Paying the Full FBAR Penalty

Few penalties have the bite of the FBAR penalty. As the IRS obtained more information and more sophistication in locating foreign bank accounts, it offered taxpayers who had used such accounts the opportunity to limit their civil and criminal exposure through a series of Offshore Voluntary Disclosure Initiatives (OVDI and its cousin OVDP). We have discussed OVDI and OVDP in previous posts here and here. Les wrote about a non-wilful FBAR case here.

The Court of Federal Claims recently rendered an opinion in Norman v. United States, No. 1:15-cv-00872 (July 31, 2018) finding the taxpayer liable for the 50% penalty imposed by 31 U.S.C. 5314. The 50% penalty means that Ms. Norman owes the IRS half of the money in her foreign bank account which makes the FBAR penalty one with an enormous bite. Jack Townsend’s blog covers FBAR issues extensively and is a much better source than PT on this issue. As usual, he wrote about this case the day after it came out and his post can be found here. The Norman case has importance not only because the court finds her conduct willful but also because the court addresses the application of the regulations. For that reason, it deserves mention in PT where we spend relatively little time writing about foreign bank accounts.


In October, 2013, the IRS assessed an FBAR penalty against Ms. Norman in the amount of $803,530 for willfully failing to report her foreign bank account. After unsuccessfully contesting the penalty administratively, she paid it and brought a suit for refund. The IRS tried to win the case on summary judgment but the court found that the issue of willfulness required the gathering of facts in a manner not possible through summary judgment. So, a three hour trial took place in Brooklyn on May 10, 2018.

A couple of things about the trial deserve note. First, the location of the trial shows that the Court of Federal Claims regularly travels around the country for its trials to a site near the taxpayer. This is not news for those familiar with the Court of Federal Claims but for those not familiar with this court it may come as a surprise.   Second, the timing of the decision in this case vis a vis the trial stands in stark contrast to the normal time for a decision from the Tax Court. Unless decided by a bench opinion, I would not expect a Tax Court decision following a trial of this type for about a year instead of less than three months; however, it did take almost three years after the filing of the complaint in the Court of Federal Claims before the case came to trial.

In short, the court did not believe the testimony of Ms. Norman. It found her memory quite selective. It went through the elements necessary to prove a willful failure to report a foreign bank account, then through the facts she did and did not prove in order to reach the conclusion without much difficulty that Ms. Norman knew about the account and knew she should have reported it. It’s not worth going through all of the factual findings here but for those representing individuals with foreign accounts the details might matter. As Les mentioned in his post, the number of opinions coming out on this issue is relatively low. The IRS settlement initiative doubtless has resolved the vast majority of cases without litigation.

Having found a willful violation, the court then had to deal with the amount of the penalty. The taxpayer argued that the court should cap her penalty based on regulation 31 C.F.R. 1010.820 which was written under the previous version of the Bank Secrecy Act and which capped the penalty at $100,000 which would be quite a reduction from the assessment here. Taxpayer requested that the court adopt the reasoning set forth in Colliot v. United States, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018), and in Wadhan v. United States, 122 AFTR2d 2018-5208 (D. Colo. 2018). In 2004 Congress amended the law to increase the penalty. Colliot and Wadhan held that the new law did not supersede the regulation promulgated under the prior statute. The Colliot district court reasoned that:

[The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by 5321(a)(5)(C).

The Court of Federal Claims found that the statement in Colliot “mischaracterizes the language of 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.” The revised statute provided that the maximum penalty “shall be increased” to the greater of $100,000 or 50% of the account. Because Congress used the imperative, the amendment did not merely permit a higher ceiling on penalties based on the decision of the Secretary it “removed the Treasury Secretary’s discretion to regulate any other maximum.” It found Congress superseded the regulations.

In invalidating the regulations the Court of Federal Claims refused to follow precedent that could have damaged the IRS not just in FBAR cases but in other similar situations in which a revised statute did not immediately trigger a withdrawal or revision of a regulation by the IRS. Of course, the Colliot decision turned on an interpretation of the intent of Treasury in leaving the regulations on the books but it had potentially far reaching consequences for the IRS. The Norman decision does not mean the IRS has won this issue but it does mean that a court of nationwide jurisdiction has not signed on to the interpretation of one district court.  While I agree with the decision in Norman, the IRS could do itself a favor by addressing the regulation.  It seems that it has the power to avoid having to litigate this issue repeatedly.



