Today: Third Annual UCI Law – A. Lavar Taylor Symposium Hosted by UC Irvine

UC Irvine is hosting the third annual UCI Law – A. Lavar Taylor Tax Symposium today. The panels start at 11:30 AM ET. The theme is taxation in time of crisis. Panels include looks at tax relief, tax administration, and tax policy.  The afternoon keynote is from Eric Hylton, the Commissioner of SB/SE.  Lavar, who readers of PT my recall for his outstanding guest posts, will be offering closing remarks this evening. 

Christine Speidel and I will be on during panel 2, starting at 1:10 ET. We will discuss our work in progress When Tax Procedure Meets COVID 19: An Uneasy Relationship  

 Registration link is here 

How to Apply the Gross Valuation Misstatement When a Gift is a Sham

As we are reviewing cases from the past few months for the next update in Saltzman and Book IRS Practice and Procedure I have noted a few developments that we have not discussed in PT. A number involve civil penalties. One case is Fakiris v Commissioner, where in November the Tax Court issued a supplemental opinion from a 2017 opinion where it applied the gross valuation misstatement penalty to a purported charitable contribution of a vaudeville era Staten Island movie theater. Fakiris involves restrictions on that gift, leading the Tax Court to conclude that donation was conditional and that there was no completed gift or contribution under Section 170. That in turn triggered Section 6662(h), which imposes an accuracy-related equal to 40% of the portion of the underpayment of tax attributable to a gross valuation misstatement. Following the 2017 opinion, the IRS filed a motion for reconsideration, arguing that the original opinion improperly applied the 6662(h) accuracy-related penalty.


The original Fakiris opinion (Fakiris 1) was rich with interesting procedural issues, including affirming that 2006 legislative changes, which lowered the threshold for gross valuation misstatements from 400% to 200% and eliminated the reasonable cause exception, applied when the original contribution arose prior to the law’s effective date but the deduction continued to a year when the taxpayer took a carryover deduction. How could a pre-legislation transaction be covered by legislation that was not retroactive? According to the Tax Court, a taxpayer who takes carryover deductions reaffirms its original misstatement in later post-effective date years.

In addition, Fakiris 1 held that the penalty applied even when the court found that there was no effective contribution or gift for federal tax purposes. It reached that conclusion by citing to and briefly discussing the Supreme Court’s 2013 decision in Woods v United States. Prior to Woods, some courts of appeal had held that when deduction or credit is disallowed in full, any underpayment is not “attributable to” a valuation misstatement for purposes of the accuracy-related penalties. Woods rejected that approach and held that the accuracy-related penalty for valuation misstatements applies when the relevant transaction is disregarded for lack of economic substance. As the Tax Court said in its 2017 opinion, “[w]hen the correct value of contributed property is zero and the value claimed is greater than zero, the gross valuation misstatement penalty applies.”

Despite the IRS’s 2017 win in Fakiris 1, the IRS filed a motion for reconsideration. In its motion, the IRS agreed with the original opinion’s conclusion that the transfer of the theater was not a gift but argued that the original opinion misapplied Woods. In particular the motion argued that the original opinon failed to properly apply the gross valuation misstatement penalty, contrasting how courts have approached the valuation penalty post-Woods in façade and conservation easement cases. 

In a somewhat unusual move, the Tax Court granted the motion for reconsideration. Last year the Tax Court issued its supplemental opinion, which affirmed its prior holding and expanded on its original rationale. As an initial matter, it explained why the original transfer was not effective to be treated as a gift or contribution for tax purposes, with a sharper focus on the degree of dominion and control that the donor/seller maintained over the property. In addition it more closely aligned its analysis with cases analogizing failed gifts to shams. After expanding on its rationale for finding that there was no gift, the supplemental opinion turns to the main issue on reconsideration:

What is the “correct value” of “property” that is claimed to be donated but is not actually donated? Or, more precisely: Is the value that of the property that was reported to have been contributed, as respondent would have it be, or the value of the property that was actually contributed? 

All of this is important because of the triggering rules in Section 6662. Recall that accuracy-related penalties apply when there is a substantial valuation misstatement as per Section 6662(b)(3), The base penalty is 20 percent, but that is doubled in certain cases that involve a gross valuation misstatement, as per Section 6662(h)(1). A “substantial” valuation misstatement arises if the value of transferred property is overstated by 150 percent or more of the correct value. The penalty is classified as a “gross” valuation misstatement and the penalty rate is doubled to 40% if the value is overstated by 200% or more of the correct value. 

