John Nolan on the possibility of a Constitutional challenge to FBAR

From the archives of Phil Hodgen’s blog, John Nolan, August 27, 2011 | 3:19 am, wrote:

To my knowledge, since the JOBS Act introduced the FBAR enhanced penalty regime in October 2004, there has been no civil case brought against anyone for enforcement of a FBAR penalty. (I am aware, however, that recently a criminal case was recently initiated alleging a single count of criminal non-filing.)

Nor am I aware of a single case in which a FBAR penalty, as such, has been paid by anyone – whether “voluntarily” as part of a plea bargain or “involuntarily” by judgement of a Federal court following a contested civil or criminal prosecution for enforcement of same.

Technically, the much-ballyhooed agreements by defendants to pay enhanced sums of money incident to a plea bargain are not FBAR penalties. Clearly, however, it is the threat of such FBAR penalties – and extra time in Club Fed – that induced such agreements.

I am not aware of any case in which a civil FBAR penalty has been asserted for simple late filing of a FBAR – for any reason. I am also unaware of any case in which a late-filed FBAR has caused the late filer to receive a demand for a payment for any maximum or lesser civil penalty amount based on simple tardiness.

(NB: the FBAR statute and its penalties makes no distinction between late and/or inaccurate filing and non-filing.)

To my knowledge, neither the FBAR filing obligation itself nor its penalties has ever been tested for constitutionality.

Nor do I believe that Treasury is confident that the criminal and/or civil FBAR penalties would be able to withstand a constitutional challenge.

In my view the FBAR’s mere existence is constitutionally infirm on substantive due process grounds. To wit:

I do not believe that Treasury, which invented the FBAR in 1970 in response to authorizing legislation found in the Bank Secrecy Act, has ever even attempted to meet the strict factual predicate imposed by Congress on Treasury in the BSA: that whatever data the information Treasury demanded should have a “high degree” of regulatory or law enforcement usefulness. I believe that if Treasury were compelled through civil or criminal discovery or even by a simple FOIA or Privacy Act request to produce substantiating evidence of any law enforcement or regulatory usefulness over the last 40 years that they would be hard put to do so; much less a “high degree” of such usefulness.

(Just for fun: maybe tax practitioners could develop a FBAR Privacy Act/FOIA request that would be filed automatically by every one of their clients who timely files a FBAR every year. It would cite the language of the privacy act notice at the bottom of the TD F 90-22.1 and demand a copy or summary of every report or document generated by FINCEN or Treasury that made use of the filer’s data and simultaneously demand all documents that might tend to substantiate the validity of the assertion of usefulness found in the Privacy Act notice at the bottom of the TD F 90-22.1)

As any constitutional scholar will be quick to tell you, “substantive due process” is a thin reed upon which to rest one’s hopes for a constitutional challenge to the validity of anything authorized by Congress.

The real constitutional vulnerability of the FBAR, however, lies in the 8th Amendment’s “excessive fines” clause.

A good constitutional challenge to FBAR, therefore, would be a three-stage attack based on:

1. Substantive due process – i.e. not rationally related to the promotion of any legitimate government interest and/or failure to meet the Congressionally prescribed substantive prerequisites.

2. Privacy act – the argument would be that the FBAR is of such dubious usefulness to any legitimate government interest that it is easily trumped by legitimate expectations of personal privacy. (Yuk-yuk. As if Americans had not long ago forfeited whatever rights to financial privacy they may have ever had!)

3. 8th Amendment – given the paucity of any current or historical evidence of law enforcement or regulatory usefulness over the more than 40 years of its existence, the original – much less the enhanced -penalties for non-filing are grotesquely disproportionate and constitutionally excessive under the 8th Amendment.

My guess is that Treasury will want to exhaust the revenue potential of its current crop of big-bucks tax-haven prosecutions before it will take the risk of such a challenge.

In the meantime, as Son-of-FBAR gets up and running next year the ease of collecting its penalties under Title 26 will gradually supplant the revenue enhancements available under the old FBAR.

At that point Treasury may feel it can safely take the risk of subjecting the old FBAR to constitutional challenge with the knowledge that, if they lose, they will have a back-up readily at hand that is probably constitutionally unassailable.

