I will close with one thought that I have not fully researched yet. It seems to me that the structure of the statute, 31 USC 5321(a)(5), here, is to provide maximum penalties for nonwillful of $10,000 (perhaps per account) and for willful of the greater of $100,000 or 50% on the key date (June 30, as interpreted). Each of these maximums could apply per year. The point is that, as the statute is written, the penalty is not required to be at the maximum. The jury was not asked to review the IRS's assertion of the maximum willful penalty. Is the IRS's decision to assert the maximum not reviewable? That just seems odd to me.
But that also raises the question of what standard the trier -- here the jury -- would apply in determining whether something less than the maximum penalty should apply and, if so, what the lesser penalty should be. There are of course mitigation guidelines in the IRM, but the IRM is not the law even under relaxed notions of Chevron deference.The continuing saga in Williams has been brought to a close (unless appeal) with this issue. United States v. Williams, 2014 U.S. Dist. LEXIS 105666 (ED VA 2014), here. (The order is cryptic, so I also include the brief (without exhibits) as follows: Williams opening brief, here, U.S. opening brief, here, Williams response brief, here, and U.S. response brief, here.)
The Government argued that the statute should be interpreted to give the IRS unreviewable discretion with respect to the penalty up to the maximum permitted by the statute. Whether no penalty, $1 or the max, the Government's argument was that there was no review. The Court, at least nominally disagreed, holding that the IRS decision was reviewable. Williams argued that the standard of review was de novo; the Government argued, on fall back, that the standard was for abuse of discretion. The Court held that the standard was abuse of discretion.
Here is all the Court had to say on the proper standard:
Although the Government argues that the amount of the penalty assessed may not be considered on remand, this Court does review the penalty amount for abuse of discretion under the "arbitrary and capricious" standard of the Administrative Procedure Act. 5 U.S. § 706. The Court rejects Defendant's contention that the Fourth Circuit's remand for "further proceedings" is an invitation to engage in de novo review of the penalty amount. Although some courts have held in similar contexts that de novo review is appropriate when the issue of a defendant's underlying tax liability is at issue, see, e.g., Dogwood Forest Rest Home, Inc. v. United States, 181 F. Supp. 2d 554, 559-60 (M.D.N.C. 2001) (collecting cases), the Fourth Circuit has already ruled on the issue of Mr. Williams's liability in this case. On remand, it has been established that Williams is eligible for the FBAR penalties, including the penalties for willful violations. Because review of the penalty amount is the only remaining issue in this case, the appropriate standard of review is abuse of discretion. n1
n1 Although the only other court to have considered the appropriateness of an FBAR penalty amount did not specifically identify a standard of review, it reviewed the penalty with great deference to the judgment of the agency. In United States v. McBride, 908 F. Supp. 2d, 1186, 1214 (D. Utah Nov. 8, 2012), the court affirmed two maximum penalties after determining that they were within the range authorized by Congress. The court did not consider the propriety of the penalty amounts, simply stating that the penalties were authorized by the statute and "[a]ccordingly . . . were proper."
I do not follow the Court's distinction. It seems to me that liability has two intertwined aspects -- both liability and amount. Liability and amount cannot be crisply separated. In the type of proceedings, where liability is in issue de novo, the IRS does not prevail or move to an abuse of discretion standard simply by proving $1 of liability. Rather, the amount of the liability is in issue and is determined do novo. Hence, I am not convinced that the abuse of discretion standard is justified by the reason stated by the court.