The penalty is more important since the Supreme Court decided United States v. Woods, 571 U.S. 31 (2013), which held that a valuation penalty applied even when an entire transaction was disregarded (some courts had previously held that the understatement was not attributable to valuation misstatements when an entire transaction was disregarded). Regulations under Section 6662 also provide that there is a gross valuation misstatement  (and thus a steep 40% penalty) when the correct value of property is zero and the value claimed on the return for such property is greater than zero.

Back to Fakiris 2. The IRS on reconsideration argued that the trigger for the penalty required a comparison between the actual value of the theater and the value of what was in fact transferred to the donee/buyer. Under the IRS’s approach on reconsideration either the 20% substantial misstatement or 40% gross misstatement penalty would not automatically apply to Fakaris. The IRS essentially argued for the court to compare the value of the theater without restrictions with the value of what was in fact transferred, i.e., a theater with substantial restrictions. Under the IRS’s approach, if the value of the theater without any restrictions was greater than or equal to twice the value of the theater with the restrictions, the taxpayer would be subject to a 40% accuracy related penalty. This differed from Fakaris 1, which had held that the gross valuation penalty automatically applied when the court found that the restrictions effectively rendered the purported gift a sham.

The Tax Court disagreed with the IRS, mainly distinguishing two easement cases. While in those cases the courts had disallowed deductions due to donors failing to comply with substantiation requirements there also was a valid transfer of something of value. In contrast on reconsideration the Tax Court held that its holding in Fakiris 1 was directly premised on the finding that the donee transferred nothing: 

In both [easement] cases we proceeded on the assumption that a discernible property right had been validly transferred from the donor to the donee. In other words, some quantum of property rights had been transferred from donor to donee, and the charitable contribution deduction was disallowed for failure to satisfy statutory requirements of substantiation. For that reason, a determination of the value of that quantum of property transferred was necessary to calculate the applicability and amount of the section 6662(h) penalty. The same is not true here; the transfer itself was a sham, with the result that the value of the property claimed to have been contributed is zero for purposes of the penalty.

As a final matter, the Tax Court emphasized that even if it were inclined to accept the IRS’s approach on reconsideration and conclude that there was some transfer/gift for federal income tax purposes, the record “is devoid of any evidence supporting a value for whatever could be said to have been transferred.” 


With the IRS urging a taxpayer friendly interpretation of the valuation misstatement penalty, the procedural posture of Fakiris is somewhat unusual. To be sure, the IRS could effectively disregard the Tax Court’s reasoning and choose to apply penalties regime consistent with what its position on reconsideration. Under Fakiris 1 and 2 if a purported charitable contribution is disallowed due to a finding that restrictions placed on the donee effectively render an initial gift or contribution as incomplete the effect is likely an automatic 40% penalty.

On the other hand, as a practical matter I am not sure that the difference matters much. Once misstatement penalties apply when the disallowance stems from threshold legal determinations in cases where a court (as in Fakiris) find that the donor maintains a degree of control over the supposedly gifted asset, I assume that the value of the asset is likely to be sufficiently low enough to trigger the 40% gross valuation misstatement anyway. 

Some Quick Thoughts on a Key Difference Between the Advance Payment of an EIP and Claiming the 6428 and 6428A Credit on a 2020 Tax Return

We have previously discussed the mechanics of the advance credit, both in the original CARES legislation from last spring and also in the Tax Relief Act legislation from late last year.  For a really good primer on the mechanics of all of this, I recommend the recently retired sage of tax procedure, Carlton Smith So, How Will the “Recovery Rebate” Refunds Work This Time? Part 1 and Part 2.  In this post I will flag how things have changed a bit since Carl’s initial post, and also offer some brief observations on why the current status for individuals who are entitled to receive 6428/6428A credits when they file their 2020 tax returns puts people in a less favorable place than if they were fortunate enough to receive the advance payments.


As background, individuals who receive an advance payment or payments that exceed the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the 6428 and 6428A credit as determined on the 2020 return exceeds the amount of the advance payment, taxpayers are entitled to claim the difference as a refundable tax credit on their 2020 returns.

