In April and May of this year I blogged Moore v US, in District Court Opinion Raises Important Administrative and Constitutional Law Issues and Procedural Due Process and FBAR. As I discussed back then, Moore involves the IRS’ assessment of a $40,000 nonwillful FBAR penalty. The case is an important case for lots of reasons, including how it emphasizes that the IRS has a legal obligation to explain the underlying reasons for its actions when it proposes and assesses FBAR penalties. Taxpayers, even those who may have stashed cash overseas, have fundamental rights that the IRS should respect. If the IRS fails to respect those rights, cases like Moore provide an important precedent for checking what may be systemic abuses of power but which at a minimum raise troubling fairness concerns for the affected party.
In my prior posts, I discussed how the district court held that Moore violated the law by not filing FBARs and did not have reasonable cause for the nonfiling but that the record before it was inadequate for it to determine whether the amount of the penalties was appropriate.
The district court ordered briefing on that unresolved issue, and now this week in Moore v US the Western District of Washington has ruled that the amount of the penalties was appropriate, but that the IRS abused its discretion in its conduct leading to the assessment and in its failure to explain why it assessed a $40,000 penalty. The decision is brief but noteworthy in its candor in criticizing the IRS’s conduct.
For more background, readers can go back to my posts or also to Jack Townsend’s Criminal Tax Blog, who also covers the current development and past cases in Moore II – District Court Approves Penalty But Admonishes the IRS and Imposes a Cost for Misleading Taxpayer.
The key to the case is its finding that the IRS treated Moore unfairly, and that IRS should have to pay a price for its misconduct. Here’s how it got there.read more...
In the first Moore opinion, the judge was troubled by the IRS’s failing to explain why it penalized Moore:
The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS’s decision to impose penalties.
Moreover, the court was deeply troubled that one of its agents promised Moore that it would not assess the penalty pending an appeal of a proposed assessment but then the IRS assessed Moore anyway:
The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the “appeal” it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court.
After briefly discussing that the US demonstrated that it was not an abuse of discretion to penalize Moore $10,000 for the years 2005-08, the district court this week then went on to state that the IRS’s conduct in assessing the penalties “by contrast, was in several respects arbitrary and capricious. In particular, the IRS disclosed no adequate basis for its decision to assess the penalties until this litigation forced its hand. Even after this litigation began, the IRS refused to disclose the evidence on which it now relies to demonstrate the basis for its decision to impose those penalties. With respect to the 2005 penalty, the IRS broke its own promise not to impose a penalty until Mr. Moore had an opportunity to respond to its “proposed” assessment.”
In light of the arbitrary actions of the IRS, the court found that Moore, though responsible for the penalty, “was not responsible for any interest, late fee, or other supplemental assessment that the IRS or another agency of the United States has attempted to tack on to Mr. Moore’s FBAR penalties.” To effectuate that result, the court stated that the US was to treat the FBAR penalties as if they were assessed as of the date of this week’s order.
Upon review of the case memorandum (that the IRS previously had refused to provide to Moore), the court said that the IRS’s penalty determination made sense, or at least was not arbitrary.
The opinion though hits hard when discussing the IRS’s failure to explain itself to Moore:
The IRS’s refusal to disclose anything about the basis for its decision until this litigation, and in particular its decision to withhold Agent Batman’s memorandum until after the court ordered it produced, was arbitrary and capricious. The IRS did not simply fail to disclose Agent Batman’s memorandum, it opposed Mr. Moore’s motion to compel its disclosure. Once the Government determined that it could point to no other evidence justifying its decision to impose the maximum penalties, the Government produced the memorandum. The IRS has offered no explanation for its apparent policy not to explain the assessment of FBAR penalties to citizens, and in particular for its apparent policy not to put that explanation in writing. It has also offered no explanation for its steadfast refusal to disclose Agent Batman’s memo in this litigation until it was left with no other options. No citizen should have to sue his own Government to find out why he is being fined, or to find out why he is being fined $ 40,000 as opposed to a smaller amount. And once a citizen has sued, he should not have to fight over the most basic disclosures.
