FBAR penalties and bankruptcy

 

 

FBAR penalties can be massive. Willful penalties can be as high as 50% of the account value. A question that many people facing this financial threat ask is "are FBAR penalties dischargable in Chapter 7 bankruptcy?" While we are not Bankruptcy attorneys, we can safely say that the government's answer to this question is 'No' (see I.R.M. 5.9.4.20.16).

 

But, there is more to the story. There may be a strategic use to bankruptcy and FBAR penalties.

 

How FBAR penalties are collected

Collecting FBAR penalties is not like collecting back taxes. Because the way the laws are written, the IRS can't just issue a levy or lien like they do with regular tax debts in order to collect on an FBAR penalty. Aside from intercepting tax refunds, the government actually has to file a lawsuit to collect FBAR penalties it has assessed. The government also has a limited amount of time to file a lawsuit to recover FBAR penalties. This is called the 'FBAR Collection Statute Expiration Date' (CSED). The FBAR CSED is two years from the date of the assessment of FBAR penalties.

 

The difference between the time to collect a tax and the time to file an FBAR lawsuit

Compare this with the CSED on taxes. Generally, the IRS has 10-years to collect on an assessed tax debt. Normally, when you file bankruptcy, the CSED on taxes stops, or tolls. Where it gets interesting is with the FBAR — the CSED does not toll in Bankruptcy. So, if your bankruptcy petition is open for 12 months, that would be a year (plus some additional time) your CSED on taxes won't run. This gives the IRS additional time to collect after you are no longer in bankruptcy (this assumes the Bankruptcy did not discharge your tax debts).

 

Yet, if you file for Bankruptcy the two-year FBAR CSED continues to run! This means the government will be given at least 30-days to file a suit after the bankruptcy is withdrawn or closed-out.

 

Let's say that there is a year left on your FBAR CSED. After consulting with a Bankruptcy attorney you decide that because some of your other debt is large, you wish to file bankruptcy (be it Chapter 7, 11, or 13.) After a year or so, you've reached a deal with some creditors and then your bankruptcy petition is withdrawn. In theory, the FBAR CSED has expired, and you just need to wait out the 30 additional days the government has to file suit. The question is, would this work?

 

Would the government be able to act quickly enough once you are no longer in bankruptcy to get their Federal lawsuit filed? Remember, they only have 30-days to to meet the FBAR CSED. What if you withdrew your case on December 1st, knowing the December is often a month many government employees have to take vacation days or else lose them?

 

Because the stakes are so high, there will probably be some upcoming cases in which we find out. If you're concerned about unfiled or misfiled FBARs, or FBAR penalties contact us to schedule a complimentary, confidential consultation. Call us at 888-727-8796 or email info@irsmedic.com.

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The entire relevant portion of the Internal Revenue Manual section on FBAR penalties and bankruptcy is below.

 

5.9.4.20  (09-04-2015)
Report of Foreign Bank and Financial Accounts (FBARs)

 

1. Reporting Requirement. Each US person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts that has an aggregate value greater than $10,000 at any time during a calendar year is required to report that financial interest in, or authority over, the foreign account on Schedule B of Form 1040, as well as on FinCEN Report 114, Report of Foreign Bank and Financial Accounts, on or before June 30 of the succeeding year. Each person who is required to report an interest in foreign financial accounts must also maintain adequate records of any accounts. Failure to maintain adequate records is an additional violation of Title 31.
2. Not Willful Violations. 31 USC § 5321(a)(5)(A) authorizes a civil monetary penalty for any person who violates (or causes any violation of) § 5314 in an amount not to exceed $10,000 per violation. The penalty is waived for reasonable cause.
3. Willful Violations. 31 USC § 5321(a)(5)(C) authorizes a civil monetary penalty for any person who willfully violates (or willfully causes any violation of) § 5314 not to exceed the greater of:

    

   1. An amount equal to 50% of the balance in the account at the time of the violation; or
   2. $100,000.

       

      Note: The penalty can be for each violation.

