This article applies to any person who fails to file a required FBAR. The FBAR is required for a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate with a financial interest in or signature or other authority over at least one financial account located outside the United States with an aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
In Mendu v. United States, the U.S. Court of Federal Claims recently handed down a decision regarding whether penalties assessed for failure to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” are subject to the full payment rule. This article explores the background and results of the case.
Mendu v. United States, No. 17-cv-738 T, April 7, 2021 (U.S. Court of Federal Claims).
Flora v. United States, No. 492, March 21, 1960 (U.S. Supreme Court).
Bedrosian v. United States, No. 17-3525, Dec. 21, 2018 (U.S. Court of Appeals, Third Cir.).
FBAR Penalties and the Full Payment Rule
In the recent case of Mendu v. United States, the U.S. Court of Federal Claims handed down a decision regarding whether penalties assessed for failure to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR) are subject to the full payment rule. The result of the case sheds some light on this often-misunderstood rule.
The Bank Secrecy Act (BSA) requires “United States persons” who have relationships with foreign financial agencies to disclose these relationships to the U.S. Department of Treasury on an FBAR. Civil money penalties may be imposed under the BSA on any person who fails to file a required FBAR. The Treasury Department may sue for collection of the penalty, but authority to collect penalties has been delegated to the IRS.
When it comes to claims for refunds, the Court of Federal Claims has jurisdiction in any civil action against the United States for the recovery of any:
- Internal revenue tax alleged to have been erroneously or illegally assessed or collected,
- Penalty claimed to have been collected without authority, or
- Sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws.
As decided by the U.S. Supreme Court in Flora v. United States, however, courts lack jurisdiction of suits for refund of income tax unless the taxpayer has paid the full amount of the assessment. In 2018, the U.S. Court of Appeals for the Third Circuit stated in a footnote to its decision in Bedrosian v. U.S. that it was “inclined to believe” that FBAR penalties are internal revenue taxes within the scope of applicable regulations and, therefore, subject to the Flora full payment rule.
The Case at Hand
In Mendu, the IRS assessed a $752,920 penalty against the plaintiff for failing to file an FBAR with respect to foreign bank accounts that he had signatory authority over.
The plaintiff made a $1,000 partial payment against this penalty and filed suit in the Court of Federal Claims alleging that the FBAR penalty assessed against him was erroneous and resulted in an illegal exaction of his $1,000 partial payment. The government filed a counterclaim seeking payment of the entire FBAR penalty plus interest. The plaintiff then filed a motion to dismiss his own claim, contending that the Court of Federal Claims lacked jurisdiction over it because the full payment rule applied.
The Court of Federal Claims stated that the structure of the BSA indicated that the FBAR penalty wasn’t an internal revenue tax. It is part of Title 31 of the U.S. Code (“Money and Finance”), not the Internal Revenue Code (IRC) found in Title 26 of the of the U.S. Code. Congress’s placement of FBAR penalties outside Title 26 means that they aren’t subject to various cross-references that equate penalties contained in Title 26 with taxes.
The court noted that both the plaintiff and the government acknowledged they were unable to find any example of a penalty outside the IRC that was subject to the Flora full payment rule. It further stated that the Third Circuit’s footnote in Bedrosian was unpersuasive because jurisdiction wasn’t at issue in that case. Rather, the court believed the Third Circuit dealt with the full payment rule in a cursory fashion and left a definitive holding on the issue for another day.
If you’re required to file an FBAR, be sure to do so in a timely and proper fashion. For further explanation of Mendu and the full payment rule, consult your CPA or attorney.