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FBAR civil penalties aren’t taken into account in $2 million whistleblower threshold

Whistleblower 22716-13W, (2016) 146 TC No. 6

The Tax Court has concluded that penalties for failing to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (Foreign Bank Account Report or FBAR) under 31 U.S.C. sec. 5321(a) are not “additional amounts” for purposes of the $2,000,000 nondiscretionary award threshold under Code Sec. 7623(b)(5)(B). Accordingly, FBAR payments must be excluded in determining whether the $2,000,000 amount in dispute requirement has been satisfied.

Background on whistleblower awards. Under Code Sec. 7623(a), IRS has discretionary authority to pay awards to informants (i.e., whistleblowers) in the sums it considers necessary for the detection of tax underpayments, or for the detection, trial, and punishment of tax law violators.

Under Code Sec. 7623(b), individuals are entitled to receive an award of 15% to 30% (or lower amounts in cases of less substantial contribution) of the collected proceeds resulting from an action based on information provided by the whistleblower in any action:

…against any taxpayer, but in the case of any individual taxpayer, only if such individual’s gross income exceeds $200,000 for any tax year subject to such action, (Code Sec. 7623(b)(5)(A)) and
…if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2 million. (Code Sec. 7623(b)(5)(B))

Thus, under Code Sec. 7623(b)(5)(B), a whistleblower is eligible for a nondiscretionary award under Code Sec. 7623(b) only “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.”

Background on FBAR filings with regard to foreign accounts. U.S. citizens and resident aliens are legally required to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers (i.e., U.S. citizens and resident aliens with worldwide income subject to the reporting rules) will need to fill out and attach Form 1040, Schedule B, Interest and Ordinary Dividends, to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Separately, certain taxpayers with foreign accounts must file a Form 114 (FBAR) with FinCEN, a bureau of the Treasury Department. It is not a tax form and cannot be filed with IRS. The form must be filed electronically and is only available online through the BSA E-Filing System website. In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during the previous calendar year. FBAR civil penalties with regard to filing failures are imposed and collected under 31 U.S.C. sec. 5321, not under the Internal Revenue Code.

Facts. Whistleblower P filed Form 211, Application for Award for Original Information, with the IRS Whistleblower Office (Office). On the application, P asserted that he was cooperating with the Department of Justice and the IRS Criminal Investigation Division in connection with the ongoing investigation of two Swiss bankers, Martin Lack and Renzo Gadola, and that his cooperation had led to, and would lead to more, information about these bankers’ involvement in tax evasion by U.S. persons having undeclared offshore financial accounts.

P filed another claim for an award (the subject of the present controversy) after he learned that a taxpayer who dealt with Gadola had agreed to pay a substantial penalty in conjunction with a guilty plea for filing a false tax return, an FBAR penalty substantially in excess of $2,000,000, and restitution. This taxpayer admitted that Gadola had helped him open Swiss bank accounts to conceal his income and assets from U.S. authorities.

P claimed entitlement to an award based upon the aggregate amount paid by the taxpayer—including the FBAR penalty—given his alleged involvement in Gadola’s arrest, which allegedly led to the taxpayer’s arrest.

During its review of the taxpayer’s claim, the Office informed P that it had received a legal opinion from the IRS Office of Chief Counsel concluding that FBAR penalty payments, because they are made pursuant to Title 31 rather than Title 26 of the U.S. Code, are not collected proceeds eligible for a nondiscretionary award under Code Sec. 7623(b)(1).

Court’s conclusion. The Tax Court held that the term “additional amounts” as used in Code Sec. 7623(b)(5)(B) means the civil penalties set out in chapter 68, subchapter A, of the Internal Revenue Code, captioned “Additions to the Tax and Additional Amounts.” Rejecting the argument that the term “additional amounts” as used in Code Sec. 7623(b)(5)(B) means, in essence, “other sums of money,” the Court noted that it has consistently held that “additional amounts,” particularly when it appears in a series that also includes “tax” and “additions to tax,” (as it does in Code Sec. 7623(b)(5)(B)) is a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A.

Accordingly, the Tax Court concluded that FBAR civil penalties aren’t “additional amounts” within the meaning of Code Sec. 7623(b)(5)(B). Such amounts aren’t “assessed, collected…[or] paid in the same manner as taxes” under Code Sec. 6665(a)(1). As a result, FBAR payments must be excluded in determining whether the $2,000,000 amount in dispute requirement has been satisfied.

References: For IRS’s whistleblower program, see FTC 2d/FIN ¶  T-1030  et seq.; United States Tax Reporter ¶  76,234   et seq.; TaxDesk ¶  821,500   et seq.

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