There is an uneasy relationship between tax procedure and refundable credits. Typically (and I am simplifying here quite a bit) a refundable credit is treated as a payment for a particular tax year, and a taxpayer will have an overpayment if the sum of their payments and credits exceeds their tax liability for that year. Just because a taxpayer has an overpayment does not necessarily mean a taxpayer gets a refund, however. Section 6402(a) allows (but does not require) the IRS to offset any overpayment of one tax against any other federal tax debt; Section 6402(c), (d), (e) and (f) require IRS (through Treasury) to offset or apply the balance of any overpayment to certain defined other debts, including past due child support, and state income taxes and covered employment compensation debt.

In an off-Code part of the law, the original CARES legislation trumped the offset rules. CARES did not distinguish between advance payments and amounts that would be claimed later on 2020 tax returns. Essentially CARES said that IRS could not exercise its discretion under Section 6402(a) to offset the economic impact payments and amounts later claimed on 2020 returns against past due federal taxes, and also overrode the mandatory offset rules in Sections 6402(d)-(f), but preserved the mandatory offset for past due child support.

Fast forward to December and the Tax Relief Act. 

Sec. 273(b) of the Tax Relief Act retroactively changes the off Internal Revenue Code provision  found in CARES Act Sec. 2201(d). What are the changes? As I mentioned above the original CARES Act provided that BOTH the advanced credit that the IRS distributed in the spring (the original EIP) and any amount of the 6428 credit that was later claimed on the 2020 return was exempt from the IRS applying to past due federal income taxes or to all mandatory offsets (e.g., state tax debt, debt to other federal agencies), except for child support.

First the good news. The TRA provided some additional protection for the second round of EIP’s by providing protection from all offsets, including for past due child support. It also protected the second round of advance payments form bank garnishment or levy by private creditors and debt collectors.

That is the good, at least from the taxpayer perspective. What about the bad? The TRA now provides that the recovery rebate credit a taxpayer claims on a 2020 tax return (under both 6428 and 6428A) loses the protection from discretionary and mandatory offsets under Section 6402. It will also be applied to any unpaid current 2020 tax liability, a necessary step to determine if a taxpayer has an overpayment in the first instance. There is also no protection from garnishment or levy if a taxpayer is lucky enough to get a 6428/6428A fueled refund. So in sum, what IRS refers to as the  “Recovery Rebate Credit” (the amount that is claimed on the 2020 return, rather than the Economic Impact Payments paid out in advance), is subject to ALL offsets, just like any other credit claimed on a tax return that generates an overpayment. 


Congress’ decision to place these benefits in the tax code and also to attempt to ensure that the IRS deliver them to the majority of people before filing a 2020 tax return (or in some instances even in the absence of a return), raises a lot of procedural issues. In this brief post, I did not attempt to exhaustively discuss those issues, but to highlight some differences between the 6428 and 6428A mechanics and typical refundable credits, like the EITC and the Additional Child Tax Credit. The post suggests that there are significant substantive differences between the advance payment mechanism and the typical way that individuals receive benefits by claiming a refundable tax credit on a tax return. This brief discussion may also be of relevance as Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return. How and whether benefits are offset ( and whether the IRS will facilitate or publicize the ability to request a bypass of offsets when taxpayers are experiencing hardship, a topic of recent comments submitted by the ABA Tax Section), as well as what happens when there may be changing circumstances when it is time to reconcile, are issues that will have a material impact on the effectiveness of any program that is tethered to the tax code.

For another day, and another post, are issues relating to how taxpayers prove eligibility for claimed refundable credits, especially given that eligibility proof for a benefit embedded in the tax code typically means a correspondence audit. As Congress possibly looks to the tax system to play a bigger role, how the IRS administers these provisions looms even larger in the welfare of some of the population’s most vulnerable.

TIGTA Audit Flags Inconsistency in IRS Treatment of E-filed Returns

A recent report from TIGTA highlights the IRS’s inconsistent treatment of millions of e-filed returns that have errors.  IRS e-file processes consider an e-filed tax return as “filed” when the IRS accepts the return for processing, not when the IRS originally receives the return. The TIGTA report reveals that IRS does not have the  “the ability to use the date an e-filed return was initially received as the return filing date.” This is a problem because under the commonly used Beard test the IRS routinely rejects legally sufficient returns, triggering delinquency penalties and uncertainty as to the statute of limitations on assessment, a topic that Keith discussed in Rejecting Returns that Meet Beard. That post covered Fowler v Comm’r, which held that a rejected an e-filed return the return still triggered the 3-year limitation period on assessment. The TIGTA report suggests that there are systemic issues stemming from the IRS practice of rejecting e-filed returns, issues that will likely require a legislative fix or a significant change to internal IRS practices.


