Challenging an FBAR Penalty: District Court Says APA Not the Ticket

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Can a taxpayer facing an assessment stemming from a Foreign Bank Account Reporting (FBAR) penalty use the Administrative Procedure Act (APA) as a basis to challenge the penalty assessment and raise a defense like reasonable cause? A couple of years ago I discussed in District Court Punishes IRS for Failing to Justify or Explain Itself in FBAR Case, Moore v US, where a taxpayer was able to rely on the APA as a lever to expose and punish sloppy IRS conduct in assessing an FBAR penalty, including failing to explain the basis for IRS imposition of the penalty.

IRS is fighting back on allowing courts to use the APA to review (and sanction) IRS administration of the FBAR penalty. In Kentera v US a district court in Wisconsin agreed with the IRS’s sovereign immunity defense as a basis to dismiss a taxpayer claim that he and his wife were not subject to an FBAR penalty.

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The Kenteras had inherited money located in a bank account in Montenegro. The opinion states that the husband and wife disclosed the existence of the account on their income tax returns but did not file the annually-required FBAR forms. They entered the Offshore Voluntary Disclosure Initiative and amended returns to include the income from the accounts and also delinquently filed the FBARs. IRS proposed assessments of non-willful FBAR penalties on them individually for five years, with her total penalties at $10,500; and his at $40,500.

The Kenteras disagreed with the proposed penalty assessments, essentially arguing that they had reasonable cause for their failure to file due to their reliance on a tax advisor. Appeals sustained the penalties.

After Appeals sustained the penalties, they then sued in district court, arguing that because IRS wrongfully rejected their reasonable cause defense the IRS’s actions were arbitrary and capricious and thus in violation of the APA as per 5 U.S.C. § 706(2)(A).

Jack Townsend has written about Kentera at the Federal Tax Crimes blog, and he includes links to the relevant documents, including the government’s memo in support of its motion to dismiss. I suggest interested readers wanting more on this look there, but I highlight the main takeaway from the opinion: the APA does not confer jurisdiction unless there is no “adequate remedy” in another court; you get to the adequate remedy issue after final agency (IRS) action and a substantive statute (the BSA) that authorizes review. In Moore, IRS did not I recall raise the adequate remedy defense and the opinion proceeded to get to the merits of Moore’s claims that were brought under the APA (note 4 of Kentera states that the government apparently did not raise the defense in Moore).

In Kentera, the district court held that the Tucker Act, codified at 28 USC § 1491(a)(1), provided the means for a remedy in the Court of Federal Claims. That statute provides that Court of Federal Claims has “jurisdiction to render judgment upon any claim against the United States, founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.”

The existence of the Tucker Act alone was not sufficient to grant the government’s motion, as Tucker does not independently grant plaintiffs like Kentera substantive rights. Taxpayers seeking to sue the government need an additional hook: a substantive source of law that provides for a monetary remedy.

The opinion concluded that the Kenteras had that monetary remedy hook in the Bank Secrecy Act itself, though not due to any explicit language but by implication:

The statute authorizes the government to impose a penalty for failure to file an FBAR, unless the failure was due to reasonable cause. 31 U.S.C. § 5321(a)(5)(B)(ii)(I). If there was no failure to file or if the failure was due to reasonable cause, there should be no penalty and any money the government receives as payment of the penalty was illegally exacted in violation of the statute. Though the BSA admittedly lacks money-mandating language, it is by necessary implication that the taxpayer has a monetary remedy—the return of his illegally exacted funds—when the statute is violated. Norman, 429 F.3d at 1095; N. California Power Agency, 122 Fed. Cl. at 116; White Mountain Apache Tribe , 537 U.S. at 477. As a result, Plaintiffs could bring their statutory and constitutional claims in the Court of Federal Claims pursuant to the Tucker Act. This, in turn, compels the Court to conclude that APA review is unavailable here, since Plaintiffs have an adequate remedy to replace it.

Parting Thoughts

The opinion also discusses the Little Tucker Act and its granting of concurrent jurisdiction to hear cases in district courts over suits against the United States for $10,000 or less founded upon “the Constitution, or any Act of Congress,…or upon any express or implied contract with the United States” and waives sovereign immunity for those claims.” That $10,000 limit is computed on a per claim basis, and since none of the separate penalty assessments exceeded $10,000, it too provided an avenue for court review separate from APA.

While the district court dismissed the case, it was without prejudice, meaning that the Kenteras still can challenge the assessments in federal court, though must pay some of the proposed penalty (illegal exaction claims do not require full payment, according to the opinion, an issue I did not separately research).

You may recall in Moore  the judge criticized IRS for its “arbitrary and capricious conduct in imposing that penalty” and prevented IRS from imposing interest on the assessment. The Kentera opinion at note 4 states that the government apparently did not raise the sovereign immunity defense in Moore. I guess (though am only speculating) that the government’s fight in Kentera to push the case away from APA may be a reaction to Moore where the district court judge relied in part on the APA to punish IRS for the way it administered the FBAR penalty.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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