Court Sustains $10,000 Per Year § 6038(b) Penalty for Form 5471 Noncompliance for Taxpayer Who Withdrew from 2009 OVDP (8/9/17)

In Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017), here, Dewees, a U.S. citizen residing in Canada, was fined $120,000 -- $10,000 per years for From 5471 noncompliance.  After assessment of that penalty, Dewees declined to pay.  He lived in Canada and apparently felt he was outside the IRS's ability to compel  payment.  Pursuant to the U.S. Canada tax treaty, however, the U.S. enlisted the Canadian tax authority to withhold a Canadian tax refund due Dewees.  At that point, Dewees paid the penalty and brought this suit to have his payments refunded on various constitutional grounds -- Eighth Amendment, Due Process and Equal Protection.  On motion of the U.S., the court dismissed the complaint.

I link the following documents:

• Complaint, here.
• U.S. Motion, here.
• Dewees' Opposition, here.
• U.S. reply, here.
• Docket Entries as of 8/9/17, here.

The key timeline that I derive from the opinion and the foregoing documents are:

1. Dewees successfully joined OVDP in 2009.  The 2009 iteration of OVDP had the following requirements:  (i) filing income tax returns for 6 years; (ii) paying income tax, 20% accuracy related penalty, and interest on both; (iii) filing FBARs for 6 years; (iii) paying an IRS penalty now called a miscellaneous offshore penalty in lieu of all other penalties, including the FBAR penalty and Form 5471 penalties.

2. It is not clear from what I saw (I did not study the documents carefully for nuance) whether Dewees completed the package including the Forms 1040 or 1040X, the 5471s, and the FBARs.  It appears that there was some commotion between the IRS and Dewees as to whether he had submitted all information.

3.  On May 26, 2010, the IRS notified Dewees that he would be "terminated from the OVDP for failure to furnish the requested 1040s and FBAR forms (for the years 2003-2008).

4.  "In June 2010, the filings requested in the correspondence dated May 19, 2010 were resent."

5.  On October 28, 2010, a $252,480 penalty assessment was made against Dewees.  Dewees alleges that the penalty assessment was "relating to FBAR non-compliance."  The Government states that it was assessed "under the terms of the OVDP."  If the Government's statement is correct, the penalty assessment was the MOP assessment in lieu of all penalties other than the income tax penalty; in Dewees case, the MOP penalty would have been in lieu of the FBAR penalty and the Form 5471 penalty.  [JAT comment:  a question I have is how the MOP could have moved to assessment without the taxpayer having signed a closing agreement inside the OVDP penalty structure, but I could not find the answer to that question.]

6.  "On November 19, 2010 the penalty assessed is reduced to $185,862, as some accounts had been double counted by the IRS."

7.  "On January 13, 2011 Mr. Dewees receives notification that he is at risk of being terminated from the OVDP program because of his failure to pay the assessed penalty."

8.  "On June 9, 2011, Mr. Dewees received a letter from Mr. Harrington [IRS Agent] requesting confirmation of his intent to no longer participate in the OVDP."

9.  "On June 16, 2011 Mr. Dewees confirms his withdrawal from the OVDP based on the excessive amount of penalties owing. The penalties were removed from his account."  [JAT comment:  this would be consistent with the penalties being MOP rather than FBAR because the MOP could not be assessed unless he completed OVDP without opting out or being removed.]

10.  "On September 20, 2011 Mr. Dewees receives a letter from Mr. Harrington dated September 9, 2011, imposing a new $120,000 of penalties for the late filing of Form 5471. The letter indicates that reasonable cause for failure to file will be considered."  [JAT Comment:  This is consistent with Dewees being removed from OVDP because he would have lost his Form 5471 penalty protection.]

11.  Now, if the taxpayer truly were removed from OVDP, he should have been subject to risk of assessment of FBAR penalties.  From what I have seen, it is not clear that FBAR penalties were imposed.  I infer from the IRS's imposition of maximum Form 5471 penalties that the IRS did not think he was a nonwillful actor, but still there is no indication what, if anything, happened on the FBAR penalties.

The district court handily dismissed his claim that the Form 5471 penalties were excessive or improper.  The Court's analysis is short, so I cut and paste it:

A. Excessive Fines Claim 

"Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." U.S. Const. amend. VIII. In analyzing an excessive fines claim, the Court must first decide whether a penalty is a fine before determining if it is unconstitutionally excessive. See United States v. Bajakajian, 524 U.S. 321, 334 (1998). A payment to the government is only considered a "fine" under the Eighth Amendment if it is "punishment for some offense." Bajakajian, 524 U.S. at 328 (quoting Austin v. United States, 509 U.S. 602, 609-10 (1993)). In other words, the purpose of the penalty must be primarily retributive or deterrent rather than remedial. Id. In the context of forfeiture, for example, a penalty that is solely "designed to punish the offender" is considered punishment and is thus limited by the Excessive Fines Clause. Id. at 333-34. 

