FBAR Filers Gain A Weapon In Recent Penalty Decision
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A U.S. court has dismissed a FBAR penalty lawsuit, saying that the U.S. Internal Revenue Service’s assessment of such a penalty violates taxpayer rights – and potentially providing a new defense for filers of these returns.
A district court in Texas has dismissed a U.S. Justice Department lawsuit to collect a Report of Foreign Bank and Financial Accounts (FBAR) penalty, a conclusion that for the first time says the Internal Revenue Service’s assessment of an FBAR penalty violates the right to a jury trial guaranteed by the U.S. Constitution.
The U.S. District Court for the Northern District of Texas, Fort Worth Division, in United States v. Sagoo concluded that because the government adjudicated liability and levied civil penalties against the defendant that had real world consequences and essentially eliminated an effective chance for the defendant to appear before a jury, the government violated the defendant’s Seventh Amendment right to a civil jury trial.
Observers say this decision, “sure to send shock waves through the halls of the IRS and Justice Department,” gives FBAR litigants a new defense against lawsuits regarding FBAR penalties.
$1 million penalty
Sharnjeet K. Sagoo, a U.S. person, had bank accounts in Kenya, India and England: In 2011, the balance of these accounts was $1,445,188; in 2012, the balance was $1,503,358; in 2013, the balance was $1,769,355.
She failed to annually disclose those accounts on a FBAR, which is not part of a regular tax return and which U.S. citizens must file annually if the aggregate maximum value of all their foreign financial accounts exceeds $10,000. The penalty for non-willful violation is up to $10,000; the penalty for willful failure is up to the greater of $100,000 or 50% of the amount of the balance in the account at the time of the violation.
In December 2022, the IRS assessed a penalty of $1,020,922.50 against Sagoo for willfully failing to report her foreign interests during the three years. Sagoo did not pay the FBAR penalties, and the IRS identified possible “computational issues” with the penalty. The government filed suit, requesting that the court reduce the penalties to judgment in an amount that the IRS will recalculate in future proceedings.
Counterclaims
Sagoo filed to dismiss on several grounds, including that the government violated her Seventh Amendment right to a jury trial by assessing the willful FBAR penalty.
The government acknowledged that Sagoo was entitled to a civil jury trial but denied that any Seventh Amendment violation had yet occurred because Sagoo was entitled to a post-assessment de novo jury determination of her liability for any willful FBAR penalty.
Sagoo countered that the Amendment violation occurred when the IRS assessed the willful penalty against her, and that she was entitled to a jury trial before any such assessment could be made. The district court agreed with her.
“Despite the historical significance and protection of the Seventh Amendment, the Government here cites no authority ‘supporting the proposition that the constitutional guarantee of a jury trial is honored by a trial occurring after an agency has already found the facts, interpreted the law, adjudged guilt, and levied punishment,’ ” case papers read. “As the Fifth Circuit recently held in [AT&T, Inc. v. FTC], a jury trial that follows an agency’s assessment of civil penalties falls short of what the Seventh Amendment guarantees.”
‘Real world impacts’
The court added that a jury trial occurring after the IRS has assessed a FBAR penalty (aka an “after-the-fact jury trial”) does not protect the taxpayer’s constitutional right to a jury trial. The federal Treasury and the IRS improperly “acted as prosecutor, jury, and judge” in investigating the taxpayer, observers noted, determining that she was liable and assessing a FBAR penalty.
“Second, an after-the-fact trial does not protect an individual’s Seventh Amendment right because the adjudication and civil penalties come with ‘real world impacts,’ ” the court decision reads. “These impacts include the threat to either pay or get sued, reputational harm, and administrative offsets … [T]he Government brought this action ‘to reduce to judgment and collect civil penalties assessed against [Sagoo]. Hence, a real-world consequence of the IRS’s assessment is that the Government can collect Ms. Sagoo’s FBAR penalties through administrative offsets before a jury ever determined that she was liable to the government for any amount of money.”
Finally, “an after-the-fact trial does not protect an individual’s Seventh Amendment right when the after-the-fact trial is the only opportunity for an individual to exercise her Seventh Amendment right … Sagoo only has access to … a jury after the penalty has been assessed. And even after the penalty is assessed, Ms. Sagoo does not have the opportunity to exercise her Seventh Amendment rights unless she refuses to pay the penalty and the Treasury chooses to bring an action to convert the penalty into a judgment.”
Affirming the authority of the IRS to enforce laws requiring individuals to report foreign financial bank accounts, the agency “must do so consistent with our Constitution’s guarantees of an Article III decisionmaker and a jury trial,” the court says. “Because the Government (1) adjudicated liability and levied civil penalties against Ms. Sagoo (2) that had real world consequences, and (3) an after-the-fact trial brought by the Government would be Ms. Sagoo’s sole opportunity to appear before a jury, the Court holds that the Government violated Ms. Sagoo’s Seventh Amendment right.”
A new defense
In the decade and a half of FBAR filings by the U.S. government, the Seventh Amendment has never been implicated in IRS assessment of FBAR penalties. Observers say Sagoo – even though only a lower court decision sure to be appealed – could be a watershed case that adds a powerful new tool in future legal defenses against federal FBAR penalties.
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About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.
Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.
Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.
Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).
Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.
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