Unlike submitting a return by snail email, when e-filing a return it generates the possibility of the IRS rejecting a return (so called validation problems). Even if an e-filed return is validated, as with paper returns sent via regular mail, the IRS may notice errors that trigger Error Resolution System (ERS) scrutiny. TIGTA notes that there were about 26 million ERS issues on 2019 individual returns, with over 24 million of those errors attributable to “when the tax liability, balance due amount or refund computed is incorrect, or when information on the return does not match the information on a supporting form or schedule.” Not surprisingly the numbers of these types of errors are much higher on paper returns, (appx 15.3 million to 8.9 million).

For some errors, the IRS process for ERS scrutiny generally involves a tax return examiner contacting a taxpayer to correct the error; if over 40 business days elapse without a response the return is often released for processing, though is still tagged with the error code that delayed the processing.

All of this background gets us to the problem that TIGTA flagged, namely inconsistent IRS processes on e-filed returns with errors:

Our review found that IRS processes do not consistently provide taxpayers the opportunity to self-correct errors on e-filed tax returns. For example, some e-filed returns with a missing form are rejected to provide the taxpayer the opportunity to self-correct the error (i.e., attach the missing form and resubmit the e-file return) while others are accepted and sent to the ERS for manual correction by an IRS tax examiner, which suspends the return and holds the refund until the error condition is resolved.

This inconsistency can leads to later problems, as the statutory filing date of a tax return is, as TIGTA notes, “the date the IRS receives a legally valid tax return from the taxpayer.” Yet despite the statutory filing date, which is key for issues like delinquency penalties and the start date for determining when the statute of limitations on assessment expires  “e-file processes do not consider a rejected e-file tax return to be “received” until the taxpayer resubmits the rejected return and the IRS accepts it for processing.”

This rejection can lead to problems, especially if someone is e-filing at or close to the filing deadline.  To be sure this problem is mitigated by the resubmission policy that IRS has adopted. Publication 1345 discusses that process, which allows for sending a snail mail return within 10 calendar days of an e-file rejection:

If the taxpayer chooses not to have the electronic portion of the return corrected and transmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return. To timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing. Taxpayers should include an explanation in the paper return as to why they are filing the return after the due date.

As TIGTA suggests, the rejection of e-filed returns that satisfy the Beard test is common. If a taxpayer fails to correct the return (or corrects after the 10-day period) there is the likelihood that a return that would qualify as a return under Beard is not treated by the IRS as filed. IRS desire to maximize taxpayer self-correction of returns makes sense; it can reduce burden, speed up refunds, and avoid possible downstream costs. Yet it seems that millions of e-filed returns that IRS rejects are likely to constitute validly filed tax returns. When facing possible delinquency penalties or there are questions about the SOL on assessment it is important to consider whether the IRS previously rejected an attempted e-filed return.

In FBAR Case Court Allows in to Evidence Newspaper Articles Despite Hearsay, Relevance, and Unfair Prejudice Objections

US v Briguet is a brief order out of the Eastern District of New York. Briguet is an FBAR case. The maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Proving that a violation is willful is the key aspect of most of these cases. The order relates to a motion in limine that Briguet filed. That motion asked the court to preclude the admission at trial of 96 newspaper articles that concerned the government’s crackdown on US taxpayers who held offshore accounts and did not report their existence on US tax returns or the FinCEN Form 114. The defendant argued that the articles should be excluded on hearsay, relevancy and unfair prejudice grounds. The order rejects the motion and (mostly) allows the articles into evidence. 


As to hearsay, the order held that the articles were not offered to prove the truth of the matter being asserted (i.e., that Mr Briguet willfully failed to file the FBAR form). Instead, the court held that the government was offering the articles as circumstantial evidence of the state of Briguet’s mind and general awareness of the FBAR filing requirement.

As to relevance, the court noted the fairly wide definition of relevance for admissibility purposes, i.e., an item is  “relevant when ‘it has any tendency to make a fact more or less probable than it would be without the evidence.’”  United States v. White, 692 F.3d 235, 246 (2d Cir. 2012), as amended (Sept. 28, 2012) (quoting Fed. R. Evid. 401. With that benchmark, the court held that the articles, which were in the NY Times and Wall Street Journal prior to the date of the filing deadline, easily met the standard. Drilling deeper, the court noted that a number of the headlines flagged efforts targeted at UBS clients (where Briguet had his account) and that Briguet had testified that he read the financial sections of the NY Times and the Journal “every day.” In addition the order flagged the customer logs from UBS itself, “one of which illustrates that he “closely followed the published events on the UBS business policy for US customers” and “consulted a lawyer, aware of [UBS’s] change of policy, and fearing for the confidentiality of his account.”

