A federal district court in Texas recently took up an interesting FBAR issue: whether civil FBAR penalties survive death? That is, if a taxpayer/account holder dies after the IRS assesses an FBAR penalty against them, do the FBAR penalties remain against the decedent’s estate?  Or do the penalties die, so to speak, along with them?

The analysis typically turns on a subsidiary question: Are the penalties, for these purposes at least, penal or remedial?  If penal, the FBAR penalties would potentially dissolve at death.  If, on the other hand, they are remedial, maybe not.

FBAR penalties can be notoriously draconian.  If a U.S. person fails to file an FBAR, the IRS can impose a civil monetary penalty.  31 U.S.C. § 5321(a)(5)(A).  The amount of the penalty can vary.  If, for example, the failure to file results from willful conduct, the statute provides for a penalty equal to the greater of $100,000 or 50% percent of the amount of “the balance in the account at the time of the violation.”  31 U.S.C. § 5321(a)(5)(C), (D).

But the issue is an intricate one.  Ultimately, whether a federal statutory claim survives the death of the defendant is a question of federal law—and one that ultimately looks to the congressional intent behind the statute.  “Penalties” can and often do serve multiple purposes.  So what, then, is the “primary purpose” of FBAR penalties?

The court in United States v. Gill took up that inquiry in the context of FBAR penalties that had been assessed against an individual who later passed away.  The Gill court concluded that the purpose of FBAR penalties is primarily remedial and that the claim therefore survives death.

Let’s take a deeper dive into the facts and the court’s analysis in Gill.

Background

The United States filed a complaint against Jagmail Gill, asserting that Mr. Gill, who became a green card holder and later a citizen of the United States, failed to report any of his foreign income on his originally filed U.S. income tax returns for 2005 through 2010.  He also did not file an FBAR to report that he had signature authority, control or authority over, or an interest in numerous foreign bank accounts that had an aggregate balance of more than $10,000.

The Government asserted that the failures to file were non-willful, but assessed FBAR Penalties of $740,848 for Mr. Gill’s non-willful failure to timely file FBARs reporting his financial interest in the foreign bank accounts.

While the case was pending, Mr. Gill passed away.  In response, the government filed a motion to appoint and substitute a personal representative for Mr. Gill’s estate.  Mr. Gill’s counsel filed an opposition, arguing that the Government’s claims did not survive death, so no representative was needed.

Section 2404

The analysis begins with 28 U.S.C. § 2404.  Under § 2404, a “civil action for damages commenced on or behalf of the United States or in which it is interested shall not abate on the death of a defendant but shall survive and be enforceable against his estate as well as against surviving defendants.” 28 U.S.C. § 2404. The government maintained that the FBAR penalties were “damages” within the meaning of this statute because they are remedial in nature and that the claims therefore survived Mr. Gill’s death.

Because § 2404 would allow a claim to proceed against the Estate if it is remedial and thus a “civil action for damages,” the court turned to the next analytical inquiry: whether the claim is primarily remedial or penal?

Statutes Surviving Death

Whether a federal statutory claim survives the death of the defendant (survivability) is a matter of federal law. “It has long been established that causes of action predicated on penal statutes do not survive . . . death, . . . whereas remedial damage actions do survive.” In re Wood, 643 F.2d 188, 190 (5th Cir. 1980).  “A remedial action is one that compensates an individual for specific harm suffered, while a penal action imposes damages upon the defendant for a general wrong to the public.” United States v. NEC Corp., 11 F.3d 136, 137 (11th Cir. 1993).

In the Fifth Circuit, courts analyze three factors to determine whether a statute is penal or remedial: “‘(1) whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public; (2) whether recovery under the statute runs to the harmed individual or to the public; and (3) whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.’” In re Wood, 643 F.2d at 191.  Other course have applied the so-called Hudson framework, utilizing the test set forth in Hudson v. United States, 522 U.S. 93 (1997).

Courts tend to agree that if a claim does not “fall neatly within the penal or remedial categories,” the court should consider the “primary purpose” of the statute.

Thus, the court turned to yet another analytical inquiry: whether the primary purpose of the FBAR penalties at issue penal or remedial?

What Are FBAR Penalties?

Congress enacted the statutory basis for the requirement to report foreign bank and financial accounts in 1970 as part of the “Currency and Foreign Transactions Reporting Act of 1970,” which came to be known as the “Bank Secrecy Act” or “BSA.” These anti-money laundering and currency reporting provisions, as amended, were codified at 31 USC 5311 – 5332.