4. Delegated Authority. Even though the penalty imposed under 31 USC § 5321(a)(5) for failing to report these foreign financial interests (commonly called the FBAR penalty) is not a tax penalty, the IRS has been delegated authority to collect the penalty for the government. Delegation Order 25-13, effective April 11, 2012, authorizes bankruptcy specialists grade 9 and above to prepare and file proofs of claim for FBAR penalties and to take appropriate action to protect the government’s interest in bankruptcy, state and federal receiverships, and other state and federal insolvency actions.
5. Systemic Tracking. FBARs are filed electronically with the Financial Crimes Enforcement Network (FinCEN), and information reported on FBARs is entered into a database known as the FinCEN Query System(FCQ). FBAR penalties are maintained on a database at the Enterprise Computing Center – Detroit (ECC-DET) and can only be checked by IRS personnel in Detroit. FBAR cases are not loaded onto AIS or IDRS because FBAR cases are not tax cases.
6. Interagency Agreement. The IRS has entered into an agreement with the Bureau of the Fiscal Service (BFS) to prepare proofs of claim in cases when a debtor with an FBAR penalty assessment has filed bankruptcy. When debtors report FBAR penalties as debts in their bankruptcy petition and schedules, clerks of bankruptcy courts send notices to BFS in Birmingham, Alabama. BFS forwards bankruptcy notices to the ECC-DET.
7. ECC-DET Duties. When the ECC-DET receives bankruptcy notices, it inputs the bankruptcy indicator on FCQ. All FBAR penalty cases are processed by and assigned to the Los Angeles Field Insolvency office. ECC-DET provides the following account information to the FBAR Penalty bankruptcy caseworker in the Los Angeles Insolvency office:

    

   • Debtor name
   • Debtor address
   • Debtor SSN
   • Balance(s) due for both the penalty and statutory additions
   • Assessment date
   • CSED
8. CSED. The government has a two-year period in which to file a civil action to recover an FBAR penalty, beginning on the later of the date the penalty was assessed or the date any judgment becomes final in any criminal action under 31 USC § 5322 in connection with the same transaction with respect to which the civil penalty was assessed. Currently, the IRS has no procedures for soliciting a waiver of this two-year statute of limitations. Filing a bankruptcy petition does not suspend the running of the collection statute expiration date. However, if the FBAR collection statute has not expired upon the date of filing of the bankruptcy petition, 11 USC § 108(c) extends the time to file an FBAR collection suit until the later of:

    

   1. The end of the two year collection period, or
   2. 30 days after notice of the termination or expiration of the stay under 11 USC §§ 362, 922, 1201, or 1301, as the case may be, with respect to the claim.

    

   Note:Insolvency must coordinate any FBAR CSED issues closely with Counsel, since the government may have only a short period of time in which to initiate a collection suit after the termination of the bankruptcy case.

9. Insolvency's Duties. Insolvency caseworkers must :

    

   • Verify the bar date has not expired.
   • Verify the FBAR CSED has not expired.
   • Prepare and distribute the proof of claim (Form B10) for BFS.
10. Creditor Name. IRS Insolvency prepares manual FBAR proofs of claim listing the creditor as the BFS at the following address:
    US Treasury
    Bureau of the Fiscal Service
    P.O. Box 830794
    ATTN: Debit Services Branch
    Birmingham, AL 35283-0794

     

    Caution: An FBAR penalty cannot be included on a claim naming the IRS as the creditor.

11. Claim Calculations. FBAR claims are always classified as unsecured general and include the FBAR penalty amount and interest. Insolvency may have to coordinate with BFS or the ECC-DET to determine the appropriate interest to report on a claim, because the interest rate on these penalties is subject to change. Also, a late payment penalty may be assessed under Title 31, and collection costs may be assessed.
12. Claim Distribution. The FBAR bankruptcy caseworker files the FBAR proof of claim with the bankruptcy court and must provide copies of the FBAR claim to the ECC-DET, the Insolvency Territory Manager, BFS, the debtor, and debtor's counsel. In addition, all FBAR cases must be referred to local Counsel along with a copy of the proof of claim.
13. FBAR Plan Review. Associate Area Counsel is responsible for reviewing bankruptcy plans as to the treatment of the unsecured general claim for the FBAR penalty. If the IRS is a creditor for unpaid federal taxes or statutory additions to taxes under the same docket number as the FBAR penalty, the assigned Field Insolvency caseworker will process the non-FBAR assessments following established procedures for the chapter under which the bankruptcy has been filed.
14. Payments on FBAR Accounts. FBAR payments received from the bankruptcy proceedings must be mailed for processing to BFS at the address given in paragraph (10) above.
15. FBAR Case Monitoring. The ECC-DET will:

     

    1. Record payments if the bankruptcy indicator is on the account;
    2. Process abatements;
    3. Process full payment of the debt;
    4. Reverse the bankruptcy indicator; and
    5. Return the account to regular collection status if appropriate.
16. Dischargeability of the FBAR Penalty. The FBAR penalty is excepted from discharge in individual Chapter 7 and 11 cases under 11 USC § 523(a)(7). Counsel should be consulted if questions arise concerning the FBAR penalty and dischargeability.
17. For additional information on FBARs, see IRM 5.21.6, Foreign Bank and Financial Account Report.