The opinion then walks through the two apparent harms arising from it calls the “arbitrary and capricious conduct in imposing that penalty.” The first harm was that Moore had to face the “unappealing choice to either accept the IRS’s unexplained imposition of a $ 40,000 penalty or to file suit. The court assumes that Mr. Moore’s choice to sue cost him a substantial sum. Second, the IRS has assessed interest and other penalties on top of the FBAR penalties. “
Suggesting perhaps that there was some other remedy for the first harm, the court says it “expresses no opinion at this time on whether the first harm can be remedied. The court remedies the second harm by preventing the IRS from profiting by imposing penalties without explaining them. The court voids the IRS’s assessment of interest and other charges on top of its previously unexplained penalties.”
Broadening the Discussion: Fairness Matters
I applaud the district court’s approach in imposing some costs on the IRS for its misconduct. One benefit that hopefully comes from decisions like Moore is that in addition to its impact on the party to the litigation, one hopes that the scathing court review has some impact on how the IRS goes about its business of administering the FBAR penalty regime.
About a year or so ago the IRS adopted a Taxpayer Bill of Rights. At the time, Commissioner Koskinen announced that the rights amounted to “core concepts about which taxpayers should be aware” and that “respecting taxpayer rights continues to be a top priority for IRS employees.” First on the list of those rights is the right to be informed. Underlying that right is an understanding that taxpayers have a fundamental interest in knowing what the IRS is doing and why it is acting a certain way.
In a sense, the Altera decision earlier this week that Pat Smith discussed on PT in his guest post is a manifestation of that principle when it comes to rulemaking, one of the two fundamental functions that the IRS (as other federal agencies) does. Altera and other cases Pat describes are bringing the IRS in line with other agencies when it comes to imposing an affirmative duty on the IRS to explain and take into account comments when announcing rules in the form of regulations.
Apart from rulemaking, the other fundamental agency function in administrative law is adjudication. With the IRS that often involves making individualized determinations with respect to a liability issue. There is longstanding law that generally provides that when taxpayers challenge a deficiency determination, the courts do not look behind the notice of deficiency. Moreover, as I have also discussed in a prior post, the IRS gets a great deal of leeway when it comes to drafting notices of deficiency, and the Tax Court has in a number of orders now stated that the APA does not independently provide an independent basis for requiring explanation of agency action in its stat notices (see my post Tax Court Order Rejects APA Claim that IRS Precluded from Asserting Penalty in Answer) and an order from this week, Weschler and Wasserman v Commissioner (hat tip on the order to Carl).
De novo review is in many ways a powerful check on agency abuses; after all, a taxpayer can take a deficiency case to Tax Court (or refund cases in district court or the Court of Federal Claims) and get the court to think anew about the issue. The flip side of de novo review for taxpayers is that while a court takes a fresh crack at the issue, it more or less ignores what the IRS did in it coming to its determination that there is a deficiency or in rejecting a refund claim (yes, this is a simplification but generally true). In a sense, courts can whitewash sloppy agency practice, as the court’s main role in liability cases is getting to the right result.
As the IRS gets knee deep in determinations that move away from its traditional deficiency cases, especially when the review is on an abuse of discretion basis, courts are starting to take a more careful look at agency practices. A good example of this is in the FBAR area, where IRS administers the potentially draconian Title 31 penalty regime (See IRM 188.8.131.52.1 (07-01-2008) (discussing the delegation to IRS and how the Code does not apply to the FBAR regime).
I have always felt and previously written in discussing CDP and court review of collection actions that the real power of abuse of discretion review is that it opens up agency conduct to the sanitizing influence of an unhappy judge. Moore reminds us that sometimes so-called limited court review can be the most searching when it comes to considering how the agency does its job. A key part of the IRS’s job is explaining why it acts a certain way. The Taxpayer Bill of Rights stands to remind IRS employees alike of the importance of informing taxpayers. Absent a remedy in court, however, sometimes those rights are illusory (or require parties to sue or pursue FOIA to find out what the IRS has done). So the best chance for taxpayers and practitioners wishing to benefit from some of these rights and perhaps change IRS culture may come in cases like Moore where unhappy judges hold up IRS misconduct to the bright and sanitizing light of judicial review.