IRS Wins Default Judgment in $18M FBAR Penalty Case

Recently, a California U.S. District Court entered default judgment in favor of the Government in an FBAR penalty suit in the case of United States v. Masud Sarshar, Case No.: 2:18-cv-7751.

Summary of the FBAR suit

From the Government’s motion:

Masud Sarshar is a United States citizen who, for tax years 2006 through 2012, maintained accounts subject to the reporting requirements of 31 U.S.C. § 5314, as implemented under 31 C.F.R. §§ 1010.350(a) and 1010.306(c). These provisions require that each United States person having a financial interest in, or signature or other authority over a financial account in a foreign country report that interest annually on a form called a Report of Foreign Bank and Financial Accounts, which is also referred to as an FBAR. As set forth in 31 U.S.C. § 5321(a)(5)(C)(i), for willful violations of the FBAR-reporting requirements, Congress authorized a maximum penalty of the greater of (1) $100,000 or (2) 50% of the balance in the account at the time of the violation.

For tax years 2006 through 2012, Sarshar willfully did not disclose all of his foreign accounts as required by law. In February 2017, Sarshar executed an agreement with the Internal Revenue Service in which he agreed that he was liable for a penalty of $18,242,537.65 under 31 U.S.C. § 5321(a)(5) for his failure to file FBARs for calendar years 2006 through 2012. In that agreement, Sarshar waived all defense to the assessment and collection of the FBAR penalty, including interest and penalties. As of November 30, 2018, the outstanding balance of the liability for the penalty imposed under 31 U.S.C. § 5321(a)(5) plus accrued interest and the late penalty provided for under 31 U.S.C. § 3717(e)(2) is $18,853,787.60.

More details about the FBAR assessment from the DOJ press release:

According to court documents, Masud Sarshar, a U.S. citizen, maintained several undeclared bank accounts at Bank Leumi and two other Israeli banks, both in his name and in the names of entities that he created…For decades, with the assistance of at least two relationship managers from Bank Leumi and a second Israeli bank (Israeli Bank A), Sarshar hid tens of millions of dollars in assets in these accounts in an effort to conceal income and obstruct the Internal Revenue Service (IRS). Between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to those undeclared accounts and earned more than $2.5 million in interest income from the funds. Sarshar reported none of this income on his 2006 through 2012 individual and corporate tax returns. He also filed false Reports of Foreign Bank and Financial Accounts, commonly known as FBARs, with the U.S. Department of Treasury on which he omitted his ownership and control of these offshore accounts.

What is an FBAR penalty suit?

Typically in a tax collections case, the government has several administrative options for collecting unpaid debt – such as filing tax liens and levying of assets, including garnishment of wages and other income.

However, the FBAR statute is contained in Title 31 of the U.S.C, which means the typical collections options in a tax case are unavailable in an FBAR penalty collection. As any other creditor, the Government must file suit in District Court to reduce the previously assessed FBAR penalty to judgment. However, prior to referring it for collections, the IRS will provide an opportunity to discuss alternative payment arrangements.

Maximum FBAR penalty amount

For willful FBAR violations,  the IRS is allowed to assess a maximum penalty of the greater of:

  • $100,000, or
  • 50 percent of the undisclosed account(s)

31 U.S. Code § 5321(a)(5)(C)

FBAR penalty statute of limitations on assessment

The assessment statute (ASED) is the time period within which the IRS may assess an FBAR penalty. Under Title 31, the ASED is 6 years from the due date of the FBAR report.

FBAR penalty statute of limitations on collection

After an FBAR penalty has been assessed, the Government has a two-year  limitation period for filing an FBAR penalty collection suit.

Challenging FBAR penalties — pre-assessment vs. post assessment Appeals

An FBAR penalty, once assessed, the penalty becomes a claim of the U.S. government. There are administrative options to challenge the penalty assessment prior to that to. After the FBAR examination process, a taxpayer can protest any penalty assessment with the IRS Office of Appeals. Married couples under FBAR examination are treated as individual cases.

An FBAR penalty can be challenged either prior to (pre-assessment) or after (post-assessment) the issuance of Letter 3709 (FBAR 30-day Letter) with the Office of Appeals. Once assessed, the penalty becomes a claim of the U.S. government. Therefore, post-assessed FBAR cases in excess of $100,000 cannot be compromised by Appeals without approval of the Department of Justice (DOJ). If DOJ does not agree with the Appeals settlement proposal, then Appeals will reject the offer and the case will be closed.

Fast Track Settlement and Alternative Dispute Resolution are also not available post-assessment.

Whether the penalty is pre- or post-assessed when it comes to Appeals, it is considered the same penalty and only one appeal is available.

Taxpayers seeking to challenge an FBAR penalty after appeals may either (1) pay a portion of or the entire penalty and file a refund suit, or (2) wait until the government files suit in district court to collect the penalty and challenge the assessment. A third option, less often used, is an Administrative Procedure Act (APA) challenge.

What should non-compliant taxpayers do?

Taxpayers should attempt to correct past non-compliance to avoid FBAR and other international information penalties. If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

Why hire us?

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.