Court Grants Government’s Motion in Limine in FBAR Penalty Trial

Last week’s order in Bedrosian v US concerns an evidentiary dispute in an FBAR case. Bedrosian is CEO of pharmaceutical company Lannett. The dispute centered around the government’s motion in limine to exclude any evidence pertaining to its administrative determination to impose penalties for willfully failing to file an annual FBAR form. The government filed its motion, arguing that the evidence pertaining to its the administrative determination was irrelevant in the court proceeding, as the court would be making a de novo review on the merits of the penalty. The court agreed with the government.

I will describe the order and give some context.


FBAR penalties are steep, especially if the failure to file the report is willful. A willful failure to file carries a penalty of up to the greater of $100,000 or 50% of the account balance.

In Bedrosian, the penalty at issue is about $1 million for willfully failing to disclose an interest in one of two UBS Swiss bank accounts.

Bedrosian had a Swiss account for many years, which he failed to disclose to the IRS. For many years he also did not report the income from the account on his federal income tax returns. He had another more recently opened smaller UBS account, which he began disclosing on an FBAR in the 2007 tax year, though when he filed the FBAR for that smaller account he did not report its income on his 2007 federal tax return.

The account he disclosed had a value of about $230,000; the other undisclosed account was worth about ten times that. In 2008 UBS told Bedrosian that it would be turning over all account information to the IRS. In 2010, Bedrosian amended the earlier FBAR filing and filed a new FBAR showing his interest in both accounts. He also amended his income tax return to reflect the income from the accounts.

The order from earlier this year on the cross summary judgment motions discusses how Bedrosian cooperated with IRS after it began investigating him in 2011. (See Jack Townsend’s Federal Tax Crimes blog post for an excellent discussion of the earlier order and the court’s discussion of the willfulness standard; hard working Jack also beat us to this punch with a post yesterday on last week’s order here). Initially the IRS proposed to only impose nonwillful FBAR penalties; however, for reasons that are not clear the IRS reassigned the matter to another IRS agent, and that agent recommended imposing the willful FBAR penalty. IRS went ahead and proposed to impose the largest willful penalty allowed under the regs; that was just under $1M.

Bedrosian sued claiming that the penalty amounted to an illegal exaction, leading both parties to file summary judgment motions.

After denying both parties’ summary judgment motions, and with the case heading to trial, the government sought to exclude from trial the evidence pertaining to the IRS’s flip flop on its penalty determination. Last week’s order agreed with the government. In so doing the court looked to analogous case law that provides that the “thoughts and analysis, application of facts to law at the administrative level with respect to willfulness have no place in the Court’s de novo review of whether Bedrosian willfully failed to comply with the FBAR requirements.”

Bedrosian cited case law interpreting the Individuals with Disabilities Education Act (IDEA), which also has de novo review of administrative proceedings but has mandated that the earlier proceedings become part of the record in court challenges. The Bedrosian order distinguished that line of cases, as the IDEA statute specifically requires that the courts should receive records of the earlier administrative proceedings.

The key, from the court’s perspective, was that the government’s documents on its FBAR penalty determination were not relevant to its task of making an independent determination on whether Bedrosian acted willfully in failing to file the FBAR. The matter now proceeds to a trial on the merits. As there are many FBAR cases in the pipeline, and only a handful of court opinions and orders, this is an important victory for the government.



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

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.


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.


Dean Zerbe Adds Insights to Whistleblower “Collected Proceeds” Tax Court Case

On August 4th, I wrote about the Tax Court’s second holding in Whistleblower 21276-13W v. Commissioner, and how the Court held that “collected proceeds” included criminal fines and civil forfeitures.   That post can be found here.  In the post, we noted that Dean Zerbe was the attorney on the prior case who successfully obtained the whistleblower award, and we assumed he was the lead attorney on this case, but the attorney of record was sealed.

