FBAR penalties are not taxes

In a decision reinforcing a critical procedural distinction in foreign account reporting enforcement, the U.S. Court of Appeals for the Eleventh Circuit in Jenner v. Commissioner affirmed that penalties for failure to file a Report of Foreign Bank and Financial Accounts (FBAR) are not "taxes." Consequently, taxpayers cannot challenge these penalties using the Collection Due Process (CDP) procedures under the Internal Revenue Code, and the U.S. Tax Court lacks jurisdiction to hear such disputes. This ruling provides essential clarity for tax professionals navigating the separate legal frameworks governing tax liabilities and FBAR penalties. 

Factual and procedural background

The case involved Stephen and Judy Jenner, who failed to file FBARs for several years. After the IRS assessed penalties under 31 U.S.C. §5321 and the assessment was sustained on appeal, the Treasury Department began collecting the debt via an administrative offset against the Jenners' Social Security benefits.

In response, the Jenners requested a CDP hearing under §6330, a procedure typically available to taxpayers facing a levy to collect unpaid taxes. When the IRS denied their request, explaining that FBAR penalties are not tax assessments subject to CDP review, the Jenners petitioned the Tax Court. The court dismissed the petition for lack of jurisdiction, a decision the Jenners appealed to the Eleventh Circuit.

The Eleventh Circuit’s analysis

The Eleventh Circuit’s per curiam opinion provides a clear and concise rationale for affirming the Tax Court's dismissal. The court's analysis rested on two fundamental points:

1. Limited tax court jurisdiction: The Tax Court is a court of limited jurisdiction, authorized by §7442 to hear matters conferred upon it by Title 26 (the Internal Revenue Code). FBAR reporting requirements and the associated penalties, however, originate from the Bank Secrecy Act, which is codified in Title 31 of the U.S. Code of law. Because the penalties were not imposed under Title 26, the Tax Court’s jurisdictional prerequisite was not met. 
2. FBAR penalties are not taxes: The court emphasized that the Bank Secrecy Act explicitly defines the FBAR sanction as a "civil penalty," not a tax. This distinction is well-established in case law, which defines a tax as an enforced contribution for the support of government, whereas a penalty is an exaction imposed as punishment for an unlawful act. The court further noted that the procedural rights afforded under §6330 are tied to the collection of an "unpaid tax" via "levy." The collection action against the Jenners was an "administrative offset" of a non-tax debt under Title 31, a distinct collection tool that does not trigger CDP rights. 

The court also rejected the Jenners' argument that the IRS's delegated authority to assess and collect FBAR penalties effectively converts them into taxes, stating that a “series of delegations has not converted the FBAR penalties into taxes.”

Implications for tax professionals

The Jenner decision serves as a critical reminder for tax practitioners of the unique procedural landscape governing FBAR enforcement.

• Forum selection is paramount: The proper venues for challenging an FBAR penalty are a U.S. district court or the U.S. Court of Federal Claims. Filing a petition in Tax Court is a jurisdictional dead end that will result in dismissal, wasting time and resources. 
• CDP rights do not apply: Practitioners cannot rely on CDP hearing requests to suspend or delay collection of FBAR penalties or to negotiate collection alternatives with the IRS Independent Office of Appeals in that forum. Collection actions, such as the administrative offset of federal payments, can proceed without the availability of these familiar tax-related safeguards.
• Client expectation management: It is crucial to advise clients that FBAR penalties are treated as non-tax debts owed to the government. This means that collection mechanisms not typically associated with tax debts, including the offset of Social Security benefits, are permissible. Clear communication on this point can prevent significant client confusion and frustration. 

From a tax pro perspective

Jenner v. Commissioner reinforces a foundational principle: FBAR enforcement, while administered by the IRS, operates under the distinct legal authority of Title 31. It is a parallel system with its own rules, procedures and jurisdictional pathways. For tax professionals, treating an FBAR penalty as just another tax liability is a significant procedural error. Sound practice demands a precise understanding of this distinction to ensure that any challenge to an FBAR penalty is pursued in the correct forum and with the appropriate legal strategy.