In concluding that the pre-filing articles were relevant the order concluded that “a reasonable jury might readily conclude Defendant read the newspaper articles in the financial sections of the New York Times and Wall Street Journal, and such an inference seriously undermines any claim that he was unaware of the FBAR filing requirement.”

It was not a complete government victory, however. The motion also opposed admission of articles that appeared after the FBAR filing date. While the court declined to exclude the articles it reserved judgment and stated it would resolve that issue later. While the articles are not relevant to the state of mind at the time of the FBAR deadline the court noted that they may prove relevant as to when Briguet became aware of the deadline.

As a final objection to admissibility Briguet’s motion claimed that the articles would unfairly prejudice him because  “the jury may be left with the impression that the UBS case, DOJ’s Swiss bank crackdown, and the IRS’s offshore voluntary disclosure program were ‘hot issues’ to investors who read the New York Times and Wall Street Journal and … infer … that Mr. Briguet probably read some of the articles at issue.” While noting that the observation was “valid” the court sided with the government noting that “[e]vidence is prejudicial, but in this instance any prejudicial effect is entirely coextensive with the probative value of the articles and therefore not unduly prejudicial.” 

Speidell v US is Latest Rebuke to Challenge to IRS Ability to Investigate Legal Marijuana Businesses

Section 280E disallows deductions for business activities concerning controlled substances which are illegal under federal law. State law increasingly allows the selling of marijuana for medicinal and recreational purposes. Federal law classifies marijuana as an illegal controlled substance. This tension between state and federal law means that taxpayers engaged in the legal selling of marijuana are unable to deduct expenses that would otherwise be deductible for federal income tax purposes. This leads to the bogarting of the ability to pay principle, and effectively penalizes taxpayers who operate legal state law marijuana businesses.

Over the last few years as part of civil tax audits IRS has investigated a number of dispensary taxpayers. At times IRS used its vast summons powers to gather information from third parties like financial institutions and state marijuana regulatory bodies. In many of these cases, the dispensaries and their individual owners have challenged those efforts, in part by arguing that the IRS could use the information to assist in the possible prosecution for violations of federal law. The courts, applying the Supreme Court’s Powell factors, have rejected challenges and found that IRS had a legitimate purpose in seeking the information from the businesses themselves and from third parties. The courts have generally held that was no abuse of process or bad faith because there was no evidence that the IRS was seeking the information to place the dispensaries and their owners in jeopardy of federal criminal investigations.

The latest case that upheld the IRS’s summons’ power over state law marijuana dispensaries is Speidell v US out of the Tenth Circuit, which has taken the lead on these cases given Colorado’s budding and booming marijuana business. The case breaks no new ground, but is a useful reminder that the IRS has broad latitude to use its summons power, and, despite the inequity in Section 280E, challenges to IRS audits of these businesses face an uphill struggle. 


As a refresher, under Powell the IRS must establish (1) that the investigation will be conducted pursuant to a legitimate purpose, (2) that the inquiry may be relevant to the purpose,'(3) that the information sought is not already within the IRS’s possession, and (4) that the administrative steps required by the Internal Revenue Code have been followed.

As the Speidell opinion notes the district court held that (1) the IRS had a legitimate purpose in issuing the summonses because there was no pending criminal investigation (2) the information sought was not already in the IRS’s possession (3) the IRS followed the required administrative steps; and (4) there was no showing of an abuse of process or bad faith because the summonses had a valid purpose, did not violate the Fourth Amendment’s right to privacy or Colorado law. 

In Speidell, the circuit court addressed some wrinkles that distinguish the case from prior marijuana business challenges to IRS investigations. In rejecting the challenge the district court had treated the government’s response to the petitions to quash the summonses as a motion to dismiss; it should have treated the government’s efforts as a motion for summary judgment.  The Tenth Circuit held that the distinction made no substantive difference, nor did the lower court’s citation of the 1985 Tenth Circuit opinion Balanced Financial Management that referred to the burden in establishing the Powell factors as “slight.”  On appeal, the plaintiffs argued that the lower court and recent similar Tenth Circuit opinions in Standing Akimbo v US and High Desert v US failed to apply the Supreme Court’s 2014 decision in US v Clarke, which recalibrated the standards that parties must satisfy to challenge the Powell factors.  In failing to apply Clarke or treat the government’s actions as a summary judgment motion, the appellants argued that the lower court improperly sided with the government.

