Introduction: Penalty as a part of American Culture
"U.S. tax, form and penalty club": Google "IRS penalty as part of American culture" and see a wide range of results https://t.co/eR0QTZ2sOH
— Citizenship Lawyer (@ExpatriationLaw) June 25, 2017
The above tweet links to a wide range of examples of America’s culture of penalty.
The purpose of this post is to explore how inflation results in the facilitation of enhanced penalty collection in America today.
What is inflation?
In its simplest terms:
“Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.”
Source: Adam Hayes, CFA
(Note his use of the words “goods and services“. Are FBAR penalties and the S. 877A Exit Tax consumer goods or government services?)
Inflation can either be helpful or can be hurtful. Some benefit from inflation and others are hurt by inflation. At a minimum, inflation will always erode the value of cash.
Effect of inflation on owners/lenders of cash: When it comes to cash inflation will hurt the owners/lenders of cash. This is because inflation will erode the value of cash.
Effect of inflation on borrowers of cash: Inflation will help he borrowers of cash. This is because inflation erodes the value of the cash that must be repaid.
The use of inflation as a means of confiscation
Inflation is the “silent destroyer” of those who hold their wealth in cash. The late Sir John Templeton (one of the earliest renunciants of U.S. citizenship) often referred to “the folly of holding cash“. (There is some speculation that Sir John Templeton’s renunciation of U.S. citizenship was a direct result of the the U.S. CFC (“Controlled Foreign Corporation”) and Subpart F income rules rules that were enacted in 1962.)
The use of inflation as a means of creating wealth
The prudent use of debt of and inflation can result in the creation of wealth. Consider the situation of home owners in Toronto and Vancouver and rapidly rising real estate prices. Let’s see how inflation was used to create wealth for those who borrowed money to invest in residential real estate.
Mr. X. buys a home in 2008 for $500,000. The $500,000 is paid by:
1. Equity: Investing $125,000 in cash (25% down); and
2. Debt: Securing a mortgage for $375,000.
The effects of inflation are:
To increase the FULL value of the house AND Second to decrease the value of the debt. This principle of “leverage” (the use of other peoples’ money) has made home ownership a good deal for many middle-class people.
How inflation can INCREASE the size (bringing more people into) of an IRS “penalty base”
Example 1: Mr. FBAR
The FBAR penalty base has – meaning the number of people potentially subject to FBAR penalties – increased enormously.
There are two reasons for this:
1. Inflation: As you know Mr. FBAR was born in 1970. In approximately 1970, the standard FBAR penalty was set at $10,000. In 1970 one could buy a house for $10,000. In 1970 $10,000 was a significant amount of money.
By 2009 – with the advent of the “FBAR Fundraiser” – inflation had significantly eroded the value of $10,000 to the point where almost all Americans abroad (necessarily committing “personal finance abroad“) exceed the $10,000 threshold. Inflation had vastly increased the FBAR penalty base!
The $10,000 is NOT indexed to inflation!
2. More Americans Living and Travelling Abroad: In 1970 fewer people had “foreign accounts” and because fewer people had $10,000 the number of people subject to FBAR penalties was relatively small. But now, Global mobility and more Americans living abroad have increased the number of people who likely have offshore bank accounts – also increasing the FBAR penalty base. Think of it: Every American Teaching English Abroad is now potentially part of the FBAR penalty base.)
Example 2: The S. 877A Exit Tax
Generally, one will be a “covered expatriate” and subject to the S. 877A Exit Tax if one has a net worth of two million USD.
The two million is NOT indexed to inflation!
Sooner or later everybody will become a “covered expatriate”!
These are two examples (there are many) of how inflation will result in an increase in the size of a “penalty base”. These are also two examples (of many) which also have a disproportionate effect on Americans abroad. These examples also indicate the potential for Americans abroad to play a significant role in the U.S. Federal budget!
To allow inflation to increase the size of a “penalty base” is to allow people to be subjected to a penalty that the penalty was NOT intended to apply to!
Inflation is now being used to INCREASE the amount of penalties on those who are now part of the larger penalty base!
After allowing inflation to increase the size of the penalty base, Congress is NOW using inflation to increase the magnitude of the penalties imposed on that penalty base. Yes!!
The incorporation of anticipated penalty revenue in the Federal budget
On November 2, 2015 Congress (“It’s 11:00 p.m. – do you know what your Congress is doing?) passed the Bipartisan Budget Act of 2015.