Dean was one of the primary architects of the whistleblower statute, and one of the leading practitioners in this area, so it is not surprising to see him attached to these important cases.  Dean reached out to me last week and confirmed he was the lead attorney on this case also.  He also provided some feedback on the post and some of the issues we highlighted.  I’ve recreated some of Dean’s insightful comments below.  It probably goes without saying, any errors and coarse language are assuredly mine .


I will not recreate my prior post, but will add a few excerpts to provide context to Dean’s comments.  The key issue was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

As stated above, the Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court held “internal revenue laws” were not simply those under Title 26, and included the fines and forfeitures.  This implicates FBAR penalties also, although not explicitly stated in the holding.  Dean’s thoughts on the holding generally were as follows:

I read  the case as the Court seeking to get rid of any shadows or dark corners about what is included in “collected proceeds” and not wanting to see this litigated again and again (there are a lot of these cases in the pipeline).  [My impression] is the Tax Court will not engage in hair splitting.  See page 26, “In sum, we herein hold that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26.”    And again on page 29, “We have already explained that ‘collected proceeds’ is a broadly defined term:  It encompasses ‘the total amount brought in’ by the Government.”   And then again, of course, the language in first paragraph of page 32.  There is nowhere to hide with those statements.

I think one of the more interesting points in this opinion (which deserves a lot of rereading) is on page 30, where the Court correctly states that the “forfeitures resulted from an administrative action with respect to the laundering of proceeds, which in turn, arose from a conspiracy to violate Section 7601 and 7206…”   Encompassing, properly, a broad linkage and again speaks to FBAR.

As to FBAR, Dean stated:

[I]t seems clear that FBAR [penalties are] encompassed by the Court’s sweeping ruling (particularly as [the holding]  fits with the discussion in the previous Section 7623(b)(5) case, as well as the reference in footnote 15 in this case to Hom – and citing that FBAR is “tax administration”).

Our readers and tax procedure enthusiasts are likely familiar with Mr. Hom.  His cases have graced our pages somewhat frequently, most recently in late July with the Ninth Circuit holding online gambling site accounts were not subject to FBAR disclosure (well done Joe DiRuzzo).  Les had a brief write up on that found here. The footnote Dean references cites to a different Hom case in the Ninth Circuit from this year, and the note states:

Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 … aff’d, … 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.’”

Hammering home that FBAR penalties are likely included in “collected proceeds”.

Dean also addressed the Chevron comment from my post regarding the regulations that were not before the Tax Court case.  I highlighted (because Les pointed it out to me) that the Tax Court’s language was akin to language used when tossing a regulation under Chevron.  Dean agreed, and provided additional insight:

The language used by the Tax Court – plain language and enforce the terms – is, as you know, right in step with the language we see from Courts when they are rejecting agency regulations under Chevron.    While the Regulations are not at issue here – see footnote 9 – it is difficult to imagine the Regulations withstanding a challenge given this holding.  However, the real hope is that the administration will not appeal the decision and seize the ruling as a chance to make the correct policy decision (as you note) and embrace the commonsense decision by the Court on defining collected proceeds broadly.

Footnote 9, for those of you interested, states both parties agree the regulations are not at issue, as the decision regarding the award was rendered prior to the effective date of the regulations.

Many thanks to Dean for his comments on the case, and congratulations on a great result.

Grab Bag: FBAR and Offshore Cases Worth Highlighting

While Stephen, Keith and I are traveling, important and interesting tax procedure developments keep coming. For those who are missing their tax procedure fix, I point to two cases and other nice write ups that will give some good context.

The first is the Hom case; Mr. Hom has filled a few PT posts with varied and important tax procedure issues. In the development this week, in a nonprecedential and unpublished (but freely available) opinion the Ninth Circuit reversed in part the district court in a case involving whether online gambling sites were accounts that were required to be reported under the FBAR rules.

Jack Townsend at Federal Tax Crimes and Ed Zollars at Current Federal Tax Developments both discuss the case.

The other case that caught my eye and is one that I will be returning too is the Maze v IRS case out of the federal district court in DC. It contains an important discussion of the Anti-Injunction Act. In particular, the opinion considers whether the AIA is a bar to preventing the court from considering the taxpayer’s argument that the IRS should have used streamlined procedures rather than transition streamlined procedures.

