I'll make two points here. First, I think the entire FinCN experience violates the Taxpayer Bill of Rights recently adopted by the IRS, and second, I think the e-filing requirement is susceptible to legal challenge under the recent decision of the Massachusetts Appellate Tax Board in Haar v Commr. Let's look at the TBOR first.
Kroh's article demonstrates that FinCEN's FBAR system pretty clearly violates provision 2 of the Taxpayer Bill of Rights, which guarantees taxpayers a right to quality service. Kroh describes how ridiculous it is to have a form-filing system that conflicts with one of the most ubiquitous pieces of software out there, namely, Adobe Acrobat. He notes that the FinCEN website fails to explain the known issues and offers no promises about maybe fixing this very basic problem. IRS: no blaming things on FinCEN to get out of your obligations. You're administering this mess. (FinCEN is a bureau of Treasury separate from the IRS, but IRS has responsibility for enforcing FBAR by levying penalties for non-compliance.)
The FinCEN experience also violates provision 10 in my view. Provision 10 says taxpayers have the "right to a fair and just tax system." It is neither fair or just in my view to force individuals to register and transmit sensitive personal information on a website that is built for the sole purpose of detecting money laundering, terrorist financing, and other financial crimes, where no evidence exists that the individuals have perpetuated or are planning to perpetuate any such crimes. This process constitutes an intimidation tactic. If you don't believe it, I invite you to visit the FinCEN website, register yourself, and file an FBAR form as a civics lesson.
I am not saying Treasury doesn't need the information FBAR requires (though much or most of it is egregiously duplicative with IRS forms that non-resident US persons already have to file). But I am saying there is no way that Treasury needs to extract this information by making individuals register on a website that so clearly transmits the message: "you are a suspected criminal and we are watching you."
Remember, we are talking about millions and millions of people who have "foreign" bank accounts because they live in foreign countries; most are citizens of those foreign countries where they live; and their banks are local to them. Congress treats these people as if they live in the United States, when they do not. But Congress does not similarly treat their local bank accounts as local (Congress should do so, and would fix many problems if they did, as I argued in a Tax Analysts column in 2012). This mismatch of fiction against fact does not make people money launderers or tax evaders. Many, many of these individuals are unjustly caught up in the US tax net because of the madness of citizenship taxation. Also: consider that the FBAR instructions even say that kids ought to fill out their own FBAR forms. Come on.
Taxpayer Rights, yes. But remedies? Not so Clear.
Whether violating the taxpayer bill of rights creates grounds for a lawsuit remains to be seen; I think Congress' continuous failure to codify the TBOR is precisely to prevent this possibility (I discussed the issue here). But the recent case of Haar v Commissioner suggests that a lawsuit challenging the requirement that FBAR forms be filed electronically would have merit. I note from Kroh's article:
According to a FinCEN FAQ, failure to comply with the electronic filing mandate could result in civil penalties, including a $500 fine for each negligent currency transaction. Exceptions to the mandate are allowed only in some limited circumstances, according to the agency.Now comes Haar:
This appeal involves the Commissioner’s assessment of a $100 penalty... because of the appellant’s failure to electronically submit [a payment in connection with an extension of time to file]...
Mr. Haar maintained that the Commissioner’s electronic payment mandate is a “serious invasion of both [his] privacy and [his] personal business practices,” as it exposes his finances to risk of cyber attack. On his abatement application, Mr. Haar explained, “I intentionally do no electronic banking nor direct bill paying, I have none of my credit cards linked to my bank accounts directly and I think anyone who does any of the above is exposing themselves to multiple risks of cybercrime and identity theft.” At the hearing, Mr. Haar testified that he does not link his “bank account information in any electronic way to any other electronic medium” because he believes it is a “very foolish thing to do.” Mr. Haar further expressed doubts as to the security of the computer systems used by the Department of Revenue (“DOR”), noting that “if the Pentagon can be hacked,” he had little confidence that DOR could protect his – or any other taxpayer’s – personal data from theft.To which the Commissioner responded:
It was the Commissioner’s position ... that... she has the authority to mandate electronic filing and payment and to assess penalties if, after notice, a taxpayer failed to comply with the prescribed filing and payment mandates. While ... penalties may be abated if a taxpayer can demonstrate “reasonable cause” for non-compliance, the Commissioner maintained that the appellant did not establish reasonable cause because Administrative Procedure 633 (“AP 633”) provides that “[t]he fact that a taxpayer does not own a computer or is uncomfortable with electronic data or funds transfer will not support a claim for reasonable cause.” AP 633(II)(D).But the Appellate Tax Board saw things differently, noting that Treasury has steadily expanded e-filing requirements, but that there is no federal requirement that individual e-file their annual tax returns, and that reasonable cause is an objective standard that can't be eliminated by a mere declaration by Administrative Procedure. The ATB concluded:
On the facts of this appeal, particularly the appellant’s credible testimony concerning his consistent practice of avoiding the payment of his bills electronically, the Board found and ruled that the appellant exercised the degree of care that an ordinary taxpayer in his position would have exercised when he made his timely payment by check, contrary to the Commissioner’s electronic payment mandate. The Board therefore found and ruled that the appellant met his burden of proving reasonable cause under § 33(g) for his failure to remit payment electronically in connection with his extension application for the tax year at issue.
Accordingly, the Board issued a decision for the appellant in this appeal and granted an abatement of the $100 penalty, along with statutory additions.I note that Haar represented himself in that appeal. When I saw that FinCEN had made e-filing mandatory, I wondered if it would spark lawsuits. The Haar case suggests that such lawsuits might prevail if the facts and legal standards align.
Lawsuits are not the only way to protect taxpayer rights in this case, however. If the US practiced residence based taxation like the rest of the world, the universe of US taxpayers who have foreign bank accounts but who aren't rich enough to employ others to deal with complex US filing obligations will shrink to a negligible number and the issue all but goes away. Until then, Treasury can act, and act quickly to resolve the technical problems here, even if we have to wait for Congress to fix the underlying defect of citizenship taxation.
The solution is clear: Treasury should abolish FinCEN registration for FBAR purposes alone and the FBAR should be treated like other tax forms since it is administered by the IRS. The IRS should make the FBAR form available as a regular pdf on the IRS website like all the other tax forms, and have a link so people who choose to e-file can do so.
