Monday, August 24, 2020

Taxpayers Who Entered OVDP Closing Agreement Seek Their Money Back Under the APA (8/24/20)

In Harrison v. IRS (D. D.C. Dkt. 1:20-cv-00828) (key pleadings at CourtListener here), the taxpayers, husband and wife, joined the IRS OVDP at a time when the miscellaneous (or in lieu of penalty) was 27 1/2% of the high amount in the account(s) over the covered years.  While taxpayers were in process on the OVDP, the IRS announced the Streamlined Process which would permit nonwillful taxpayers to obtain the same relief with a 5% miscellaneous penalty.  The IRS announced also that qualifying taxpayers in OVDP process could transition to the Streamlined Process.  The key qualification for the Streamlined Process was that taxpayers be nonwillful.  The taxpayers attempted to transition into the Streamline Process but were denied transition by the IRS committee that must approve the transition.  (Taxpayers refer to this process as governed by Transition Rules.)  At that point, their options were to either accept the OVDP civil penalty result or opt out and hope to achieve a lesser costs (principally the FBAR nonwillful penalty or no penalty at all).  The taxpayers did not opt out and entered a Closing Agreement under the OVDP penalty structure (notably 27 1/2% miscellaneous penalty as noted).

One would think that the Closing Agreement put the matter behind the taxpayers and the IRS.  But, the taxpayers had another trick (real or imagined) up their sleeves.  

In this case, taxpayers seek their money back and have packaged the request in APA clothing (rather than refund clothing), urging that the IRS had failed to provide guidance for when the request for transition relief would be approved and failed to provide guidance as to willfulness.  Moreover, they assert, the IRS did not adopt the rules (whatever they were) by informal rulemaking procedure (notice and comment), which would have given interested parties an opportunity to comment.  I presume that the claim is that the transition process and whatever unpublished guidance governed it were legislative rules (with force and effect of law) under the APA, for only legislative rules require notice and comment; interpretive and procedural rules do not require notice and comment.  The claim also is that the Transition Rules denying them transition (whatever those Rules are) are arbitrary and capricious.  Further they allege that the Transition Rules violate Due Process.  Finally, they reallege all of the foregoing and assert that the Closing Agreement is invalid.  They seek declaratory relief and a "refund of all money that Plaintiffs paid to Defendant through their participation in OVDP's penalty structure.

DOJ moved for summary judgment.  Taxpayers responded.  No decision on the motion to date.  These motion documents can be retrieved from the Court Listener docket sheet linked above.

JAT Comments:

1. DOJ claims that the refund remedy, which taxpayers waived in the Closing Agreement, was an adequate remedy, thus foreclosing APA review.  Further, the Transition Rules do not constitute final agency action.  Finally, the Transition Rules are a presumptively unreviewable exercise of enforcement discretion (rather than rulemaking).

2. I wonder whether the taxpayers could not have pursued a straight-forward refund remedy.  I suppose that their request for return of the money paid could be viewed as a refund remedy.  But, if indeed the Closing Agreement is invalid for the reasons alleged, then it should not be a bar in a refund suit.

3. The taxpayers overstate their request, I think, by asking for a full refund rather than a refund only in excess of the amount they would have paid had they been allowed Transition Relief.

4. The essence of taxpayers' argument is circular.  The request for transition relief required the taxpayers to establish that they were nonwillful.  If, they could do that, they had the right to opt out and perhaps obtain even more relied on the opt out (zero FBAR penalty perhaps).  They chose not to opt out.  It is not clear why they did not opt out if indeed they thought they could establish nonwillfulness.  But the point is that, if the Streamline Transition process required nonwillfulness and they have to establish nonwillfulness (or at least state it under oath and subject to testing by the committee), they had an adequate remedy on the opt out where the IRS would have had to establish willfulness.  So, denial of the Streamlined Transition did not deny them a remedy they would otherwise have had.

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