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30 thoughts on “John Nolan on the possibility of a Constitutional challenge to FBAR

  1. If your bank gives the information to the IRS it is not privileged, particularly if the bank doesn’t challenge the constitutionality of the request. Eighth amendment would still apply if the IRS went crazy, which I think they would if they get the information. Remember OVDI is 27.5 %. Undisclosed accounts under FATCA will be likely subject to 50% fines, just to be fair with the OVDI people.

  2. While we are discussing Constitutions, here is a link to an article a few days ago in Globe and Mail about Canada’s Charter of Rights and Freedoms being a “global model” for Constitutions.

    http://www.theglobeandmail.com/news/opinions/editorials/canadas-charter-of-rights-a-global-model/article2334413/

    According to this, a study by two NYU professors to be released this June points to Canada’s Constitution as an example for democracies around the world.

    I especially liked this information:
    ______________________________________________________________________
    “Is Canada a constitutional superpower?” U.S. law professors David Law and Mila Versteeg ask in an article to be published this June in the New York University Law Review. They imply the answer is . . . no. Still, “on average, the world’s democracies are constitutionally more similar to Canada than to the United States.” And “given Canada’s relatively high prestige and goodwill as a member of the international community,” they conclude that Canada is “a constitutional trend-setter among common-law countries.”
    ______________________________________________________________________

    I also found the following statement very reflective of Canada and Canadian values: As Canada was founded on compromise and dialogue, so are those qualities woven into its rights charter.

    Based on what we’re seeing with IRS, the concept of dialogue and compromise is simply foreign to IRS. Oops–Maybe next they will tax dialogue and compromise if it happens outside US borders.

    I know Steven Mopsick thinks other nations will simply revise their constitutions and laws to accommodate FATCA. While I appreciate your participation here Steven, I think you are way off base in that assumption.

  3. Revising constitutions to permit FATCA implementation would be nothing less than abrogating 200+ years of democratic and civil rights progress. In Switzerland, this would require a popular vote.

  4. @Jefferson: Agreed. That is why I think Steven is way off base. Any Canadian who remembers Meech Lake knows neither politicians nor the public want to go down that route again.

    I assume changing Constitutions of other countries is just as challenging. But, from comments Steven made in another thread, he seems to think that the US will get what it wants by other countries simply changing their constitutions and laws to get in step with IRS.

  5. Could the IRS be suffering from collective narcissism?

    “Collective narcissism (or group narcissism) is a type of narcissism where an individual has an inflated self-love of his or her own ingroup, where an “ingroup” is a group in which an individual is personally involved.”

  6. I will test it when I opt-out OVDI in case IRS imposes penalty on RRSP.

    I am willing to pay FBAR proxy penalty inside OVDI of on non-RRSP.

    When I am out — I will agree to pay zero FBAR penalty. We will see what will happen — maybe the very first civil case ever ? Wow — be famous and acting rich !

  7. @IJ, yes. You may have technically made an error but you did so completely innocently. You weren’t deliberately hiding money or trying to evade US tax. In fact, you were honorable in being so honest about trying to put it right even at great cost to yourself.

  8. I’ve been trying to see what arguments have already been made in the US, re rights to financial privacy and security as impacted by the requirements of FBARs – and have found an US article that I cannot access in fulltext – but which someone might be able to access and skim – to see if it is of any use (even to see how the opposing argument might be posed): 6 Florida Tax Review 579 (2003-2005)
    “Sharing Bank Deposit Information with Other Countries: Should Tax Compliance or Privacy Claims Prevail” by Blum, Cynthia
    http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/ftaxr6&div=31&id=&page=
    Pages 602 – 632 considers issues of financial privacy, and also the privacy issues and claims of US citizens with ‘offshore’ accounts.

  9. The Blum article looks pretty useless and Ameri(ec)centric. I share this one sentence from page 633:

    However, the American depositor himself chooses the foreign country in which to make the deposit, and therefore presumably should be able to insure that the foreign government can be relied upon to keep the information confidential (except for conveying it to the IRS).

    Isn’t that a cute little thought from an ivory-tower legal theorist?

