After James Moore had filed amended returns and delinquent FBARS, the IRS assessed against him maximum non-willful FBAR penalties of $10,000 for each of the years 2005 through 2008, for a total of $40,000. Instead of waiting for the Treasury to file suit to collect the penalties assessed, Moore filed suit in The U.S. District Court Western District of Washington at Seattle. The U.S. filed a Motion for Summary Judgment and in ruling on the motion the Court discussed the law and factual analysis applicable to:
- Whether, under the Administrative Procedures Act (APA), the IRS determination process before assessing the FBAR penalties was “arbitrary, capricious, an abuse of discretion, or not otherwise in accordance with the law.” 5 USC 706 (2) (A).
- Whether due process rights afforded Moore passed muster under the U.S. Constitutional requirements.
- Whether the penalties assessed constituted “an excessive fine” under the Eighth Amendment to the U.S. Constitution, and,
- Whether Moore had established reasonable cause for not timely filing his FBARS. (James Moore v. U.S. Case 2:13-cv-02063-RAJ filed 4/1/15).
Since the Court was ruling on a Motion for Summary Judgement only, (this was not a trial on the merits but only a hearing to decide if a trial on the merits was necessary), the U.S. only had to prove that the record, viewed most favorably to Moore, showed no genuine issue of material fact remaining to be decided by trial. In that case, the U.S. is entitled to judgement as a matter of law.
The Court not rule on the U.S Summary Judgement Motion regarding this issue.
Moore was challenging the IRS’ method of assessing the penalty and the amount of the penalty assessed. The Court discussed whether its review of IRS procedures should be de novo – that is, considering all available evidence anew, or merely of facts showing “abuse of discretion.” The court stated that a de novo review would only apply if the IRS “fact-finding procedures are inadequate.” The Court found the IRS procedures to be adequate and therefore limited its review to whether IRS had acted arbitrarily, capriciously or abused its discretion. In its review the court sated it looks for a “rational connection between the facts found and the choice (the agency) made.”
The Court found that the record before the Court (what both sides had submitted, depositions, admissions etc.) contained insufficient facts for the Court to decide whether IRS had acted arbitrarily, capriciously or abused its discretion in assessing the maximum FBAR penalty. It did not rule on this issue and ordered the parties to submit to the court additional arguments in Supplemental Briefs within 14 days of the issuance of Court’s order.
Due Process Argument
The Court granted Summary Judgment to the U.S. on this issue.
The Court found that Moore’s due process rights had not been violated because the penalty assessment procedures satisfied the Due Process Clause of the U.S. Constitution, by:
- IRS having conducted an interview with Moore and counsel to determine his reasons for not filing FBARS.
- Issuing a notice proposing to assess $40,000 in FBAR penalties.
- Offering Moore an opportunity to internally appeal the decision before assessment in the case of 2006 through 2008 and to appeal after assessment in the case of 2005.
- Affording him an opportunity to seek judicial review of all of the IRS decisions.
Thus, Moore had both notice and an opportunity to contest the FBAR penalties and that was sufficient. Due process does not always require a full evidentiary or formal hearing said the Court.
Excessive Fine Argument (Eighth Amendment)
The Court granted the U.S. Motion for Summary Judgement on this issue.
The Court found the assessments did not violate the excessive fines provision of the Eighth Amendment because the penalty, in the court’s eyes, was not “grossly disproportionate to the gravity of the defendant’s offense” (U.S. v. Bajakazian, 524 U.S. 321, 337 (1998) Bajakazian’s fine was found excessive because it expropriated $350,000 of Barjakazian’s tax-paid cash, simply because he neglected to fill out a custom’s form upon leaving the U.S. The Supreme Court had noted that no fraud against the U.S. had been committed. Moore, the court found, fell way short of the facts in Bajakazian. He failed to report an account worth between $300,000 and $550,000. The $40,000 represented only 10% of the account value. The court found the fine not grossly disproportionate. The fact that his failure to file caused no harm to the U.S. did not persuade the court.
One point of support for its decision, I find questionable, however. The Court pointed out that congress had authorized the penalty of up to $10,000 for non-willful violations without regard to the value of the account. In addressing constitutional concerns about a law Vis a Vis the Eighth Amendment, what congress authorized should not govern, rather what the constitution permits should be the focus.
Bottom line, Moore’s conduct in maintaining the account was viewed by the Court as more willful than non-willful. So, it had little difficulty upholding the maximum non-willful penalty. The court granted Summary Judgment to the U.S. on this issue.
Reasonable Cause Argument.
The Court granted Summary Judgment to the U.S. on this issue.
The Court, applying the income tax standards for reasonable cause in the absence of applicable FBAR regulations, found no reasonable cause because:
- Moore maintained the offshore account for nearly two decades.
- Moore had no objective basis for his belief that he did not have to file FBARS because the account was held, not in his name, but in the name of his 100% owned Bahamian corporation.
- Moore could not point to professional advice he had received that he did not have to file FBARS.
- Moore admitted that since at least 2003 he did not even know if the Bahamian company still existed.
- Moore moved his account to Switzerland in 2003 but did not ask bank officials if he had to report the account to U.S. authorities (RSS not that the Swiss bank officials at that time would have suggested he report).
- Prior to 2006, Moore had prepared his own tax returns and filled out Schedule B, but did not answer the foreign bank account question “yes” or “no.”
- Moore signed the declaration on each return he filed.
- Moore could have read page B-2 of the return instructions as the foreign bank account question directed and would have learned of the requirement to file, even if the account was owned by his 100% owned entity.
- Beginning in 2006, Moore’s tax preparer sent Moore a “tax organizer. Moore completed the questionnaire in its entirety and answered “no” to a question in the organizer whether he had an offshore bank account.
- Moore admitted that even a minimal inquiry, such as looking at the return instructions would have informed him of his obligation to file FBARS.
- Moore’s age, in his eighties, is not an excuse for negligence especially since his deposition testimony in the case showed him to be “a man of ample intelligence.”
Citing U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) (finding willful blindness), the Court found that “Evidence that a taxpayer ignored relevant questions on Schedule B and in tax organizers is evidence of willful conduct. In this court’s view, it suffices as a matter of law to demonstrate a lesser FBAR violation – one made without reasonable cause.”
The case illustrates the difficulty of establishing reasonable cause. It points up the risks of filing amended returns outside of the Streamlined Filing Compliance Procedures or OVDP and emphasizes the importance of carefully vetting Streamlined Filings and strictly adhering to the Streamlined Procedures. For, if the taxpayer is kicked out of Streamlined Filing Process the only way to avoid a penalty will be to establish reasonable cause. The non-willful penalty can be up to $60,000, the maximum permitted for each year open under the statute of limitations. The courts, at least so far, are giving IRS wide latitude on determining the amount of the penalty that is appropriate, reviewing IRS determinations under the abuse of discretion standard.
Thus, as I’ve written often, deciding how to come into compliance is a decision making process that should be undertaken with the assistance of tax counsel experienced in these matters.
© 2015 by Robert S. Steinberg, Esquire
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