The Speidell court disagreed: 

The Appellants argue that the rules announced in our 1985 Balanced Financial Management decision, which rules impose a “slight” burden on the IRS and a “heavy” burden on the taxpayer, are incompatible with normal summary judgment standards and the Supreme Court’s 2014 ruling in Clarke. Although Standing Akimbo does not directly address this issue, the panel in that case was clearly aware of Clarke and continued to apply Balanced Financial Management principles. See Standing Akimbo, 955 F.3d at 1154–55, 1157, 1160–61, 1163, 1166 (citing both Clarke and Balanced Financial Management). High Desert embraces a similar analysis. See 917 F.3d at 1181–84, 1187, 1191, 1194 (same). In any event, we need not decide whether this point in Standing Akimbo and High Desert is dictum or a holding. As discussed below, even if we eschew descriptions like “slight” and “heavy” and apply traditional summary judgment standards, the Appellants simply have not submitted proof sufficient to create a genuine dispute of material fact. The Appellants thus fall short even if we assume arguendo that Balanced Financial Management has been displaced by Federal Rule of Civil Procedure 56 and Clarke

The opinion discusses further the relationship between its precedent and Clarke, noting that Clarke at its core emphasizes the need for credible evidence. Bare allegations of improper purpose under pre or post Clarke law are insufficient for evidentiary hearings at the summons enforcement stage. Even if there was some gap between the precise language in pre-Clarke Tenth Circuit law and the standard for all courts to apply following ClarkeSpeidell held that any tension between the two was “indirect” and Clarke did not overturn its precedent. 


There is more to the opinion, including an interesting discussion of the lower court’s treatment of one of the individual owner’s untimely petition to quash the summons, principles of sovereign immunity, and the relationship of the constitution’s Supremacy Clause to the legitimacy of the IRS investigation.  At one level, the opinion highlights the difficulties parties face when fighting IRS and its vast summons powers. At another level, however, the opinion flags the need for Congress to update the federal tax laws to reflect the growing importance of the legal marijuana business. Help for these businesses is unlikely to come in summons enforcement cases; it will come in legislation that carves out the 280E prohibitions from the sale of substances that are allowed under state law. A recent Politico article Why the Next Congress is Unlikely to Legalize Marijuana suggests that this may not be high on the agenda next year, with the Senate the main stumbling block. 

Padda v Comm’r: Possible Opening in Defending Against Late Filing Penalty When Preparer Fails to E-file Timely

Courts have generally not excused taxpayers from late filing penalties when the taxpayer defense is that that the return preparer was responsible for the delinquency.  Decades ago the Supreme Court in Boyle held that reliance on a third party to file a return does not establish reasonable cause because “[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.”  We have previously discussed how Boyle seems incongruent with e-filing. As I noted last year in Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases “the basic question is whether courts should reconsider the bright line Boyle rule when a taxpayer provides her tax information to her preparer and the preparer purports to e-file the return, but for some reason the IRS rejects the return and the taxpayer arguably has little reason to suspect that the return was not actually filed.”

So far taxpayers have not been successful in arguing that courts should distinguish BoylePadda v Commissioner is the latest case applying Boyle in these circumstances. Like other cases where the taxpayer’s late filing was due to a preparer’s mistake the court did not relieve the taxpayer from penalties. What is unusual though is that in rejecting the defense Padda implicitly acknowledges that differing circumstances might lead to a taxpayer win.


I will summarize the facts and discuss the slight opening the opinion suggests.

The opinion nicely summarizes what went wrong:

Padda and Kane’s 2012 federal individual income tax return was due October 15, 2013. On October 15, 2013, Padda and Kane signed IRS Form 8879, “IRS e-file Signature Authorization” to authorize Ehrenreich’s accounting firm to electronically file their 2012 Form 1040, “U.S. Individual Income Tax Return”. On October 15, 2013, Ehrenreich’s accounting firm was electronically filing several tax returns just before midnight. Ehrenreich’s accounting firm created an electronic version of Padda and Kane’s return on October 15, 2013, at 11:59 p.m. It transmitted the electronic version to the IRS on October 16, 2013, at 12 a.m. On October 16, 2013, the IRS rejected the return as a duplicate submission. Ehrenreich’s accounting firm electronically resent the return on October 25, 2013, and it was received and accepted by the IRS the same day.

