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September 15, 2015
Sen. Paul Files Lawsuit Challenging FATCA
by William R. Davis and Andrew Velarde

Full Text Published by Tax Analysts®

This article first appeared in the July 15, 2015 edition of Tax Notes Today.

Sen. Rand Paul, R-Ky., along with six current and former U.S. citizens living abroad, filed a lawsuit July 14 in the U.S. District Court for the Southern District of Ohio challenging the constitutionality of the Foreign Account Tax Compliance Act and foreign bank account reporting.

"FATCA eschews the privacy rights enshrined in the Bill of Rights in favor of efficiency and compliance by requiring institutions to report citizens' account information to the IRS even when the IRS has no reason to suspect that a particular taxpayer is violating the tax laws," the petition states.

Republicans Overseas Action, a political organization that represents the interests of U.S. Republicans who live abroad, challenges FATCA, intergovernmental agreements, and FBAR on behalf of the plaintiffs. They make eight separate claims under the president's constitutional power to make international agreements; the due process clause of the Fifth Amendment, providing equal protection; the Eighth Amendment excessive fines clause; and Fourth Amendment protections against searches unsupported by probable cause.

"At its core, FATCA is a bulk data collection program requiring foreign financial institutions to report to the IRS detailed information about the accounts of U.S. citizens living abroad, including their account balances and account transactions," the petition says.

The congressional office of Paul, who is also a presidential candidate, did not respond to Tax Analysts' request for comment. The other petitioners all live abroad and are portrayed in the petition as sharing a commitment to public service. Five of the petitioners are current U.S. citizens, while one renounced her citizenship after the implementation of FATCA.

The petition says that FATCA imposes enormous economic costs on individuals and financial institutions, costing an estimated $8 billion systemwide to become compliant. "What's striking about these costs is that they are expected to equal or exceed the amount of additional revenue that FATCA is projected to raise," the petition says. It also alleges that foreign financial institutions have changed their dealings with U.S. citizens by denying them access to banking and by closing current accounts.

The plaintiffs also moved for a preliminary injunction declaring as unconstitutional, and enjoining the government from enforcing, FATCA and its corresponding IGAs and foreign bank account reporting.

"This lawsuit will not only enable Republicans Overseas to defend all overseas Americans' and stateside 'Green Card' holders' right to privacy and other constitutional protections, but also provide them immediate injunctive relief by crippling the Treasury's ability" to enforce IGAs and the FATCA enforcement capabilities of the IRS and the Financial Crimes Enforcement Network, James Bopp Jr. of the Bopp Law Firm, lead attorney for the plaintiffs, said in a statement by Republicans Overseas Action.

"It also speaks volumes about [the] Obama administration's lawlessness and disregard for the constitution when we have eight constitutional claims against FATCA/IGAs/FBAR in comparison to the Citizens United v. FEC case, where I had only one constitutional claim," Bopp said. Bopp served as a legal adviser for the plaintiff in Citizens United.

The FATCA suit makes the following claims:

  • the IGAs are unconstitutional sole executive agreements because they exceed the scope of the president's independent constitutional powers, and because they override FATCA;
  • the heightened reporting requirements for foreign financial accounts deny U.S. citizens living abroad the equal protection of the laws;
  • the FATCA FFI penalty, passthrough penalty, and willfulness penalty are all unconstitutional under the excessive fines clause;
  • FATCA's information reporting requirements are unconstitutional under the Fourth Amendment; and
  • the IGAs' information reporting requirements are also unconstitutional under the Fourth Amendment.

Since 2011 the Senate has been unable to approve any tax treaty by unanimous consent because Paul objects to treaty information sharing provisions and wants to be able to debate the treaties on the Senate floor.

The petition says that Paul would vote against the FATCA IGAs if the executive branch submitted them to the Senate for advice and consent under Article II or to Congress as a whole for approval as congressional-executive agreements. Paul claims he has no adequate remedy at law and is suffering irreparable harm.

FBAR Fines Called Excessive

The petition also brings a challenge against FBAR, which requires disclosure of foreign bank accounts with balances in excess of $10,000. It asserts that FBAR civil penalties under 31 U.S.C. section 5321 are unconstitutional under the excessive fines clause of the Eighth Amendment, alleging that they are "grossly disproportionate to the gravity of the offense." It asserts that the willfulness penalty is designed to punish and is therefore subject to the excessive fines clause.

"In practice, it is just a trap for the unprepared and the uninformed, pinching regular middle-class Americans residing outside the United States. The penalties for failing to file the report can be financially devastating and can wipe out a person's entire savings," the complaint states.

Some practitioners have speculated that penalty rates under FBAR -- $10,000 for non-willful FBAR violations and a maximum penalty of the greater of $100,000 or 50 percent of the account value for willful FBAR violations -- may be unconstitutional under the Eighth Amendment. As the complaint notes, FBAR penalties are cumulative and the ultimate fine can exceed the account value. The IRS issued guidance on May 13 that would provide both hard and soft caps to FBAR penalties.

Various plaintiffs in the complaint are said to "reasonably fear" that their bank accounts will be subject to FBAR fines if they willfully fail to file an FBAR for their accounts. The complaint does not allege any connections to Paul and the unconstitutionality of FBAR.

A memorandum in support of the plaintiffs' motion for preliminary injunction cites United States v. Bajakajian, 524 U.S. 321 (1998), in which the Supreme Court held that a punitive forfeiture is invalid only if it is grossly disproportional to the gravity of the defendant's offense.

"The FBAR Willfulness Penalty, like the fine struck down in Bajakajian, targets a crime that is solely a reporting offense where the underlying activity (i.e., owning a foreign bank account) is patently legal," the memo states. "Moreover, the failure to file an FBAR report does not harm anyone except the U.S. government by depriving it of the information that the filer has a foreign bank account. But informational harm in this case is even more minor than that at issue in Bajakajian because here the foreign account required to be reported on the FBAR must be noted on the filer's annual tax return."

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