Not surprisingly, Jack’s blog, which is the place to turn for developments generally relating to criminal tax but in particular on all offshore issues, hits the opinion hard here.

What caught my eye in the opinion is the extensive discussion of Florida Bankers and other important AIA cases, including Cohen v US, Foodservice and Lodging Inst. v Regan, and Seven-Sky v Holder. We have discussed some of those issues in PT previously. The opinion is careful to limit the openings in the AIA that some cases have revealed.

Legitimate Claim of 5th Amendment on Tax Return Should not Result in Frivolous Return Penalty

Tax Court Judge Holmes issued an order on November 6, 2015, holding that a petitioner’s claim of privilege under the 5th Amendment does not form the basis for assertion of the frivolous return penalty.  I have written before on this penalty which is imposed under IRC 6702(a)(1).  As required to implement this statute, the IRS publishes a list of frivolous positions but may assert the penalty for reasons that go beyond its own list.  Here it asserted the penalty based on one of the items on the list.  Citing the 5th amendment on a tax return is something that a tax protestor might do which is why such an assertion makes the list, but it is also something that someone with a legitimate fear of prosecution should do.  The employees at the Service Center will have a difficult time distinguishing between legitimate and frivolous assertions of the 5th amendment just looking at the return.  I suspect they generally default to presuming every assertion of the 5th amendment is a tax protestor tactic.   The Youssefzadeh case provides an example of the appropriate use of the 5th amendment privilege and the inappropriate use of this penalty.  The issue comes up in a collection due process (CDP) case which is also interesting because of the many posts we have had on when taxpayers can raise the merits of an assessable penalty in a CDP case or whether the opportunity to go to Appeals to contest the penalty bars the taxpayer from raising it in the CDP context.  For those with a subscription to Tax Notes, see Ajay Gupta’s excellent post on this case on November 17, 2015, which focuses much more on the background of the FBAR civil and criminal penalties.   Jack Townsend discusses this case as well in a good post summarizing the order in his Federal Tax Crimes blog.


On Schedule B of his 2011 return Mr. Youssefzadeh asserted his 5th amendment right not to incriminate himself.  After the IRS assessed the frivolous return penalty, it began sending the collection notices including the notice of intent to levy.  He sent the IRS a request for a CDP hearing and raised the correctness of the assertion of the penalty in his circumstances.  The appeals officer upheld the imposition of the penalty in the determination letter and Mr. Youssefzadeh filed a Tax Court petition.  As frequently happens in CDP cases, the IRS filed a motion for summary judgment.  In a much less frequent occurrence, petitioner filed a cross motion for summary judgment.  Petitioner here had sophisticated representation from the Beverly Hills firm of Hochman, Salkin, Rettig Toscher & Perez, which many CDP petitioners do not.  Because the Court decides the case on the basis of the motions for summary judgment, the decision comes out in the form of an order rather than in the form of an opinion.

A few interesting aspects of the CDP case cause me to stop before going further with the case to comment on the proceeding.  Mr. Youssefzadeh filed his petition on June 25, 2014.  On May 27, 2015, the Court sent the notice of trial setting the trial on October 26, 2015.  The IRS did not file its motion for summary judgment until 14 months later on August 27, 2015, the last day to file a motion for summary judgment under the Tax Court Rule 121 which was revised in 2011 to prevent summary judgement motions at the last minute.  Because the case went through Appeals before the petition, the case was with Chief Counsel’s office for over 14 months before it decided to file the motion for summary judgment.  The staffing problems within Chief Counsel’s office undoubtedly contributed to the delay but this points out why CDP cases take so long to resolve.  Even though Congress seemed to expect an expedited process by giving the taxpayer only 30 days to request a CDP hearing and only 30 days to petition the Tax Court, as a practical matter those two points where the taxpayer must act quickly remain the only points during which the CDP process receives expedited treatment.  Carl Smith and I wrote about this several years ago detailing the time these cases spend in Appeals and the Court and the system does not seem to have changed.