Prior to trial, the IRS and spouses Padda and Kane stipulated that the return was filed on October 25, 2013. The IRS had proposed late filing penalties under Section 6651, which trigger a 5% penalty of the amount required to be shown on the return if the failure to file is under a month, as the case here. In arguing that they had exercised reasonable care and prudence, the taxpayers explained that “1) Ehrenreich’s accounting firm pressed a button only a few seconds late, (2) they relied on Ehrenreich’s accounting firm to timely file the return, and
(3) they themselves could not have pressed the button to timely file the return.”

In rejecting the defense, the Padda opinion cites to Boyle and other cases which provide that taxpayers cannot delegate their filing obligation other than in circumstances where the advice pertains to whether a return needs to be filed at all. 

What I find interesting is that the opinion could have just cited Boyle and stopped there. Instead, it suggested that a relationship with a preparer who had history with the taxpayer of submitting e-filed returns on time might have led to a different outcome:

Even if sometimes it might be reasonable for a taxpayer to rely on his or her accountant to timely file his or her returns (contrary to the caselaw), it was not reasonable in this particular case for Padda and Kane to rely on Ehrenreich’s firm to timely file their return. Padda and Kane have relied on Ehrenreich’s firm to file their returns every year since at least 2006. And every year since then, except for 2011, their return was filed late. Yet they have continued to use Ehrenreich’s firm to file their return year after year. Padda and Kane’s failure to ensure that Ehrenreich’s firm timely filed their 2012 return demonstrates a lack of ordinary business care, particularly in the light of the firm’s history of delinquent filings.

Given the the firm’s delinquent filing history, the opinion concluded that the taxpayers failed to establish that they had reasonable cause for the late filing.


We wait for perhaps better facts for a court to distinguish Boyle. The Boyle-blanket rule seems out of place in today’s world where there may be little way to monitor preparers who taxpayers should be able to expect can meet a deadline. Padda suggests, though does not explicitly embrace, that some reliance may be reasonable, but when there is a long past history of delinquency, even if the taxpayer was not in a position to monitor the particular filing, it will be difficult to find that the taxpayer has a winning reasonable cause defense.

Circuit Court Weighs in on Meaning of Willfulness, Maximum Penalty and SOL Issues in Important FBAR Case

In US v Horowitz  the Fourth Circuit issued a published opinion addressing a number of issues relating to the willful penalty for failing to file an annual Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR. 

The opinion addresses 1) the meaning of willful, holding that willful encompasses recklessness and that the term has different meanings for civil and criminal law purposes, 2) the maximum penalty for willful violations when a 1987 regulation that capped the willful penalty at $100,000 is inconsistent with a 2004 statutory change that boosted the “maximum penalty” for a willful violation to the greater of $100,000, or 50 percent of the account balance, holding that the statutory change effectively abrogated the $100,000 regulatory cap, and 3) the meaning of the term assessment when during the course of a post-assessment administrative appeal of the penalty there was uncertainty as to whether the IRS had abated the assessment.

In this post, I will discuss the third issue, focusing on the SOL argument the taxpayers raised. 


As background, the Horowitzes had lived and worked in Saudi Arabia since 1984. While there, they initially had a bank account in a Saudi Arabian bank, but they eventually transferred the funds to FOCO, a Swiss bank. When FOCO was bought by an Italian bank, the Horowitzes moved the funds to another Swiss bank, UBS. By the time they moved back to the US in 2001 the account had grown to approximately $1.6 million. All the while they did not report income earned on the account on their US tax returns, and they never provided UBS with their US address.  By 2008, after UBS experienced financial setbacks, Mr. Horowitz traveled to Switzerland and withdrew the funds, depositing the proceeds in Finter Bank, another Swiss bank, this time in his name only. For an additional fee, Finter created the account as a “numbered” account with “hold mail” service, which meant that there was only a number associated with the account and that the bank would hold all correspondence associated with the secret account.

By 2009, there was widespread attention around the IRS crackdown on offshore accounts. The opinion discusses its impact on the Horowitzes:

In January 2010, the Horowitzes submitted a letter to the IRS disclosing the FOCO, UBS, and Finter Bank accounts and requesting that they be accepted into the Department of Treasury’s Offshore Voluntary Disclosure Program. This program provided potential protection from criminal prosecution and reduced penalties in exchange for cooperation. After entering the program, the Horowitzes filed FBARs, as well as amended income tax returns, for 2003 through 2008. As part of that process, they reported additional income of $215,126 and paid more than $100,000 in back taxes. In 2012, however, the Horowitzes opted out of the program.

