Tax Court Holds That Collection Due Process Rules Do Not Apply to FBAR Penalties

(Parker Tax Publishing October 2024)

The Tax Court held that Foreign Bank Account Reporting (FBAR) penalties that the IRS assessed against a married couple are not taxes imposed by the Internal Revenue Code and thus are not subject to the collection due process requirements of Code Sec. 6320 and Code Sec. 6330. As a result, the FBAR penalties may be withheld from the couple's monthly social security benefits to satisfy their FBAR debt. Jenner v. Comm'r, 163 T.C. No. 7 (2024).

Background

According to the IRS, Stephen Jenner and his wife, Judy, allegedly failed to timely file foreign bank account reports (FBARs) under 31 U.S.C. Sec. 5321 for years 2005 through 2009. As a result, the Treasury Department's Bureau of the Fiscal Service (BFS) informed Judy that the Treasury Offset Program (TOP) would withhold funds from her monthly social security benefits. In a nearly identical letter, BFS informed Stephen that TOP would also withhold funds from his social security benefits.

Title 31, Sec. 5314, 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. Accordingly, any person that meets this definition must file Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), with FinCEN on or before June 30 of the year following the calendar year for which the financial account is maintained. Under 31 U.S.C. Sec. 5321(a)(5)(A), the Treasury Secretary may impose a civil penalty on any person who fails to file the requisite form. The Treasury Secretary has delegated to FinCEN the authority to enforce the provisions and impose civil penalties for violations of 31 U.S.C. Sec. 5314 and FinCEN subsequently redelegated this authority to the IRS.

On December 7, 2022, Stephen and Judy each requested collection due process (CDP) hearings under Code Sec. 6330 relating to the FBAR penalties. The IRS notified the couple that they did not qualify for a CDP hearing under Code Sec. 6330 because the FBAR penalties assessed against them were not taxes and were not subject to the requirements of Code Sec. 6330.

Code Sec. 6330(a)(1) provides that the IRS cannot levy on any property or right to property unless it first notifies the property owner in writing of the right to a CDP hearing under Code Sec. 6330 before the levy is made. Code Sec. 6330(a)(3)(A) further provides that the notice required must include, in simple and nontechnical terms, the amount of unpaid tax. In Mason v. Comm'r, 132 T.C. 301 (2009), the Tax Court held that the statutes creating the CDP procedures, and the statutes creating the lien and levy collection mechanisms reviewed by the CDP procedures, all explicitly pertain to "tax." Under Code Sec. 6330(d)(1), a taxpayer may, within 30 days of a determination, petition the Tax Court for a review of such determination and the Tax Court will have jurisdiction with respect to such matter.

The Jenners filed a petition with the Tax Court alleging that they were denied their CDP rights pursuant to Code Sec. 6330. They argued that (1) the letter they received from the IRS notifying them that they did not qualify for a CDP hearing provided the requisite determination pursuant to Code Sec. 6330(d)(1) to invoke the Tax Court's jurisdiction; (2) nothing in Code Sec. 6330 limits the CDP procedures to Title 26 liabilities; (3) the administrative offsets on their social security benefits are "levies by the Secretary" that entitle them to a CDP hearing; and (4) there is no "rational distinction" between levies by the IRS to collect Title 26 tax liabilities and levies to collect FBAR penalties. According to the Jenners, the CDP procedures in Code Sec. 6330 apply to any type of liability to the extent the Treasury Secretary files a lien or intends to levy.

The IRS responded by filing a Motion to Dismiss for Lack of Jurisdiction and contended that the collection of FBAR penalties is not subject to the notice and other requirements of Code Sec. 6330.

Analysis

The Tax Court dismissed the case for lack of jurisdiction after holding that 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 constitute taxes subject to the CDP provisions of either Code Sec. 6320 or Code Sec. 6330. In reaching its conclusion, the court cited its decision in Ryckman v. Comm'r, 163 T.C. No. 3 (2024), in which it held that the rights afforded by the CDP statutes apply only to those people subject to IRS actions to collect tax. In the Jenners' case, the court concluded that FBAR penalties are not taxes and the IRS was thus under no obligation to provide the Jenners with a CDP hearing.

The Tax Court observed that it has consistently held that jurisdiction under Code Sec. 6330(d)(1) is contingent on the issuance of a valid notice of determination, and that a taxpayer may only file a petition for review with the Tax Court where the administrative determination concerns a tax over which the court generally has jurisdiction. Calling the Jenners' contentions "specious," the court flatly rejected their argument that the CDP procedures in Code Sec. 6330 apply to any type of liability to the extent the Treasury Secretary files a lien or intends to levy.

For a discussion of CDP hearings, see Parker Tax ¶260,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com