The overall purpose of the Act was obviously to assist in the management of the Federal budget. Interestingly, anticipated penalty revenue is calculated into the budget.
The Bipartisan Budget Act included Sec. 701 which was titled:
SEC. 701. CIVIL MONETARY PENALTY INFLATION ADJUSTMENTS.
(a) SHORT TITLE.—This section may be cited as the ‘‘Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015’’.
The purpose of the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” was to impose a mandatory increase in Federal penalties. The increase is to be tied to inflation and is a an anticipated source of revenue contributing to the Federal budget.
Penalties and American Culture – Three points are worthy of note:
1. After having relied on inflation to increase the size of the penalty base, the Government is now using inflation to increase the actual penalties imposed on people who are part of that penalty base.
2. This speaks volumes about American culture. Penalties are an important part of American culture. By imposing an “inflation adjustment” on penalties, Congress is acknowledging that “penalties” are really just another “good or service” (a “good” consumed by an American and/or a “service” provided by the U.S. Government).
3. American culture has become a “culture of penalty” where “penalties are an unremarkable and normal part of day-to-day life!
Mr. FBAR receives a gift – an inflation adjustment to his penalties!!!
FBAR penalties are both a “service provided” by the U.S. Government and a “good” consumed by those who with offshore accounts. As a result, FBAR penalties are NO LONGER the $10,000 minimum. FBAR penalties are now subject to an inflation adjustment.
You will find the FBAR penalty adjustment tables here. For example, the $10,000 standard FBAR penalty has increased to $12,663!
(Okay, so we have an approximate 25% increase in the penalty without any adjustment to the $10,000 penalty base.)
Note that the inflation adjusted penalties apply (not just to FBAR) to a wide range of U.S. penalties!
Appendix A – Table Of Contents and SECTION 7 “Judiciary”
Public Law 114–74
To amend the Internal Revenue Code of 1986 to provide for a right to an administrative
appeal relating to adverse determinations of tax-exempt status of certain
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the ‘‘Bipartisan
Budget Act of 2015’’.
(b) TABLE OF CONTENTS.—The table of contents of this Act
is as follows:
Sec. 1. Short title; table of contents.
TITLE I—BUDGET ENFORCEMENT
Sec. 101. Amendments to the Balanced Budget and Emergency Deficit Control Act
Sec. 102. Authority for fiscal year 2017 budget resolution in the Senate.
Sec. 201. Standard Reinsurance Agreement.
Sec. 301. Debt collection improvements.
TITLE IV—STRATEGIC PETROLEUM RESERVE
Sec. 401. Strategic Petroleum Reserve test drawdown and sale notification and definition
change. Sec. 402. Strategic Petroleum Reserve mission readiness optimization.
Sec. 403. Strategic Petroleum Reserve drawdown and sale.
Sec. 404. Energy Security and Infrastructure Modernization Fund.
Sec. 501. Single employer plan annual premium rates.
Sec. 502. Pension Payment Acceleration.
Sec. 503. Mortality tables.
Sec. 504. Extension of current funding stabilization percentages to 2018, 2019, and
TITLE VI—HEALTH CARE
Sec. 601. Maintaining 2016 Medicare part B premium and deductible levels consistent
with actuarially fair rates. Sec. 602. Applying the Medicaid additional rebate requirement to generic drugs.
Sec. 603. Treatment of off-campus outpatient departments of a provider.
Sec. 604. Repeal of automatic enrollment requirement.
Sec. 701. Civil monetary penalty inflation adjustments.
Sec. 702. Crime Victims Fund.
Sec. 703. Assets Forfeiture Fund.
TITLE VIII—SOCIAL SECURITY
Sec. 801. Short title.
Subtitle A—Ensuring Correct Payments and Reducing Fraud
Sec. 811. Expansion of cooperative disability investigations units.
Sec. 812. Exclusion of certain medical sources of evidence.
Sec. 813. New and stronger penalties.
Sec. 814. References to Social Security and Medicare in electronic communications.
Sec. 815. Change to cap adjustment authority.
Subtitle B—Promoting Opportunity for Disability Beneficiaries
Sec. 821. Temporary reauthorization of disability insurance demonstration project
Sec. 822. Modification of demonstration project authority.
Sec. 823. Promoting opportunity demonstration project.