In May of 2014 IRS sent letters to the Horowitzes proposing FBAR penalties for the undisclosed UBS accounts that they owned in 2007 and 2008. The letters proposed enhanced penalties based on an IRS determination that their conduct was willful and gave them about a month to respond. 

The Horowitzes, through their counsel, did respond to the May letter proposing penalties. In a June 3, 2014 letter they requested an administrative appeal of the still yet to be assessed penalties. The letter included a consent to extend the SOL on assessment of the penalties to December 31, 2015.

While the Horowitzes’ counsel letter began the process of an administrative appeal of the penalties, and had hoped that the extension would put off any possible assessment, on June 13, 2014 the IRS assessed the penalties. The opinion goes into some detail about the assessment process for FBAR penalties, including the work of the FBAR Penalty Coordinator at the Department of Treasury, and how she prepared four Form 13448 Penalty Assessment Certifications that a supervisor signed.

Here is where we get to the SOL issue.  The failure to file the annual FBAR gives the IRS six years to assess penalties, as per 31 USC § 5321(b)(1). At the time the FBAR had to be filed by June 30, so the SOL for assessing the 2007 FBAR penalty was June 30, 2014.  (Note that Title 31 gives the US two-years post-assessment to commence enforcement. 31 USC § 5321(b)(2)). 

There was no dispute that the penalty for 2007 was assessed prior to June 30, 2014, but the Horowitzes contended that the IRS’s actions after they protested the penalty amounted to an abatement of the assessment. 

In October of 2014, the Appeals Officer sent an email to the Appeals FBAR coordinator (with the very cool last name Batman) requesting that the assessments be “removed.” Internal emails between Appeals and the FBAR penalty coordinator suggested that the June 2014 assessment was “assessed prematurely.” In light of the protest and extension, Treasury’s FBAR penalty coordinator “simply deleted “6/13/2014” (the assessment date) from the “date penalty input” field in the assessment database.”

When the appeals process culminated in 2016 with no resolution, the Horowitzes argued that the IRS post-Appeals actions amounted to a reassessment of the penalty—this time beyond the six-year SOL for both 2007 and 2008 as per 31 USC § 5321(b)(1). 

The Fourth Circuit disagreed. In so holding, the opinion discussed the internal IRS procedures that allowed Appeals to hear the matter. Importantly, the opinion notes that the coordinator’s entry in the database was not accompanied by any more formal action:

But she did nothing more. Significantly, she generated no document, and her supervisor, Calamas, did not sign any document reversing the assessment certifications he had executed on June 13, 2014. Moreover, the Horowitzes were never informed that the penalties against them had been placed back into an unassessed status.

As the opinion discusses, the administrative appeals process continued for a couple of years. By May of 2016, Appeals informed the Horowitzes that there was insufficient time to reach resolution, in light of the two-year deadline to commence enforcement action “given that the government’s time for filing suit was set to expire in June 2016 (i.e., two years after the penalties were assessed in June 2014).”

Prior to closing the case at Appeals, the Appeals FBAR coordinator and the Treasury FBAR Penalty coordinator spoke about the legal effect of the database entry. That exchange, as well as its decision to end the Appeals process, highlighted that the government did not believe its actions amounted to an unwinding of the original assessment.

The Fourth Circuit emphasized that even if there were any subjective misunderstanding surrounding the legal effect of its data base deletion it concluded as a “matter of law” that the “mere act of deleting that date did not have the legal effect of reversing the assessments that had been formally certified … on June 13, 2014. Accordingly, the civil penalties against the Horowitzes were timely assessed, and the enforcement action was timely filed.”


The Horowitz opinion highlights the importance of the legal effect of an assessment. The opinion suggests that there were few formal mechanisms in place to allow Appeals to consider a post-assessment challenge to the penalty. The workaround that Appeals facilitated, which temporarily delayed the practical effect of an assessment, did not unwind its legal effect.


There are some excellent discussions in other blogs about the opinion. See Jack Townsend in his Federal Tax Crimes blog, discussing all aspects of the case, as well as Carolyn Kendall of Post & Schell who blogged the case in the firm’s White Collar blog with a focus on the opinion’s discussion of willfulness.