Because petitioner lived in California at the time of filing the petition and because he contested the merits of the liability, venue for appeal in this CDP case is the 9th Circuit.  The 9th Circuit, in the case of Keller v. Commissioner is one of the Circuits that has limited the Tax Court to the administrative record in CDP cases.  Since the Tax Court is limited to the administrative record pursuant to the application of the Golsen rule, Judge Holmes issued an order on July 27, 2015, ordering the parties to stipulate to the administrative record by September 25, 2015.  I had not seen an order like this before because I do not practice in a circuit that has limited the Tax Court to the administrative record.  The order seems like a great way to cause the parties to prepare for the hearing.  I would be interested to hear how the order works.

Here the joint motions for summary judgment eliminated the need for a trial of the case.  The petitioner filed the 2011 return filling out “most of the lines in a normal fashion.”  On Schedule B where he had to report dividends and interest he did not answer some of the questions and instead invoked his 5th amendment privilege against self incrimination.  The opinion states that “the IRS warned that it would assess a frivolous return penalty against him unless he filed a return with all of the required information.”  I imagine that this warning came from the Service Center as it processed the return but that is not clear.  Whatever part of the IRS that made the request, petitioner refused to fill in the lines where he had invoked the 5th amendment.  The case sets up the issue in simple fashion because Mr. Youssefzadeh’s argument was simply that he had a valid 5th Amendment claim, he had no desire to waste the time of the IRS but also no desire to incriminate himself by putting the missing information on the return.  Does a valid assertion of the 5th amendment on the return allow the IRS to assert a frivolous return penalty or is a valid assertion of the right to not incriminate oneself also a basis for the IRS to assess a civil penalty.

To successfully assess a frivolous return penalty, the IRS must show three things: (1) the document purports to be a return; (2) the return omits enough information to keep the IRS from judging the substantial correctness of the return or appears substantially incorrect and (3) taxpayer’s position must be frivolous or demonstrate a desire to impede the IRS.  The Court quickly found the document purported by be a return.  It decided on a closer question that the return contained sufficient information.  The IRS fought over this factor arguing that the missing information was needed to determine if the tax shown on the return was correct.  The Court, however, determined that the test was not complete correctness but substantial correctness and the return met that standard.

On the third factor the IRS relied on its Notice 2010-33 implementing section 6702.  The Court acknowledged that the notice lists use of the 5th Amendment on a return as a basis for assertion of the penalty but found that the notice does not discuss the legitimate use of the 5th Amendment.  Because the tactic of using the 5th Amendment in inappropriate circumstances has been adopted over the years by tax protestors, the legitimate use of the 5th Amendment has out due to so much inappropriate use.  Relevant IRS provisions (See IRM and talk about “blanket assertion of the 5th amendment.  Here, the return made a precise use of the 5th amendment with respect to certain questions but not a blanket assertion.  In Garner v. United States the Supreme Court has held that taxpayers may make a legitimate assertion of the 5th Amendment on a tax return.

Mr. Youssefzadeh argued that 31 USC 5314 and 5322 make it a crime to willfully fail to file a Report of Foreign Bank and Financial Accounts (FBAR).  The IRS could have easily used his answers to the questions he failed to answer to determine that should have filed an FBAR. The Court found that “because the lines that Youssefzadeh redacted ask for information that triggers the duty to file an FBAR and because willful failure to file an FBAR is a crime, we hold that Youssefzadeh has shown us a real and appreciable danger of self-incrimination…”  The Court, therefore, held that the penalty should not apply in his case.  This seems like the only result that does not penalize a taxpayer for the proper use of the right against self-incrimination.  Of course, Mr. Youssefzadeh has brought a lot of attention upon himself.  He may need to continue to employ his lawyers because his problems may not be over with the removal of the penalty if the IRS can identify his FBAR failure (assuming there was such a failure.)

Here the Court and the IRS allowed Mr. Youssefzadeh to raise the merits of the penalty without discussion of the Perkins case or the CDP regulation denying taxpayers the right to raise arguments where the taxpayer previously had an opportunity to go to Appeals.



Summary Opinions for July

Here we go with some of the tax procedures from July that we didn’t otherwise cover.  This is fairly long, but a lot of important cases and other materials.  Definitely worth a review.