The specific statutory authority for the FBAR is found under 31 USC § 5314, which directs the Secretary of the Treasury to require a resident or citizen of the United States to keep records and/or file reports when making transactions or maintaining a relationship with a foreign financial agency.

The FBAR regulations likewise require that a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, file an FBAR to report:

• a financial interest in or signature or other authority over at least one financial account located outside the United States if
• the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

31 U.S.C. § 5314(a) imposes penalties for a failure to file a FBAR report and the regulations implement that penalty, providing: “Each United States person having a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country shall report such relationship” to the IRS “each year in which such relationship exists.” 31 C.F.R. § 1010.350(a).

The FBAR penalty regulation read as follows:

((g))  For any willful violation committed after October 27 1986, of any requirement of [§ 1010.350, § 1010.360 or § 1010.420], the Secretary may assess upon any person, a civil penalty:

…

((2))  In the case of a violation of [§ 1010.350 or § 1010.4201 involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.

Id. at 11446 (codified as amended at 31 C.F.R. § 1010.820(g)).

As a side note, it should be noted that taxpayers/account holders facing FBAR penalty exposure often have exposure to other foreign-reporting penalties.  Some of the more common foreign-reporting requirements are:

• FinCEN Form 114, Report of Foreign Bank and Financial Accounts;
• IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts;
• IRS Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner;
• IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations;
• IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business;
• IRS Form 926, Filing Requirement for U.S. Transferors of Property to a Foreign Corporation;
• IRS Form 8938, Statement of Specified Foreign Financial Assets;
• IRS Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.

A failure to file any of these forms can lead to criminal prosecution and/or civil penalties.  See, e.g., U.S. v. Little, 828 Fed. Appx. 34 (2d Cir. 2020) (affirming criminal conviction for failure to file FBARs and willfully assisting in the filing of false Forms 3520); Wilson v. U.S., No. 20-603 (July 28, 2021) (discussing duel civil penalties under 26 U.S.C. § 6048 for foreign trust non-reporting).

But let’s turn back to the FBAR issues and the Gill court’s analysis.

Cases That Support the Government’s View: Estate of Schoenfeld, Green, Park, and Wolin

The district court reviewed a series of cases favoring the government’s and the estate’s positions.  We will look at each of those in turn, starting with the cases that tend to favor the government’s view.

Estate of Schoenfeld

In United States v. Estate of Schoenfeld, the Government originally filed a case to obtain a judgment for a failure to file an FBAR with respect to an account in Switzerland. After the taxpayer died, the Government amended the complaint to name the estate and the taxpayer’s son. The penalty at issue in Estate of Schoenfeld was assessed for a willful failure to file an FBAR. The defendants moved to dismiss or for summary judgment on grounds that the statute was punitive and the action did not survive the taxpayer’s death. The court determined whether the FBAR penalty was punitive or remedial by considering the Kennedy factors set forth in Hudson. Notably, though, the parties had agreed that these factors applied.

The Estate of Schoenfeld court found that, under the Kennedy framework, the FBAR penalty was remedial in nature and the claim survived the original defendant’s death. It considered each of the seven Kennedy factors and found that (1) the penalty did not involve an affirmative disability or restraint (like being imprisoned); (2) monetary penalties have not historically been regarded as punishment; (3) the penalty applies regardless of scienter (though it impacts the amount); (4) it promotes retribution and deterrence, though “all civil penalties have some deterrent effect” and “none are solely remedial”; (5) a willful failure can result in a criminal penalty, but the inclusion of a criminal penalty does not render the money penalty criminally punitive; (6) the “FBAR penalty serves the additional alternative purpose of acting as 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 funds; and (7) “the FBAR penalty is not excessive in relation to this alternative purpose.” Id. at 1370–73. The court concluded that there was no indication that the FBAR penalty, which Congress specifically expressed is a civil sanction, is penal in nature.

United States v. Green

In United States v. Green, the U.S. district court for the Southern District of Florida considered whether FBAR penalties assessed for willfully failing to disclose accounts and file FBARs survived death by considering whether they were penal or remedial.  It noted that courts typically examine the factors in In re Wood to make this distinction, but pointed out that the factors “do not allow for a situation where the United States itself has suffered a harm because of a defendant’s conduct.” Thus, while finding the In re Wood factors instructive, the court also found the Kennedy factors relied upon in Estate of Schoenfeld “helpful because the analysis may be implemented to provide a robust examination as to whether a penalty is remedial or penal in nature.” The court decided to examine “the relevant considerations which are embodied in both [the Kennedy and In re Wood] analyses to determine whether the FBAR penalty is remedial or penal.”

