From the archives of Phil Hodgen’s blog, John Nolan, August 27, 2011 | 3:19 am, wrote:
To my knowledge, since the JOBS Act introduced the FBAR enhanced penalty regime in October 2004, there has been no civil case brought against anyone for enforcement of a FBAR penalty. (I am aware, however, that recently a criminal case was recently initiated alleging a single count of criminal non-filing.)
Nor am I aware of a single case in which a FBAR penalty, as such, has been paid by anyone – whether “voluntarily” as part of a plea bargain or “involuntarily” by judgement of a Federal court following a contested civil or criminal prosecution for enforcement of same.
Technically, the much-ballyhooed agreements by defendants to pay enhanced sums of money incident to a plea bargain are not FBAR penalties. Clearly, however, it is the threat of such FBAR penalties – and extra time in Club Fed – that induced such agreements.
I am not aware of any case in which a civil FBAR penalty has been asserted for simple late filing of a FBAR – for any reason. I am also unaware of any case in which a late-filed FBAR has caused the late filer to receive a demand for a payment for any maximum or lesser civil penalty amount based on simple tardiness.
(NB: the FBAR statute and its penalties makes no distinction between late and/or inaccurate filing and non-filing.)
To my knowledge, neither the FBAR filing obligation itself nor its penalties has ever been tested for constitutionality.
Nor do I believe that Treasury is confident that the criminal and/or civil FBAR penalties would be able to withstand a constitutional challenge.
In my view the FBAR’s mere existence is constitutionally infirm on substantive due process grounds. To wit:
I do not believe that Treasury, which invented the FBAR in 1970 in response to authorizing legislation found in the Bank Secrecy Act, has ever even attempted to meet the strict factual predicate imposed by Congress on Treasury in the BSA: that whatever data the information Treasury demanded should have a “high degree” of regulatory or law enforcement usefulness. I believe that if Treasury were compelled through civil or criminal discovery or even by a simple FOIA or Privacy Act request to produce substantiating evidence of any law enforcement or regulatory usefulness over the last 40 years that they would be hard put to do so; much less a “high degree” of such usefulness.
(Just for fun: maybe tax practitioners could develop a FBAR Privacy Act/FOIA request that would be filed automatically by every one of their clients who timely files a FBAR every year. It would cite the language of the privacy act notice at the bottom of the TD F 90-22.1 and demand a copy or summary of every report or document generated by FINCEN or Treasury that made use of the filer’s data and simultaneously demand all documents that might tend to substantiate the validity of the assertion of usefulness found in the Privacy Act notice at the bottom of the TD F 90-22.1)
As any constitutional scholar will be quick to tell you, “substantive due process” is a thin reed upon which to rest one’s hopes for a constitutional challenge to the validity of anything authorized by Congress.
The real constitutional vulnerability of the FBAR, however, lies in the 8th Amendment’s “excessive fines” clause.
A good constitutional challenge to FBAR, therefore, would be a three-stage attack based on:
1. Substantive due process – i.e. not rationally related to the promotion of any legitimate government interest and/or failure to meet the Congressionally prescribed substantive prerequisites.
2. Privacy act – the argument would be that the FBAR is of such dubious usefulness to any legitimate government interest that it is easily trumped by legitimate expectations of personal privacy. (Yuk-yuk. As if Americans had not long ago forfeited whatever rights to financial privacy they may have ever had!)
3. 8th Amendment – given the paucity of any current or historical evidence of law enforcement or regulatory usefulness over the more than 40 years of its existence, the original – much less the enhanced -penalties for non-filing are grotesquely disproportionate and constitutionally excessive under the 8th Amendment.
My guess is that Treasury will want to exhaust the revenue potential of its current crop of big-bucks tax-haven prosecutions before it will take the risk of such a challenge.
In the meantime, as Son-of-FBAR gets up and running next year the ease of collecting its penalties under Title 26 will gradually supplant the revenue enhancements available under the old FBAR.
At that point Treasury may feel it can safely take the risk of subjecting the old FBAR to constitutional challenge with the knowledge that, if they lose, they will have a back-up readily at hand that is probably constitutionally unassailable.