Tax penalties, by contrast, having been held to fulfill a remedial purpose are therefore not subject to the Excessive Fines Clause. The Supreme Court first articulated this principle almost 80 years ago in Helvering v. Mitchell, 303 U.S. 391 (1938), reasoning that tax penalties are remedial because they exist as "a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud." Id. at 401 (citing a string of supporting precedent). Since then, the lower courts have erected "an insurmountable wall of tax cases" to support this proposition. See, e.g., McNichols v. Comm'r of Internal Revenue, 13 F.3d 432, 434 (1st Cir. 1993) (holding that the Excessive Fines Clause does not apply to civil tax penalties and characterizing the proposed extension of rule from forfeiture cases to tax penalties as an unsupported "giant leap"); Little v. Comm'r of Internal Revenue, 106 F.3d 1445, 1455 (9th Cir. 1997) (holding that the Excessive Fines Clause was not violated because plaintiff "failed to establish that the additions to tax in question [were] penal sanctions unrelated to the government's fundamental interest in raising revenue"); Thomas v. Comm'r of Internal Revenue, 62 F.3d 97, 102-03 (4th Cir. 1995) (same). A Bankruptcy Court recently applied this precedent in holding the same Form 5471 non-compliance penalties challenged here are not fines. See In re Wyly, 552 B.R. 338, 608 (Bankr. N.D. Tex. 2016). The Court concludes likewise. Because "a small, fixed-penalty provision," such as the $10,000 penalty here, "can be said to do no more than make the Government whole," it is outside the Eighth Amendment's reach. Austin, 509 U.S. at 622 n.14 (internal quotations omitted). 

Dewees nonetheless attempts to scale this "insurmountable wall" of precedent by arguing that a smaller penalty would have achieved the same objective of making the Government whole. See Pl.'s Opp'n 3. But that is beside the point. Congress authorized a $10,000 penalty for every instance of non-compliance because it recognized the expenses and loss that could result if U.S. taxpayers no longer felt obligated to disclose their foreign assets. The IRS strictly applied that statutorily authorized amount across Dewees' twelve years of non-compliance, resulting in a total penalty of $120,000—an amount designed to mitigate the harm suffered by the Government. Because Congress authorized this penalty for a legitimate remedial purpose, Dewees' Eighth Amendment claim fails. 

B. Due Process Claim 

Dewees likewise fails to establish a due process violation because he has been afforded an adequate "opportunity to be heard at a meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965)). Courts judge procedural due process challenges to property deprivations by weighing (1) "the private interest that will be affected by the official action;" (2) "the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards;" and (3) "the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail." Id. at 335. 

Mere postponement of an opportunity to challenge the imposition of a tax penalty "is not a denial of due process, if the opportunity given for the ultimate judicial determination of the liability is adequate." Phillips v. Comm'r of Internal Revenue, 283 U.S. 589, 596-97 (1931). Such delays are "an inevitable consequence" of disputes between taxpayers and the IRS, and are not unconstitutional. Bob Jones Univ. v. Simon, 416 U.S. 725, 747 (1974). Federal district courts have jurisdiction over lawsuits against the Government for the refund of tax penalties. See 28 U.S.C. § 1346(a)(1). Full payment of the amount [*10]  owed followed by a lawsuit in a district court seeking a refund is a proper procedure for challenging penalties assessed under § 6038. See Wheaton v. United States, 888 F. Supp. 622, 627 (D.N.J. 1995) (citing 28 U.S.C. § 1346(a)). Section 1346 gives district courts original jurisdiction over "any civil action against the United States for the recovery of . . . any penalty claimed to have been collected without authority or any sum alleged to have been excessive on in any manner wrongfully collected under the internal-revenue laws[.]" Id. That is so even if this results in the taxpayer being "in the position of paying a substantial tax penalty without prepayment review." Id.; see also Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 543 (2012) ("[T]axes can ordinarily be challenged only after they are paid, by suing for a refund."). 

Dewees claims that he was denied adequate due process because he had no opportunity to appeal his penalty "through administrative means or the U.S. Tax Court" before it was collected. Compl. ¶ 67. But the absence of Dewees' requested avenue of relief does not mean his due process rights have been violated. The ability to challenge tax penalties in district courts under § 1346(a)(1) fulfills the Fifth Amendment's requirements. Accordingly, Dewees has failed to state a claim for relief under the Due Process Clause of the Fifth Amendment. 

C. Equal Protection Claim 

Finally, the Government moves to dismiss Dewees' equal protection claim for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. See Def.'s MTD 18. The Court must start with the jurisdictional issue. In order to have standing to litigate a claim in federal court, a plaintiff must establish an injury in fact, which is traceable to the defendant, and which is likely to be redressed by prevailing in court. Lujan, 504 U.S. at 560-61. A sufficient injury in fact is concrete and particularized, and actual or imminent as opposed to merely hypothetical. Id. at 560. It is the plaintiff's burden to demonstrate that his claim satisfies all of these elements. Id. at 561. In considering a motion to dismiss for lack of standing, the Court must assume the truth of the plaintiff's factual allegations but not his legal conclusions, which must be supported by more than "mere conclusory statements." Williams v. Lew, 819 F.3d 466, 472 (D.C. Cir. 2016) (quoting Iqbal, 566 U.S. at 663). 

Dewees bases his equal protection claim on the contention that he was not allowed to participate in the SFCP while other similarly situated taxpayers were, and thus he was denied the opportunity to have a lower penalty imposed. See Compl. ¶¶ 52-53. This argument suffers fro a fatal flaw because, as the Government points out, Dewees has not pled that he sought entrance into the SFCP or that his application was denied. See Def.'s MTD 18. And because Dewees ha not shown (or attempted to show) that the IRS ever denied him the opportunity to participate in the SFCP, he cannot establish that he suffered an actual injury. By failing to show that he was injured, Dewees lacks standing and this Court lacks jurisdiction to hear his claim. n1
   n1 The Government alternatively moves to dismiss under Rule 12(b)(6) for failure to state a claim. Because the Court lacks subject matter jurisdiction, it will not consider this contention. The Court notes, however, that a fellow court in this district denied a similar equal protection claim, holding that a taxpayer who participated in OVDP prior to July 1, 2014 "may be able to receive the favorable penalty terms of the Streamlined Procedures, but must remain in the OVDP in order to do so." Maze I, 206 F. Supp. 3d at 7-8. Applying that principle here, Dewees' decision to leave the OVDP—and not the IRS's actions—rendered him ineligible for the SFCP.