Often the focus of FBAR cases has been directed at determining the definition of willfulness; however, more recently courts have been confronted with determining who the authorities can pursue to collect FBAR penalties when the non-filer dies before or during collection measures.¹ Since there is already agreement that remedial suits survive death but penal suits do not, the courts have been forced to decide where exactly FBAR penalty suits fall on the remedial-penal spectrum.
On April 27, 2020, yet another U.S. District Court took the position that penalties for willful failure to file foreign bank and financial account reports (FBAR penalties) can survive the death of the penalized non-filer.² Specifically, the court in U.S. v. Green concluded that:
[t]he FBAR penalty is the proverbial square peg in the round hole; it fits perfectly in neither of the round holes of the remedial-penal dichotomy. Rather, the FBAR penalty is primarily remedial with incidental penal effects. Accordingly, the FBAR penalties pursuant to § 5321(a)(5)(C) survive [non-filer’s] death.³″
As we discuss this case below, our readers should carefully consider the growing number of decisions indicating that FBAR penalties survive the non-filer’s death and the implication that eventually someone else will be obliged to satisfy the penalties.
The children (Defendants) of the non-filer (Green) filed a motion to dismiss for failure to state a claim, challenging the IRS’s $2.1 million FBAR suit against them as representatives of Green’s estate.
Briefly, since the 1980’s, Green had used shell companies to set up several accounts in foreign banks. And although Green was required to file FBARs for certain accounts in tax years 2010 and 2011, she failed to do so. In the fall of 2013, Green applied to enroll in the 2012 Offshore Voluntary Disclosure Program (OVDP). The OVDP “offered a coordinated, standardized settlement” for those non-filers such as Green.⁴ Thereafter, Green tried to “directly enter” another IRS offshore disclosure program. When she was later informed that she was not allowed to “directly enter” the program, she told the IRS that she intended to withdraw from the 2012 OVDP; thus, the IRS removed her from the 2012 OVDP.
In the summer of 2017, the IRS assessed FBAR penalties against Green for tax years 2010 and 2011. Green did not pay the penalties. She died in the summer of 2018. Meanwhile, interest continued to accrue, and a penalty for failure to pay a lawful debt was incurred.
In September of 2019, the IRS filed their complaint to recover the unpaid penalties. Defendants responded with their motion to dismiss the complaint for failure to state a claim.
Citing a case from 1884, Ex Parte Schrieber, the court first noted that in the context of an action brought against a deceased party, the action will fail unless the cause of action is one that “survives by law.”⁵
Moreover, the court explained that federal law is well-settled in that remedial actions survive death, but penal actions do not.⁶ The court distinguished the actions from each other, clarifying that remedial actions are compensatory in nature, while penal actions impose damages on a person who generally wronged the public.⁷ And when a claim is not clearly one or the other, a court must “determine whether the claim’s primary purpose is penal or remedial.”⁸
Citing United States v. NEC Corp., the court then provided that the Court of Appeals for the Eleventh Circuit has generally instructed that courts examine the following three factors in deciding whether a statute is remedial in nature or penal in nature:
However, the court promptly noted that NEC Corp. was related to the Truth in Lending Act and the injured party was not the United States; thus, the court stated that those “factors do not allow for a situation where the United States itself has suffered a harm because of defendant’s conduct.”
Emphasizing that the Eleventh Circuit had not yet decided whether FBAR penalties survive death, it reviewed two additional recent cases—United States v. Estate of Schoenfeld ¹⁰ and United States v. Park,¹¹ — both of which resulted in rulings that FBAR penalties survive death. The court noted that the Estate of Schoenfeld court applied a framework used in Hudson v. United States,¹² which in turn studied factors from Kennedy v. Mendoza Martinez,¹³ to determine whether a “‘scheme was so punitive either in purpose or effect’ as to ‘transfor[m] what was clearly intended as a civil remedy into a criminal penalty.’”¹⁴
In the end, though, the court here ultimately stated that it didn’t consider either NEC Corp. or Hudson “precisely on point” and so it proceeded to examine “the relevant considerations which are embodied in both analyses to determine whether the FBAR penalty is remedial or penal.”¹⁵
So, rather than strictly adhering to any other court’s previous set of factors, the court embarked on its own analysis of handpicked factors.
Prefacing its analysis, the court reiterated that FBAR penalties are statutorily denominated as “civil penalties” and subject to the IRS’s enforcement authority. As such, the court stated that this indicates that “Congress intended to provide a civil penalty.”¹⁶ Moreover, since Congress did not expressly provide that FBAR penalties survive death, the court explained that it must use federal common law.
First, the court highlighted that the Government was the injured party as a result of Defendant’s conduct. Specifically, according to the court:
FBAR violations may deprive the Government of taxes on investment gains and the Government likely expends significant resources on investigating foreign accounts. See United States v. Garrity, No.3:15-CV-243(MPS), 2019 WL 1004584, at *9 (D. Conn. Feb. 28, 2019). Moreover, FBAR violations may prevent the Government from investigating and prosecuting crimes and may aid in concealing other misconduct.¹⁷
Here, the court considered that Green’s failure to comply with the FBAR requirements:
may have deprived the Government of taxes on investment gains she made in the accounts at issue, hindered the Government from investigating and prosecuting crimes committed by Marie or others, and forced the Government to expend significant resources to investigate Marie’s accounts.¹⁸“
Second, the court acknowledged that the FBAR penalty serves both a remedial purpose to recover monetary harm and a punitive function as a deterrent and retribution. Although, the court was quick to note that the Supreme Court has made it clear that civil penalties are all comprised of some deterrent effect and that none are wholly remedial.¹⁹
Third, the court asserted that the FBAR penalty (specifically, the greater of $100,000 or ½ of the account’s balance at the time of the violation) is not entirely disproportionate to the harm suffered here, and that the FBAR penalty is not required to directly relate to the Government’s loss in order to be considered remedial. The court found it significant that the FBAR penalty corresponds to the amount of the account balance—in the court’s opinion, making it reflective of Congress’ notion that the value of the harm suffered by the Government corresponds to the account balance.
Furthermore, the court compared the FBAR penalty to the penalty in Helvering v. Mitchell,²⁰ which was a 50% penalty on income tax underpayment in addition to the underpayment recovery. In Helvering, the penalty was found to be remedial, because it was primarily “a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud.”²¹
In sum, the court concluded that the FBAR penalty is primarily remedial and survives Green’s death, stating that:
granting a windfall to estates of violators of the FBAR requirements because the violator suffered the paradoxical fortune and misfortune of passing away after the violation occurred and before the Government filed suit against him or her for FBAR violations contradicts the remedial purpose of the FBAR filing requirements.²²“
In response to Defendants’ argument that the IRS failed to state a claim, because Green’s failure to comply with FBAR requirements was not willful, the court explained that the recklessness definition of willfulness doesn’t require knowledge of a duty—just reckless or careless disregard of that duty. As such, the court determined that the government alleged sufficient circumstantial evidence for the inference that Green acted willfully.
Again, this is another win for the IRS, which maintains that FBAR penalties survive the non-filer’s death. And this necessarily begs the very important question: who’s liable now? The courts have a variety of parties to consider shifting this burden to, including but not limited to, beneficiaries, surviving spouses, trustees, and recipients of fraudulent transfers. You can be sure that the IRS will pursue anyone they can make a creative case against.