In conducting this analysis, the Green court noted that the statute itself denotes that the penalties are “civil.”  It then found that the Government had suffered an individual monetary harm (as opposed to a more general harm to the public) due to the decedent’s conduct because the Government “likely expends significant resources on investigating foreign accounts.”  It found that “the FBAR penalty has a remedial purpose [because] it allows the Government to recover for the aforementioned monetary harm.” The statute, however, also has “deterrent and retributive purposes” but “those purposes [do] not unilaterally render the FBAR penalty penal in nature.”  It determined that the penalty “is not wholly disproportionate to the harm the Government itself has suffered” because, for willful violations, the amount is tied to the account’s balance (or $100,000), and it “need not be tied to the Government’s loss directly to be remedial.” The penalty for willful violations “ties the amount to the balance of the account, which reflects Congress’ likely determination that the value of harm to the Government itself is correlated to the balance of the account.” The court asserted that the penalty amount “was selected to ensure that the Government would be made completely whole.”  It found that “because FBAR violations likely deprive the Government of taxes on investment gains and require the Government to expend significant resources investigating foreign accounts, the FBAR penalty is not wholly disproportionate to the monetary harm the Government itself suffers.” In addition to these factors, the court opined that it would be inappropriate to grant a “windfall to estates of violators of the FBAR requirements.” While it found, after these considerations, that the penalty does not fit neatly in either the remedial or penal category, it determined the penalty is “primarily remedial with incidental penal effects.”

United States v. Park

In United States v. Park, the U.S. district court for the Northern District of Illinois similarly held that FBAR Penalties survive the death of the person who willfully failed to file an FBAR form during his lifetime. The court relied on Estate of Schoenfeld and agreed that the penalties are remedial rather than punitive. It held that “the estate of a person who willfully fails to file an FBAR form during his lifetime cannot avoid the penalty that person would not have avoided if he had lived.”

In United States v. Wolin, the U.S. district court for the Eastern District of New York considered the same issue and noted that all the courts that had considered whether FBAR Penalties survive the death of a party have found that the penalty is remedial. The estate’s representative in Wolin had requested that the In re Wood test be applied, but the court rejected the use of the In re Wood test, stating that the In re Wood factors do not work when the wronged party is the United States itself. The Wolin court was persuaded by the “predominant consensus that the FBAR penalty claim is remedial”; it relied heavily on United States v. Green.

Cases Supporting the Estate’s View: Simonelli, Bajakajian, Bittner, Kaufman, and Boyd

Simonelli

In Simonelli, the U.S. District Court for the District of Connecticut held that a debt for an FBAR penalty was not dischargeble in bankruptcy. The defendant had three accounts in the Bahamas and was required to report them on an FBAR but failed to do so. He consented to an assessment of $25,000 for a willful failure to file. He, however, failed to pay the penalty, and the Government filed a civil case to collect the penalty plus interest. In the interim, the defendant had obtained a general discharge in bankruptcy, and he argued that the FBAR penalty was discharged at that time. The Government argued that the penalty was exempt from a bankruptcy discharge.  The defendant argued that the FBAR penalty was a tax penalty imposed in lieu of taxes and was thus dischargable under 11 U.S.C. § 523(a)(7).

The court considered whether an FBAR penalty for willfully failing to provide a report is a “penalty” or a “tax.” It noted that a plain reading of the Bank Secrecy Act indicates it is a “civil penalty,” notwithstanding the defendant’s argument that it is, “in essence, actually a tax.” The court found that the debt “was imposed pursuant to a non-tax law,” which the defendant sought “to recharacterize as a tax law.” The court determined that “[b]ecause there is no tax underlying the FBAR penalty, the FBAR penalty cannot be considered a tax penalty.” It found the penalty was a “penalty” (not a “tax”) within the meaning of § 523(a)(7) and, as such, it was excepted from discharge in bankruptcy. While the court found the FBAR penalty assessed in Simonelli was a “penalty” within the meaning of 11 U.S.C. § 523(a)(7), which supports the Estate’s arguments that it is a penalty in this case, the Simonelli court was considering whether it was a “civil money penalty” or a “tax”; it was not considering whether the penalty was primarily penal or remedial.

