There have been two recent developments in the FBAR world: The due dates for 2016 FBARs have changed, and the IRS has had its wrist slapped for the way it fined a taxpayer.

Filing date change

Historically, the FBAR has been due June 30. While taxpayers often think of the FBAR as connected to the tax return, the requirement to file is created by an entirely separate statute - the Bank Secrecy Act. At the beginning, the FBAR was not even intended to be used for tax purposes. So the filing date didn't fit with the regular tax return filing deadlines.

Unsurprisingly, taxpayers often missed the deadline.

A recent law made a number of changes to tax return filing deadlines, and at the same time changed the FBAR deadline to April 15. Also, an extension is available to October 15. These dates match the income tax dates. It is open to the IRS to allow other extensions, so I anticipate that it will parallel the treatment of other filings - an extension that is valid for your 1040 will be valid for the FBAR as well. 

I expect these new deadlines will make compliance easier.

The law is a little hard to find, because it is an earmark to a transportation bill [Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, HR 3236].

I’m not sure why they didn’t make this change effective for the 2015 filing year, but taxpayers need to beware that the due date for this year will be June 30, 2016.

IRS slapped for abusing FBAR filer

A district court has held that the IRS' conduct in assessing penalties for failure to file FBARs was "arbitrary and capricious", in violation of the Administrative Procedures Act (APA). The court disallowed the interest and late-payment penalties (but not the failure-to-file penalty).

The APA provides procedural guarantees for "information adjudication". It requires that an agency give prompt notice when denying any request, and that the notice include a brief statement of the grounds for such denial.

James Moore maintained a foreign account subject to FBAR requirements. He filed no FBAR until at least 2009. In 2010 he filed late FBARs for 2003-8, as well as a timely-filed form for 2009.

In October of 2011, an IRS agent interviewed Mr. Moore and then prepared a Penalty Summary Memo recommending that the IRS impose a $10,000 penalty for each year from 2005 to 2008. The memo, which provided the agent's reasoning in detail for recommending the penalty, wasn't disclosed to Mr. Moore at that point.

In December of 2011, the IRS sent Mr. Moore a letter proposing a $40,000 penalty. The letter provided virtually no information about the basis for the penalty, demanded that he accept the penalty or request a conference with Appeals by January 28, 2012. However, on January 23, 2012, the IRS assessed a $10,000 penalty against Mr. Moore for 2005 only (effectively abating the later years’ penalties).

Mr. Moore requested an appeal, and his counsel provided detailed arguments in a letter as to why Mr. Moore acted with reasonable cause. The IRS responded in a brief letter upholding the penalties and assessed the $10,000 penalties. Mr. Moore filed suit late in 2013. He argued that the IRS violated the Fifth Amendment's Due Process Clause, the Eighth Amendment's Excessive Fines Clause, and the APA. He also sought to have the IRS compelled to disclose the memo.

In April 2015, the district court held that Mr. Moore committed non-willful violations of the BSA and was thus subject to civil penalties. It also rejected his reasonable cause, Fifth Amendment and Eighth amendment arguments for relief from that penalty. The court did not accept Mr. Moore’s “reasonable cause” argument, saying it boiled down to merely arguing age and ignorance.

As to Moore's APA argument, the court said the appropriate standard of review was whether the IRS's actions were “arbitrary, capricious, an abuse of discretion, or otherwise not accordance with the law” under the APA. The court observed that, unlike tax deficiencies, there are “no codified procedures” for the Service to use in assessing FBAR penalties. Thus, the IRS can essentially fashion its own procedures for doing so, subject to constitutional limitations and the APA.

The court then examined the letter sent to Mr. Moore and found that it could not, on the record before it, determine whether the IRS acted arbitrarily, capriciously, or abused its discretion in assessing the penalties. The court then issued an order that gave the IRS time to introduce additional material in support of its determination to show that its decision wasn't arbitrary.

The IRS's conduct was arbitrary and capricious. After reviewing the parties' supplemental briefs in response to its order, the court reached the following conclusions:

  1. The IRS demonstrated that its decision to assess Mr. Moore FBAR penalties of $10,000 for each year from 2005 through 2008 was not arbitrary, not capricious, and not an abuse of its discretion. The memo indicated that the IRS was following Internal Revenue Manual (IRM) guidelines for such types of assessments. The court found that those guidelines were not arbitrary or capricious and that it was not an abuse of discretion for the IRS to follow those guidelines in this case.
  2. The IRS' conduct in assessing those FBAR penalties, by contrast, was in several respects arbitrary and capricious:
    1. The IRS disclosed no adequate basis for its decision to assess the penalties until this litigation forced its hand;
    2. Even after this litigation began, the IRS refused to disclose the evidence on which it relied to demonstrate the basis for its decision to impose those penalties. The IRS did not simply fail to disclose the memo, it opposed Mr. Moore's motion to compel its disclosure. The IRS offered no explanation for its apparent policy not to explain the assessment of FBAR penalties to citizens, and in particular for its apparent policy not to put that explanation in writing;
    3. No citizen should have to sue his own government to find out why he is being fined, or to find out why he is being fined $40,000 as opposed to a smaller amount. And once a citizen has sued, he should not have to fight over the most basic disclosures, and
    4. With respect to the 2005 penalty, the IRS broke its own promise not to impose a penalty until Mr. Moore had an opportunity to respond to its “proposed” assessment. The IRS explained that its January 23, 2012 assessment was dictated by its internal policy to assess FBAR penalties at least 180 days before the expiration of the statute of limitations for doing so. The court said that such a policy is well within its discretion. What was not within its discretion was the IRS's decision to offer Mr. Moore the opportunity to contest the 2005 FBAR penalty before its assessment, and then to impose the penalty before the deadline the IRS imposed. The IRS offered no explanation for why it allowed rote application of its internal policies to trump the individual assurances it made to Mr. Moore.
  3. In light of the arbitrary and capricious conduct described above, any interest, late fee, or other supplemental assessment that the IRS or another agency of the U.S. attempted to tack on to Mr. Moore's FBAR penalties was void. The government had to treat the FBAR penalties as if they were first assessed on the date of the court's order. The court noted that there were two apparent harms arising from IRS's arbitrary and capricious conduct in imposing that penalty.
    1. Moore was given the unappealing choice to either accept IRS' unexplained imposition of a $40,000 penalty or to file suit. The court assumed that Mr. Moore's choice to sue cost him a substantial sum.
    2. The IRS assessed interest and other penalties in addition to the base FBAR penalties.

 [Moore v. U.S., (DC WA 2015) 115 AFTR 2d [2015-591]