The Court then moved to broad generalisms about an administrative agency's selection of a penalty, saying that the courts should not substitute their judgments for the IRS judgment. The Court deferred to the IRS:
In this case, the two $100,000 penalties issued by the IRS were within the range authorized by Congress in 31 U.S.C. § 5321(a)(5)(C) for willful violations. Although the IRS may impose a lower penalty where the violating taxpayer meets certain criteria, see U.S. Br. at 6, such departures are within the discretion of the agency. The Internal Revenue Manual states that in assessing penalties, examiners "exercise discretion" in determining "the total amount of penalties to be asserted," and also states that examiners are to consider the facts and circumstances of each case when making that determination. The Manual clarifies that the penalties are determined "per account," and not per person or per unfiled FBAR. IRM § 184.108.40.206. The Manual specifically lists "[t]he nature of the violation and the amounts involved" and "[t]he cooperation of the taxpayer during the examination" as among the factors that an examiner should consider. However, it also warns that "given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties . . . should be considered only in the most egregious cases." IRM § 220.127.116.11.7.
Although Defendant argues that the imposition of two maximum penalties is not warranted in this case, the Court finds that there is sufficient evidence in the record to demonstrate that the $200,000 penalty was the product of reasoned decision-making and consideration of the appropriate factors. While there is no evidence from which the Court can conclude that the penalties were assessed for an improper purpose, the IRS's letter to Mr. Williams bolsters the conclusion that the agency made a reasoned decision after considering the relevant factors. See Def. Ex. 29. Reviewing the IRS's decision under an abuse of discretion standard, this Court cannot simply substitute its judgment for that of the agency. Although the Internal Revenue Manual does state that multiple maximum penalties are for "egregious" cases, it would not be arbitrary and capricious for the IRS to find that the amount of money involved in this case justified the imposition of maximum penalties.Note that the Court says that there is no evidence that the assessment was made for an improper purpose, but I think Williams claim is that there was such evidence -- either for an improper purpose or based on no criteria at all other than liability for the Willful Penalty, which does not per se address what the amount of the penalty should be. This is from Williams' opening brief (pp 5-6):
And looming over the entire record is evidence that, as a subjective matter, the FBAR assessment underlying this action was issued by the IRS for the improper purpose of coercing Mr. Williams’s agreement to a separate but related audit, and then punishing his non-agreement by imposing, without analysis, the most onerous financial penalty that could be structured under the FBAR law as it then existed. See Gov’t Response to Contention Interrogatories (Defendant Trial Exhibit 2) at 4.3
* * * In response to an Interrogatory requesting the criteria that informed the IRS’s assessment of double maximum penalties in this matter (criteria that, if persuasive to the Court, could have been adopted and applied by it in its de novo review of the penalty assessment), the government acknowledged that it could offer no justification other than the bare assertion that Mr. Williams willfully violated the FBAR reporting requirement. See Exhibit B at 1-2. n4 And in its evidentiary presentation at trial, the government offered no testimony regarding justifications for double maximum penalties in this case, other than Mr. Williams’s testimony that in 2000 his company had “bank accounts” in Switzerland that were not reported (4/26/10 Tr. 13-14).Finally, and moving to another issue, here is the Court's discussion of the Fourth Circuit's controversial nonprecedential holding in Williams:
n4 In particular, in response to Interrogatory No. 1, which asked for the “criteria” used to impose the FBAR penalties against Mr. Williams, the government asserted only that Mr. Williams had willfully failed to file a timely FBAR for the year 2000 reporting his interest in foreign bank accounts.
The Fourth Circuit held that Williams willfully violated Section 5314 by signing his 2000 federal tax return. The court found Williams's signature "prima facie evidence that he knew the contents of his return," Op. at 12, and concluded that he was also on notice of the FBAR requirement. The court held that Williams's admission that he did not carefully review the instructions on his federal tax return suggested a "conscious effort to avoid learning about reporting requirements," id. (citing United States v. Sturman, 951 F.3d 1466, 1476 (6th Cir. 1991)), and combined with his false answers indicated an intent to conceal his financial information. Because the Fourth Circuit found that this conduct constituted at least willful blindness to the FBAR requirement, it found that Mr. Williams's violations were willful and remanded for proceedings consistent with that opinion.That is perhaps a straight-forward statement of a facile holding.