United States v. Bajakajian

United States v. Bajakajian for the proposition that if there is some retributive or deterrent purpose, the statute is punitive. The Bajakajian Court concluded that a forfeiture of currency under 18 U.S.C. § 982(a)(1) constitutes punishment. 524 U.S. at 328. Under that statute, forfeiture is “an additional sanction when ‘imposing sentence on a person convicted of’ a willful violation of” the reporting requirement in 31 U.S.C. § 5316.  The Court noted that the forfeiture was “imposed at the culmination of a criminal proceeding and requires conviction of an underlying felony, and it cannot be imposed upon an innocent owner of unreported currency, but only upon a person who has himself been convicted of a § 5316 reporting violation.”  The Government had argued that a forfeiture under § 982(a)(1) also served a remedial purpose, which was to control what property leaves and enters the country and that forfeiture deters “‘illicit movements of cash’” and aids “in providing the Government with ‘valuable information to investigate and detect criminal activities associated with that cash.’”  The Court pointed out, however, that “[d]eterrence . . . has traditionally been viewed as a goal of punishment, and forfeiture of the currency here does not serve the remedial purpose of compensating the Government for a loss.”  The Court reasoned that the loss of information suffered by the Government “would not be remedied by the Government’s confiscation of the respondent’s $357,144.” The Court found that the “forfeiture serves no remedial purpose, is designed to punish the offender, and cannot be imposed upon innocent owners.” It thus found that the forfeiture is punitive and constitutes a “fine” under the Excessive Fines Clause. While the Supreme Court’s viewpoint on the remedial purpose espoused by the Government in Bajakajian is certainly instructive, this case is not be as helpful as the Estate asserts because the forfeiture—unlike the penalty in this case— could not be imposed on an innocent owner of unreported currency. Moreover, while the Bajakajian Court noted that the Government’s loss would not be remedied by confiscating the money in that case, here, the Government asserts that it had to conduct an examination into Mr. Gill’s accounts because he did not file the reports, so it seems the recovery would be a direct remedy for that loss, at least to some extent, here.

Other Cases

The Estate also pointed to cases that have found that the fact that the Government applies the penalty for non-willful violations per account as opposed to per missing FBAR filing is excessive: United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020), and United States v. Kaufman, No. 3:18-CV-00787 (KAD), 2021 WL 83478 (D. Conn. Jan. 11, 2021). The Estate contended that these cases supported its argument that the FBAR penalties were disproportionate to the alleged harm suffered.

United States v. Bittner

In United States v. Bittner, the federal district court for the Eastern District of Texas considered whether the text of § 5321(a)(5)(A) and (B)(i) for non-willful violations of the regulations implementing § 5314 indicates that the penalties apply per foreign account or per annual FBAR report. The court “conclude[d] that non- willful FBAR violations relate to each FBAR form not timely or properly filed rather than to each foreign financial account maintained but not properly reported.” The court determined that because Congress used different language for the penalty for non-willful violations than it did for willful violations—excluding references to the existence of and balance on accounts in the former—it must have “intended the penalty for willful violations to relate to specific accounts and the penalty for non-willful violations not to.” It also noted that interpreting the statute this way would avoid “absurd outcomes.” The Government argued in Bittner, like it argues here, that hidden foreign accounts increase investigation costs and potential damage to the government in terms of lost tax revenue, rendering the penalties remedial; the court found this concern legitimate but overstated. It noted that there may not be any connection between the number of foreign accounts and lost tax revenue, and even though there may be higher costs associated with investigating extra accounts, “that concern is simply not strong enough” to convince the court to “change its analysis of the statute’s meaning.”

United States v. Kaufman

In United States v. Kaufman, the court also construed the statute to determine if the Government could impose the penalty per account as opposed to per report. It reasoned that the reporting obligation is triggered by the aggregate balance of all foreign accounts, so it does not make sense to read the section imposing penalties for non-willful violations to apply on a per account basis rather than a per report basis. Also, interpreting the statute as applying per account “could readily result in disparate outcomes among similarly situated people” because the penalties could vary drastically for the same aggregate amount in foreign accounts if one person has this amount split among multiple accounts.

United States v. Boyd

The Ninth Circuit recently considered the same issue and reached a similar conclusion. The Ninth Circuit strictly construed the statute and determined that the “non-willful penalty provision allows the IRS to assess one penalty not to exceed $10,000 per violation, and nothing in the statute or regulations suggests that the penalty may be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.” While these cases would be helpful if the court were determining the propriety of the amount assessed, in general, here the court simply must consider the amount that was assessed and determine if it is not proportionate to the amount of loss as part of its remedial versus penal analysis.

Conclusion

FBAR penalties can be significant.  And when the accountholder passes away, it raises an interesting legal question: whether civil FBAR penalties assessed during life survive their death?  The court in United States v. Gill took up that inquiry, ultimately concluding that, under its analysis, the purpose of the FBAR statute is primarily remedial and that the government’s claim for FBAR penalties therefore survives death.

Have a question? Contact Jason Freeman, Freeman Law, Texas.

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