  • Starting off with some internal guidance from the Service, it has held that the signature of the president of a corporation that subsequently merged into a new corporation was sufficient to make a power of attorney binding on the new corporation (the pres served in the same capacity in NewCo).  In CC Memo 20152301F, the Service determined it could rely on the agent’s agreement to extend the statute of limitations on assessment based on the power of attorney.  There is about 14 pages of redacted material, which makes for a fairly uninteresting read.  There was some federal law cited to allow for the Service reliance, but it also looked to IL law to determine if the POA was still valid. This would have a been a more interesting case had the president not remained president of the merged entity.
  • The Tax Court, in Obiakor v. Comm’r, has held that a taxpayer was entitled to a merits review by the Service and the court during a CDP case of the underlying liability for the TFRP where the Service properly sent the Letter 1153 to the taxpayer’s last known address, but the taxpayer failed to receive the letter.  The letter was returned to the Service as undeliverable, and the Service did not show an intent by the taxpayer to thwart receipt. This creates a parallel structure for TFRP cases with deficiency cases regarding the ability of the Tax Court to review the underlying liability when the taxpayer did not previously have an opportunity to do so based on failure to actually receive a notice mailed to their last known address.  Unfortunately for the taxpayer, in the Court’s de novo review, the Court also found the taxpayer failed to make any “cogent argument” showing he wasn’t liable.
  • In Devy v. Comm’r, the Tax Court had an interesting holding regarding a deficiency created by a taxpayer improperly claiming refundable credit.  The IRS allowed the credit requested on the return and then applied it against a child support obligation the taxpayer owed.  Subsequently, the IRS determined that he was not entitled to the credit and assessed a liability.  The Tax Court found it lacked the ability to review the Service’s application of the credit under Section 6402(g), which precludes any court in the US to review a reduction of a credit or refund for past due child support obligations under Section 6402(c), as well as other federal debts and state tax intercepts .  The taxpayer also argued that he should not have to repay the overpayment because the Service elected to apply it against the child support obligation, not pay it to him.  The Court stated that whether it is paid over to the taxpayer or intercepted, the deficiency was still owed by the taxpayer.  See Terry v. Comm’r, 91 TC 85 (1988).
  • With a lack of splits in the Circuits, SCOTUS has denied certiorari in Mallo v. IRS.  Mallo deals with the discharge of tax debts when the taxpayer files late tax returns.  Keith posted in early June on the Solicitor General’s position before SCOTUS, urging it to deny cert.  Keith’s post has a link to our prior coverage on this matter.
  • The DC Circuit had perhaps its final holding (probably not) in Tiger Eye Trading, LLC v. Comm’r, where it followed the recent SCOTUS holding in Woods, affirming the Tax Court’s holding that the gross valuation misstatement penalty applied to a tax shelter partnership, but the Court could not actually adjust the outside basis downward.  The actual adjustment had to be done in a partner level proceeding, but the Court did not have to work under the fiction that the partner had outside basis above zero in an entity that did not exist.  Taxpayers interested in this area should make sure to read our guest post by Professor Andy Grewal on the Petaluma decision by the DC Circuit that was decided on the same day, which can be found here.
  • In Shah v. Comm’r, the 7th Cir. reviewed the terms of a settlement agreement between a taxpayer and the Service which contained a stipulation of facts, but did not contain a calculation of the deficiency in any applicable year.  The Tax Court provided an extension to calculation the amount outstanding.  No agreement could be made, and the Service petitioned the Court to accept its calculation.  Various additional extension were obtained, and the taxpayers went radio silence (apparently for health issues and inability to understand the IRS calculations).  The Tax Court then ordered the taxpayers to show cause why the IRS calculations should not be accepted, instead of providing a trial date.  The taxpayer objected due to IRS mistakes, but the Court accepted the IRS calculations somewhat because the taxpayers had not been cooperative.  The Seventh Circuit reversed, and held that the Tax Court was mistaken in enforcing the settlement, because there was not a settlement agreement to enforce.  The Seventh Circuit indicated that informal agreements may be enforceable, but the court may “not force a settlement agreement on parties where no settlement was intended”. See Manko v. Comm’r, 69 TCM 1636 (1995).  The 7th Circuit further stated that it was clear the taxpayers never agreed to the calculations (which the IRS acknowledged).  At that point, the Service could have moved for summary judgement, or notified the Tax Court that a hearing was required, not petitioned to accept the calculations.  Keith should have a post in the near future on another 7th Circuit case dealing with what amounts to a settlement, where the agreement was enforced.  Should be a nice contrast to this case.
