Helpful Non-willful FBAR penalty case decided by court

For the first time, in the case of James Moore, Plaintiff v. United States of America, Defendant (James Moore v. U.S. Case 2:13-cv-02063-RAJ filed 4/1/15), we finally get a look at some non-willful FBAR penalty litigation.

The US district court has essentially dismissed a taxpayer’s challenges to his penalty for failing to file FBARs (Report of Foreign Bank and Financial Account) with respect to his foreign account, finding that he failed to make the required filings, he had no reasonable cause for that violation, and his constitutional objections were without merit. However, the court reserved ruling on the taxpayer’s Administrative Procedures Act (APA) claims and ordered the parties to supplement the record. In arriving at its conclusions, the court had to tackle a number of FBAR-related issues, such as the appropriate standard of judicial review, for which there is little to no case law.

FACTS:

For nearly 20 years, Mr. Moore maintained a foreign account subject to FBAR requirements. The account was opened in the Bahamas, was ultimately migrated to Switzerland, and at all relevant times contained a balance between $300,000 and $550,000.

Mr. Moore filed no FBARs until at least 2009. Around that time, he became aware of IRS’s voluntary offshore disclosure program (OVDP) to encourage people who had not been reporting foreign accounts to come forward. He ultimately amended six years of tax returns (from 2003 through 2008) to report income for each of those years from his foreign account. In addition, Mr. Moore in 2010 filed late FBARs for 2003 through 2008, as well as his first timely-filed FBAR for 2009.

In October of 2011, an IRS agent interviewed Mr. Moore and then prepared an FBAR Penalty Summary Memo (memo) recommending that IRS impose a $10,000 penalty for each year from 2005 to 2008. The memo, which provided the agent’s reasoning in detail for recommending the penalty, wasn’t disclosed to Mr. Moore until he filed this lawsuit.

Mr. Moore probably opted-out of the OVDP program and was hence subject to a standard examination. In December of 2011, IRS sent Mr. Moore a letter proposing a $40,000 penalty that provided virtually no information about the basis for the penalty, demanded that he accept the penalty or request a conference with Appeals by Jan. 28, 2012, and explained that if nothing was done by that date, the penalty would be assessed and collection procedures would be instigated. However, on Jan. 23, 2012, IRS assessed a $10,000 penalty against Mr. Moore for 2005 only. Mr. Moore requested an appeal, and his counsel provided detailed arguments in a letter as to why Mr. Moore acted with reasonable cause In December of 2012, IRS responded in a brief letter upholding the penalties and assessed the $10,000 penalties for each of the remaining three years on Jan. 24, 2013.

Mr. Moore filed suit late in 2013. He argued that IRS violated the Fifth Amendment’s Due Process Clause, the Eighth Amendment’s Excessive Fines Clause, and the Administrative Procedures Act (APA) (other arguments were deemed abandoned). He sought a refund of $10,500 he paid toward the 2005 penalty and asked the court to set aside the remaining penalties. IRS sought summary judgment on his claims, as well as on its counterclaims to reduce to judgment the penalties for 2006 to 2008.

CASE DECISION:

In setting out the undisputed facts of the case, it was established that, as a matter of law, Mr. Moore committed non-willful violations of the BSA and was thus subject to civil penalties. The remaining issue was whether Mr. Moore could escape liability based on having acted with reasonable cause. The court noted as an initial matter that there was no binding case law providing standards for judicial review of FBAR civil penalty assessments, then determined that it would apply de novo review in reviewing Mr. Moore’s liability for the FBAR penalty.

• “Reasonable cause” defined for BSA purposes. The court found that, although the term “reasonable cause” wasn’t defined in the BSA or applicable regs, it made the most sense to attribute to it the meaning of the phrase in other statutes involving IRS’s tax assessment role (e.g., Code Sec. 6664(c)(1) and Code Sec. 6677(d)) and found that a person would have “reasonable cause” for an FBAR violation when he committed that violation despite an exercise of ordinary business care and prudence.
• Reasonable cause lacking in this case. The court then examined Mr. Moore’s explanation in support of reasonable cause and found that he had no objective basis for his purported belief that he didn’t have to report his account. The court determined that he knew of the requirement to report the account vis-a-vis Schedule B, Foreign Accounts and Trusts, which he didn’t self-prepare during the years at issue but had done so in the past. Also, in two tax questionnaires used by his return preparer that were part of the record, he indicated to his preparer that he had no interest in a foreign account, and there was no evidence that he otherwise disclosed the account to the preparer.

Challenge to assessment & amount. The court then determined that, in evaluating IRS’s assessment of the FBAR penalties, including the amount thereof, the appropriate standard of review was whether IRS’s actions were “arbitrary, capricious, an abuse of discretion, or otherwise not accordance with the law” under the APA. The court observed that, unlike tax deficiencies, there are “no codified procedures” for IRS to use in assessing FBAR penalties. Thus, IRS can essentially fashion its own procedures for doing so, subject to constitutional limitations and the APA.

• Assessment fails to meet APA. The APA provision at issue in this case is §555. That section provides minimal procedural guarantees for “information adjudication,” including that the agency give “[p]rompt notice” when denying any request made in connection with any agency proceeding, and that the notice include a “brief statement of the grounds for denial.”

The court then examined the letter sent to Mr. Moore and found that it could not, on the record before it, determine whether IRS acted arbitrarily, capriciously, or abused its discretion in assessing the penalties. Specifically, the letter didn’t actually indicate whether IRS considered relevant factors or whether it made a clear error of judgment. And the fact that the summary memo provided some explanation as to why the agent recommended imposing the maximum amount didn’t make a difference in this case because that memo wasn’t an explanation of the ultimate decision to impose a penalty.

The court noted, however, that the foregoing failure wasn’t adequate grounds to overturn IRS’s decision. Instead, the court decided that it would allow IRS to introduce additional material in support of its determination to show that its decision wasn’t arbitrary. Specific instructions were provided to this effect. The court also stated that IRS “may also choose” to provide a better explanation for why it assessed the 2005 penalty in advance of the time indicated to Mr. Moore and that, absent an adequate explanation, the court would rule that assessing the 2005 penalty in January 2012 was arbitrary and capricious.

The court determined that IRS’s penalty assessment procedures “served all of the purposes of due process.” Namely, with respect to the 2006, 2007, and 2008 penalties, Mr. Moore was interviewed, received a notice proposing to assess the penalties, afforded an appeal process, and was issued notice of assessment. For 2005, although there was no meaningful pre-assessment review, IRS nonetheless allowed him to contest it, and Mr. Moore had the opportunity to seek judicial review of all of IRS’s decisions.  Finally, the court found that IRS’s imposition of the maximum penalty of $40,000 didn’t violate the excessive fines clause.

It is possible the IRS may settle the case with the taxpayer. This case is a good case in that it provides helpful direction to the IRS and taxpayers to consider the Administrative Procedure Act and the process in a determination of the amount of the FBAR penalty. We expect more cases to resolved on this contentious issue.

Patel Law Offices offers a strategy session to discuss how to resolve your legal problem. Conveniently schedule online today with our online scheduler and questionnaire.