A district court upheld penalties against a taxpayer for failing to file Treasury Form TD F 90-22.1 (superseded by FinCEN Form 114), Report of Foreign Bank and Financial Accounts (FBAR), for four years but disallowed related interest and late-filing penalties because it found the IRS's conduct in assessing the penalties was arbitrary and capricious.
Facts: For nearly two decades, James Moore maintained a foreign bank account subject to FBAR requirements. Moore did not file an FBAR until 2009. In 2010, Moore filed late FBARs for 2003 through 2008 as well as a timely filed FBAR for 2009. The IRS conducted an investigation, interviewing Moore in 2011. An FBAR Penalty Summary Memo was prepared, recommending an assessment of the maximum $10,000 civil penalty against Moore for each of the years 2005—2008. The memo outlining the reasons for the imposition of the penalties was not disclosed to Moore.
In December 2011, Moore received a letter from the IRS proposing the $40,000 penalty with no information regarding the basis for the penalty and with a demand that the penalty be accepted or an Appeals conference scheduled by Jan. 28, 2012. On Jan. 23, 2012, the IRS assessed a $10,000 penalty against Moore for 2005, and a year later imposed the remaining penalties. The IRS also imposed late-payment penalties and interest. Moore requested an appeal. The IRS denied his appeal, and Moore filed suit in 2013. The government moved for summary judgment.
Issues: The Bank Secrecy Act (BSA) provides that the Treasury Department has the authority to collect information from U.S. persons who have financial interests in or signature authority over financial accounts in a foreign country. A provision requires that an FBAR be filed annually if the accounts' value exceeds $10,000 at any time during the year. Enforcement authority has been delegated to the IRS. For nonwillful violations, the civil penalty cannot exceed $10,000 per failure. However, if a U.S. person meets several requirements, including that the violation was due to reasonable cause, no penalty is imposed.
Moore argued that he had reasonable cause for failing to file the FBARs. He also argued that the IRS violated the Administrative Procedure Act (APA) and the Due Process Clause of the U.S. Constitution in deciding the penalty amounts and assessing them by doing so arbitrarily and capriciously.
Holding: The district court granted partial summary judgment to the government, holding that Moore violated the BSA by failing to file FBARs for 2005—2008, that he had no reasonable cause for that violation, and that he was subject to the maximum penalty as assessed. While holding that the assessment procedures did not violate the Due Process Clause, the court deferred a ruling on the APA claim, allowing the IRS to supplement the record to explain its actions.
In a subsequent ruling, after receiving supplemental briefs and evidence, the court held that the IRS's conduct in assessing the penalties was arbitrary and capricious and that any late fee, interest, or any other fee tacked on to the FBAR penalty was void. The court gave three reasons for its holding. It found that the IRS did not disclose an adequate basis for its decision to assess the penalties until Moore commenced the litigation. In addition, the court found fault with the IRS's opposing Moore's motion to compel disclosure of the FBAR Penalty Summary Memo during litigation. Finally, the court noted that the Service also "disregarded its own promise" with regard to the 2005 penalty by "ignor[ing] the terms of its own letter" and imposing the penalty before the expiration of the period during which it had told Moore he could request an Appeals conference before it would impose the penalty.
- Moore, No. C13-2063RAJ (W.D. Wash. 4/1/15 (partial summary judgment granted) and 7/24/15 (supplemental order))
—By Maria M. Pirrone, CPA, LL.M., assistant professor of taxation, St. John's University, New York City.