  • The Service has issued a PLR on a taxpayer’s criminal restitution being deductible as ordinary and necessary business expenses under Section 162(a).  In the PLR, the taxpayer was employed by a company that was in the business of selling “Z”.    That sounds like a cool designer drug rich people took in the 80’s, but for the PLR that was just the letter they assigned to the product/service.  Taxpayer and company were prosecuted for the horrible thing they did, and taxpayer entered into two agreements with the US.  In a separate plea agreement, he pled to two crimes, which resulted in incarceration, probation, a fine, and a special assessment, but no restitution.  In a settlement agreement, taxpayer agreed to restitution in an amount determine by the court.  Section 162(f) disallows a deduction for any fine or similar penalty paid to the government in violation of the law, but other payments to the USofA can be deductible under Section 162(a) as an ordinary and necessary business expense.  The PLR has a fairly lengthy discussion of when restitution could be deductible, and, in this case, determined that it was payable in the ordinary course of business, and not penalty or other punishment for the crime that would preclude it under Section 162(f), as those were decided under the separate settlement agreement.  The restitution was simply a repayment of government costs.
  • This kind of makes me sad.  The Tax Court has held that a guy who lived in Atlantic City casino hotels, had no other home, and gambled a lot was not a professional gambler.  See Boneparte v. Comm’r.  Nothing that procedurally interesting in this case, just a strange fact pattern.  Dude worked in NYC, and drove back and forth to Atlantic City every day to gamble between shifts at the Port Authority.  Every day.  The court went over the various factors in determining if the taxpayer is engaging in business, but the 11 years of losses seemed to make the Court feel he just liked gambling (addicted) and wasn’t really in it for the profits.
  • S-corporations are a strange tax intersection of normal corporations and partnerships (which are a strange tax intersection of entity taxation and individual taxation), but the Court of Federal Claims has held that s-corps are clearly corporations in determining interest on a taxpayer overpayments.  In Eaglehawk Carbon v. US, the Court held that the plain language of Section 6621(a) and (c)(3) were clear that corporations, including s-corporations, were owed interest at a reduced rate.
  • The Third Circuit in US v. Chabot  has joined all other Circuits (4th, 5th, 7th, & 11th – perhaps others)  that have reviewed this matter, holding that the required records doctrine compels bank records to be provided by a taxpayer even if the Fifth Amendment (self-incrimination) might apply.  We’ve covered this exception a couple times before, and you can find a little more analysis in a SumOp found here from January of 2014.  This is an important case and issue in general, and specifically in the offshore account area.  We will hopefully have more on this in the near future.
  • A Magistrate Judge for the District Court for the Southern District of Georgia has granted a taxpayer’s motion to keep its tax returns and records under seal, which the other party had filed as part of its pleadings.  The defendants in this case were The Consumer Law Group, PA and its owners, who apparently offered services in reducing consumer debt.  In 2012, the Florida AG’s office filed a complaint against them for unfair and deceptive trade practices, and for misrepresenting themselves as lawyers.   Two years prior it was charged in NC for the same thing.  One or more disgruntled customers filed suit against the defendants, and apparently attached various tax returns of the defendants to a pleading.    Presumably, these gents and their entity didn’t want folks to know how profitable their endeavor (scamming?) was, and moved to keep the records under seal.  The MJ balanced the presumption of openness against the defendants’ interest.  The request was not opposed, so the Court stated it was required to protect the public’s interest.  In the end, the Court found the defendant’s position credible, and found the confidential nature of returns under Section 6103 was sufficient to outweigh the public’s interest in the tax returns.



District Court Punishes IRS For Failing to Justify or Explain Itself in FBAR Case

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.


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.

(emphasis added).

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  (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.