing an issue not raised by the parties, the Third Circuit held that  Bedrosian’s claim did not give the district court jurisdiction under the Little Tucker Act.  The Court reasoned that 28 U.S.C. §1346(a)(1) gives the district courts jurisdiction over actions for refund of any tax or penalty wrongfully collected “under the internal revenue laws.”  The Court reasoned that “internal revenue laws” encompass more than the Internal Revenue Code.  Since one of the reasons for enactment of the FBAR statute was to deter wealthy individuals from using offshore accounts to evade taxes, and the IRS has been delegated authority to enforce and assess FBAR penalties, the Court concluded the FBAR statute was an internal revenue law.  The Court was inclined to believe that the rule of Flora v. United States, 362 US 145 (1960) applied, which would mean that the district court had no jurisdiction over  Bedrosian’s initial claim since he did not full pay the assessment.  The Government’s counterclaim, however, gave the district court jurisdiction

There was another implication of the Little Tucker Act addressed by the Court: if Bedrosian’s claim was based on the Little Tucker Act, under 28 U.S.C. sec. 1295(a)(2) the Federal Circuit would have exclusive jurisdiction of appeals.  Sec. 1295(a)(2) gives the Federal Circuit exclusive jurisdiction over appeals from district court decisions where a claim arises under the Little Tucker Act, with certain exceptions.  In letter briefs filed with the Third Circuit, both parties argued that the exception in sec. 1295(a)(2) for claims founded upon a statute or regulation “providing for internal revenue” applied, but that Bedrosian’s claim for refund of the FBAR penalty was not a claim for refund of a penalty under the internal revenue laws, so sec. 1346(a)(1) did not apply.  The Third Circuit held that since the FBAR statute was an internal revenue law, the Third Court held it had jurisdiction over the appeal.

The Court then addressed the issue of whether the district court erred in holding that Bedrosian did not act willfully.  The Court held that willfulness encompasses not only voluntary, intentional or knowing violations, but also violations that are “reckless.”  While voluntary, intentional or knowing is a subjective standard, whether conduct is reckless is determined by “’an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known’” Safeco, 551 U.S. at 68.”  Because the district court based its determination on  Bedrosian’s motivation and the egregiousness of his conduct compared with the conduct of taxpayers in other FBAR willful cases, the Circuit Court held  the district court did not conduct the correct analysis of whether Bedrosian’s conduct “satisfies the objective recklessness standard articulated in similar contexts” and  remanded the case back to the district court for further consideration.

Prior to the Third Circuit’s decision, both private practitioners and the Government viewed the FBAR statute as not being an internal revenue law.  If the Third Circuit is correct, a host of new issues come into play: a) is the FBAR penalty to be assessed like a tax under the Internal Revenue Code; b) do the claim for refund provisions apply: c) would IRS assessment and collection procedures apply; d) does a person against whom an FBAR penalty is assessed have CDP rights; e) can the IRS settle assessments for over $100,000 without DOJ approval; f) if a person had several offshore accounts, is the penalty to be treated as a divisible tax for purposes of ; and g) a  host of other issues.

Well, at least the Bank Secrecy Act originated in the House of Representatives, so Article I Section 7 of the Constitution is not implicated.


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