Sec. 824. Use of electronic payroll data to improve program administration.
Sec. 825. Treatment of earnings derived from services.
Sec. 826. Electronic reporting of earnings.
Subtitle C—Protecting Social Security Benefits
Sec. 831. Closure of unintended loopholes.
Sec. 832. Requirement for medical review.
Sec. 833. Reallocation of payroll tax revenue.
Sec. 834. Access to financial information for waivers and adjustments of recovery.
Subtitle D—Relieving Administrative Burdens and Miscellaneous Provisions
Sec. 841. Interagency coordination to improve program administration.
Sec. 842. Elimination of quinquennial determinations relating to wage credits for
military service prior to 1957.
Sec. 843. Certification of benefits payable to a divorced spouse of a railroad worker
to the Railroad Retirement Board.
Sec. 844. Technical amendments to eliminate obsolete provisions.
Sec. 845. Reporting requirements to Congress.
Sec. 846. Expedited examination of administrative law judges.
TITLE IX—TEMPORARY EXTENSION OF PUBLIC DEBT LIMIT
Sec. 901. Temporary extension of public debt limit.
Sec. 902. Restoring congressional authority over the national debt.
TITLE X—SPECTRUM PIPELINE
Sec. 1001. Short title.
Sec. 1002. Definitions.
Sec. 1003. Rule of construction.
Sec. 1004. Identification, reallocation, and auction of Federal spectrum.
Sec. 1005. Additional uses of Spectrum Relocation Fund.
Sec. 1006. Plans for auction of certain spectrum.
Sec. 1007. FCC auction authority.
Sec. 1008. Reports to Congress.
TITLE XI—REVENUE PROVISIONS RELATED TO TAX COMPLIANCE
Sec. 1101. Partnership audits and adjustments.
Sec. 1102. Partnership interests created by gift.
TITLE XII—DESIGNATION OF SMALL HOUSE ROTUNDA
Sec. 1201. Designating small House rotunda as ‘‘Freedom Foyer’’.
SEC. 701. CIVIL MONETARY PENALTY INFLATION ADJUSTMENTS.
(a) SHORT TITLE.—This section may be cited as the ‘‘Federal
Civil Penalties Inflation Adjustment Act Improvements Act of 2015’’.
(b) AMENDMENTS.—The Federal Civil Penalties Inflation Adjustment
Act of 1990 (28 U.S.C. 2461 note) is amended—
(1) in section 4—
(A) by striking the matter preceding paragraph (1)
and inserting the following:
‘‘(a) IN GENERAL.—Not later than July 1, 2016, and not later
than January 15 of every year thereafter, and subject to subsections
(c) and (d), the head of each agency
(B) in paragraph (1)—
(i) by striking ‘‘by regulation adjust’’ and inserting
‘‘in accordance with subsection (b), adjust’’; and
(ii) by striking ‘‘, the Tariff Act of 1930, the Occupational
Safety and Health Act of 1970, or the Social
Security Act’’ and inserting ‘‘ or the Tariff Act of 1930’’;
(C) in paragraph (2), by striking ‘‘such regulation’’ and
inserting ‘‘such adjustment’’; and
(D) by adding at the end the following:
‘‘(b) PROCEDURES FOR ADJUSTMENTS.—
‘‘(1) CATCH UP ADJUSTMENT.—For the first adjustment made
under subsection (a) after the date of enactment of the Federal
Civil Penalties Inflation Adjustment Act Improvements Act of
‘‘(A) the head of an agency shall adjust civil monetary
penalties through an interim final rulemaking; and
‘‘(B) the adjustment shall take effect not later than
August 1, 2016.
‘‘(2) SUBSEQUENT ADJUSTMENTS.—For the second adjustment
made under subsection (a) after the date of enactment
of the Federal Civil Penalties Inflation Adjustment Act
Improvements Act of 2015, and each adjustment thereafter,
the head of an agency shall adjust civil monetary penalties
and shall make the adjustment notwithstanding section 553
of title 5, United States Code.