  10. Thanks @usxcanada for looking at that, I didn’t have fulltext access, so had to guess potential utility from the abstract or table of contents – to see if it was worth finding (seems to be electronic access – Lexis-Nexis database – paid subscription/academic libraries only). You’re right, ‘real cute’ sentence there, – no rigor in evidence; making that completely unsubstantiated and fanciful leap using ‘presumably’ – not even meeting the sometimes wobbly standard of ‘arguably’!

  11. RE: John Nolans remarks above with regard to FBAR penalties. I am very worried about my case and would like someone to clarify. I failed to file fbars for 2006 – 2010 (5 years) In 2006 my wife and I wired 200,000 (our life savings) to p urchase an apartment in a foreign country. The money sat for only one month then was used to purchase it. Then for the following 2008 until present the apartment was rented and all the money in the account was rental income. All the rental income was reported on the 1040 but we had no idea about the FBAR filing and schedule E acknowledgement of the accounts. Also, IAn agency has been doing our taxes for the last 20 years or so and no one ever said we had to claim the accounts and file FBARS. This year we found out about the requirement to file FBARs and report the interest income which was minimal. The total dividen income on the accounts over 5 years was 250.00 collectively. Our We filed the late fbars stating we were totally unaware of the filing requirmeent. Our qAfter reading lenthgy blogs and IRS regulations on this issue we are very afradid that we could lose everything ew ever saved due to the FBAR enalty scheme. My question is, will the IRS come after us and impose FBAR penalties u and what should we do if the do? Thank you.,

  12. I would like to also add that based on Mr. Nolan’s first two paragraphs above, does that relate to non-fbar filers such as me? I am starting to interpret his statement that the IRS will not come after us. The entire thing is confusing and if someone could help me digest if what Mr. Nolan said could apply to my case? We never entered any amnesty program offfered by the IRS. Thanks Again

  13. @Pina1

    this is not advice, but in answer to what he is saying:

    He seems to be saying (whether it is true or not) that outside of OVDI there are not lots of cases of penalties being imposed.

    There is a six year statute of limitations on FBARs. What does that mean for you? Clearly the people in ovdi are paying penalties that are “in lieu” of other penalties (including FBAR).

  14. @Pina1 Is the current ballance in your foreign account add up to over $10,000? Also, what year was your $200K in that bank. Was it less than six years ago?

  15. In 2006 there was 168000 at one point. The between 2007 – 2010 we have 2 accounts inthe same bank not totaling over 55000. My main point of confusion is I submitted 5 years of late fbars 2006 – 2010. This was a voluntary submission and not through any OVDI or special amnesty program that I have been reading about. We decided to report the fbars with a statemnent of (we were honestly not aware of the reporting requirement) which is true. My main question is what will the IRS dwhen they get these 5 late FNBARs? Will they come after us and penalize us? The interest in the accounts was minimal over the 5 years. A total of approx 250.00 of unreported dividend earning for those 5 years. Any insgiht would be appreciated. Thanks.

  16. I wonder where I can find information on FBAR penalties of people not in the OVDI. What is happeining to folks like us who just found out of the reporting requirement and began to report and file the late fbars?

  17. My wife and I have been soliciting the advice of many declared international tax professionals. One whose advice I tend to like is this person advised me to just file the late FBARs and not hire or consult with an attorney because he said that an attorney cannot do anything more for you than what you can do for yourdself in this situations. The tax professional also said that he did not ever hear of anyone who declares late fbars get penalized with such small amounts of money. At the end of the day you can read a thousand opinions on this and get left with no real understanding of what you are up against until the IRS comes knocking on your door. If they do, and you are like me with such little money at stake do we stand a chance fighting by ourselves or de we have to get a lwyer to fight hte IRS?

  18. @ Pina1 I’ve been following this issue for a couple years, and I too have not heard of anyone being charged with penalties at that level.

  19. I just discovered something I have to ask someone on this blog to help me understand. As I have said in previous blogs, my wife and I decided to send 5 late FBARs to treasury with a note we were not aware of this filing requirement. Was this a “VOLUNTARY DISCLOSURE”???? I am still confused of the different types of status for fbar late filing or disclosure. Is VOLUNTARY DISCLOSURE the same as OVDI??? Did I make a VOLUNTARY DISCLOSURE by just mailing in the late FBARS and will come under a more austere penalty regime? Thanks.

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