‘‘(c) EXCEPTION.—For the first adjustment made under subsection
(a) after the date of enactment of the Federal Civil Penalties
Inflation Adjustment Act Improvements Act of 2015, the head of
an agency may adjust the amount of a civil monetary penalty
by less than the otherwise required amount if—
‘‘(1) the head of the agency, after publishing a notice of
proposed rulemaking and providing an opportunity for comment,
determines in a final rule that—
‘‘(A) increasing the civil monetary penalty by the otherwise
required amount will have a negative economic
‘‘(B) the social costs of increasing the civil monetary
penalty by the otherwise required amount outweigh the
‘‘(2) the Director of the Office of Management and Budget
concurs with the determination of the head of the agency under
‘‘(d) OTHER ADJUSTMENTS MADE.—If a civil monetary penalty
subject to a cost-of-living adjustment under this Act is, during
the 12 months preceding a required cost-of-living adjustment,
increased by an amount greater than the amount of the adjustment
required under subsection (a), the head of the agency is not required
to make the cost-of-living adjustment for that civil monetary penalty
in that year.’’;
(2) in section 5—
(A) in subsection (a), by striking ‘‘to the nearest—
’’ and all that follows through the end of subsection (a)
and inserting ‘‘to the nearest multiple of $1.’’; and
(B) by amending subsection (b) to read as follows:
‘‘(1) IN GENERAL.—Except as provided in paragraph (2),
for purposes of subsection (a), the term ‘cost-of-living adjustment’
means the percentage (if any) for each civil monetary
penalty by which—
‘‘(A) the Consumer Price Index for the month of October
preceding the date of the adjustment, exceeds
‘‘(B) the Consumer Price Index for the month of October
1 year before the month of October referred to in subparagraph
‘‘(2) INITIAL ADJUSTMENT.—
‘‘(A) IN GENERAL.—Subject to subparagraph (C), for
the first inflation adjustment under section 4 made by
an agency after the date of enactment of the Federal Civil
Penalties Inflation Adjustment Act Improvements Act of
2015, the term ‘cost-of-living adjustment’ means the
percentage (if any) for each civil monetary penalty by which
the Consumer Price Index for the month of October, 2015
exceeds the Consumer Price Index for the month of October
of the calendar year during which the amount of such
civil monetary penalty was established or adjusted under
a provision of law other than this Act.
‘‘(B) APPLICATION OF ADJUSTMENT.—The cost-of-living
adjustment described in subparagraph (A) shall be applied
to the amount of the civil monetary penalty as it was
most recently established or adjusted under a provision
of law other than this Act.
‘‘(C) MAXIMUM ADJUSTMENT.—The amount of the
increase in a civil monetary penalty under subparagraph
(A) shall not exceed 150 percent of the amount of that
civil monetary penalty on the date of enactment of the
Federal Civil Penalties Inflation Adjustment Act Improvements
Act of 2015.’’;
(3) in section 6, by striking ‘‘violations which occur’’ and
inserting ‘‘civil monetary penalties, including those whose associated
violation predated such increase, which are assessed’’;
(4) by adding at the end the following:
‘‘SEC. 7. IMPLEMENTATION AND OVERSIGHT ENHANCEMENTS.
‘‘(a) OMB GUIDANCE.—Not later than February 29, 2016, not
later than December 15, 2016, and December 15 of every year
thereafter, the Director of the Office of Management and Budget
shall issue guidance to agencies on implementing the inflation
adjustments required under this Act.
‘‘(b) AGENCY FINANCIAL REPORTS.—The head of each agency
shall include in the Agency Financial Report submitted under OMB
Circular A–136, or any successor thereto, information about the
civil monetary penalties within the jurisdiction of the agency,
including the adjustment of the civil monetary penalties by the
head of the agency under this Act.
‘‘(c) GAO REVIEW.—The Comptroller General of the United
States shall annually submit to Congress a report assessing the
compliance of agencies with the inflation adjustments required
under this Act, which may be included as part of another report
submitted to Congress.’’.
(c) REPEAL.—Section 31001(s) of the Debt Collection Improvement
Act of 1996 (28 U.S.C. 2461 note) is amended by striking
SEC. 702. CRIME VICTIMS FUND.
There is hereby rescinded and permanently canceled
$1,500,000,000 of the funds deposited or available in the Crime
Victims Fund created by section 1402 of the Victims of Crime
Act of 1984 (42 U.S.C. 10601).
SEC. 703. ASSETS FORFEITURE FUND.
Of the amounts deposited in the Department of Justice Assets
Forfeiture Fund, $746,000,000 are hereby rescinded and permanently
Appendix B – BIPARTISAN BUDGET ACT OF 2015 – Complete Legislation